Leasehold covenants and issues - Leases granted before 1 January 1996

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Overview

Leasehold covenants from before 1 January 1996 pose a challenging legal environment important for the SQE1 FLK2 exam. This article examines the network of obligations and liabilities inherent in these leases, focusing on privity of contract and estate, the ongoing liability of tenants after assignment, and the enforcement of covenants. Understanding these concepts is vital for understanding property law and excelling in the exam.

The Legal Framework of Pre-1996 Leases

Why the 1 January 1996 Date Matters

The Landlord and Tenant (Covenants) Act 1995 dramatically changed leasehold law, especially regarding covenant liability. However, leases granted before this date follow the old rules, creating a dual legal structure that practitioners must understand thoroughly.

Privity of Contract and Privity of Estate

Two main principles define relationships in pre-1996 leases:

  1. Privity of Contract: Keeps original lease parties bound to its terms despite any assignments. Original tenants remain liable for breaches unless specifically released by the landlord.

  2. Privity of Estate: Affects the relationship between current landlords and tenants, allowing some covenants to be enforced against the present occupier, even if they weren't part of the original lease.

Tenant Liability and Covenant Obligations

The Lasting Liability of Original Tenants

In pre-1996 leases, original tenants retain liability for breaches during the lease term, known as "continuing liability." This responsibility arises from privity of contract and can create situations where they are accountable for the actions of later tenants.

Categories of Covenants and Their Transfer

Lease covenants are categorized as:

  1. Positive Covenants: Require specific actions (e.g., repairs).
  2. Restrictive Covenants: Prohibit certain activities (e.g., use limitations).
  3. Qualified Covenants: Impose conditions.

The transfer of these covenants varies:

  • Positive covenants usually don't transfer with the land.
  • Restrictive covenants can transfer, binding future owners.
  • The benefits often pass to new landlords, enabling enforcement against the original party.

Example: Continuing Liability

Consider this scenario:

Alpha Ltd leases a commercial property from Omega Properties in 1990 for 25 years, with a covenant to maintain the property's façade. In 2000, Alpha Ltd assigns the lease to Beta Corp. By 2010, the façade is in disrepair.

Here, Omega Properties can pursue Alpha Ltd for breach of the maintenance covenant despite the lease being assigned, due to privity of contract. Omega may also hold Beta Corp accountable under privity of estate as the current tenant.

Enforcement Mechanisms and Challenges

Landlord's Enforcement Options

Landlords of pre-1996 leases can enforce covenants through:

  1. Action against the Original Tenant: Leveraging privity of contract to sue for breaches, regardless of assignment.

  2. Action against the Current Tenant: Using privity of estate to enforce obligations on the present tenant.

  3. Equitable Remedies: Seeking legal orders like specific performance or injunctions to uphold covenants.

Case Study: Enforcement Complexities

In the case Pennell v Payne (1995) 27 HLR 718, the Court of Appeal looked at a lease covenant breach against subletting. Although the original tenant had assigned the lease, the assignee sublet the property in breach of the covenant.

Key details:

  • The court ruled the landlord could enforce the covenant against both the original tenant (via privity of contract) and the current tenant (via privity of estate).
  • This decision highlights the potential for landlords to pursue multiple parties, complicating enforcement.

Remedies for Covenant Breaches

Remedies Available to Landlords

When faced with covenant breaches, landlords have several options:

  1. Damages: Financial compensation for breach-related losses.
  2. Forfeiture: Ending the lease and reclaiming the property.
  3. Specific Performance: Court mandate for the tenant to meet their obligations.
  4. Injunctions: Court orders restricting certain actions or enforcing obligations.

The Process of Forfeiture

Forfeiture is a powerful yet complex remedy:

  1. A forfeiture clause must be in the lease.
  2. The landlord must serve a Section 146 notice under the Law of Property Act 1925, detailing the breach and giving time for resolution (excluding rent arrears).
  3. If unmet, the landlord may initiate forfeiture proceedings.

Example: Omega Properties leases a retail unit to Gamma Retail in 1994, with a use-restriction covenant and forfeiture clause. In 2005, Gamma uses part of the premises for storage. Omega serves a notice under Section 146, allowing 28 days for remedy. Failing that, Omega may pursue forfeiture.

Relief from Forfeiture

Tenants can seek relief, a court-granted, discretionary remedy. Considerations include:

  • The breach's nature and severity
  • The tenant's behavior and willingness to resolve the breach
  • The impact of forfeiture on the tenant versus the landlord's interests

Conclusion

Pre-1996 leasehold covenants involve complex legal doctrines and practical challenges. For SQE1 FLK2 exam candidates, understanding these principles is key. Remember:

  1. Original tenant liability persists due to privity of contract.
  2. Distinguish between privity of contract and estate in enforcement.
  3. Know how covenants transfer and enforceability against future parties.
  4. Be aware of available remedies for breaches, including damages and forfeiture.
  5. Understand forfeiture processes and possible relief for tenants.

Mastering these concepts allows practitioners to navigate the dual covenant system effectively, balancing the interests of landlords, original tenants, and subsequent assignees.