Leasehold covenants and issues - Leases granted on or after 1 January 1996

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Overview

The Landlord and Tenant (Covenants) Act 1995 transformed leasehold covenants for leases granted on or after 1 January 1996. It's vital for SQE1 FLK2 exam candidates to understand this Act, as it sets out the legal rights, duties, and liabilities of landlords and tenants. This article closely examines the nature, enforcement, and practical aspects of post-1996 leasehold covenants, essential for handling property transactions and resolving disputes in today's leasehold practice.

Key Aspects of Leasehold Covenants Post-1996

1. Automatic Tenant Release

The 1995 Act introduced automatic release for tenants when they assign their lease. This means outgoing tenants are not typically liable for future covenant breaches unless an agreement states otherwise.

Exam Focus for SQE1 FLK2: Responsibility shifts from the outgoing tenant to the incoming tenant unless an Authorised Guarantee Agreement (AGA) is signed.

2. Authorised Guarantee Agreements (AGAs)

An AGA is a legal pact ensuring that the outgoing tenant may be liable for the incoming tenant's covenant breaches, safeguarding the landlord's interests.

Example Use: In retail leases, outgoing tenants may need to secure an AGA to ensure new tenant compliance with lease terms.

3. Landlord Release in Assignments

The Act allows landlords to disengage from future obligations by notifying tenants within four weeks of assigning the reversion.

Strategic Note: This can be valuable for landlords aiming to transfer lease responsibilities to another entity.

4. Enforceability of Covenants

The Act enhances the clarity and enforceability of both action-required and restrictive covenants.

Key Point for SQE1 FLK2: Detailed drafting and interpretation of covenants are important to ensure enforceability against original and future tenants.

Types of Covenants and Their Impact

1. User Covenants

These stipulate the allowed use of a property. For example:

"The Tenant agrees to use the Property solely for [specified use] and for no other purpose."

Impact: Violating a user covenant may lead to forfeiture or claims for damages.

2. Repair Covenants

These require tenants to maintain the property to a set standard, such as:

"The Tenant agrees to keep the Property in good repair throughout the lease."

Impact: Non-compliance can lead to claims at the lease's end.

3. Alienation Covenants

These control the tenant's rights to assign or sublet. For example:

"The Tenant agrees not to assign or sublet without the Landlord's prior consent, which cannot be unreasonably withheld."

Impact: Violations can result in forfeiture, with potential disputes over the delay or withholding of consent.

Enforcing Leasehold Covenants

Enforcement Principles

Both statutory and common law guide the enforcement of leasehold covenants. The 1995 Act ensures enforceability against subsequent property owners.

Enforcement Techniques

  1. Direct Action: Enforcing against the current tenant for present breaches.
  2. Through AGAs: Using AGAs and similar agreements.
  3. Forfeiture: As a last resort, subjected to statutory tenant protections.

Case Study: Repair Covenant Enforcement

In Jervis v Harris, the Court of Appeal ruled that landlords could repair and recover costs as a debt, influencing the enforcement of positive covenants.

Enforcement Steps

  1. Notice Service: Landlords must usually inform tenants of breaches and allow time for correction.
  2. Court Proceedings: Continuing breaches may lead to suing for specific performance or damages.
  3. Forfeiture Relief: Tenants can seek relief if breaches are corrected and compensation is provided.

Authorised Guarantee Agreements (AGAs)

Legal Context and Guidelines

AGAs, established by the 1995 Act, offer landlords security during lease assignments. Key rules include:

  1. Must be executed as a deed.
  2. Required only if the lease states this.
  3. Liability is limited to the immediate assignee.

Sample AGA Clause

"In consideration of the consent to the Assignment, the Tenant guarantees the Assignee's performance of all lease terms."

AGA Legal Impact

  1. Liability Scope: The outgoing tenant's liability matches the assignee's.
  2. Duration: Ends with the next assignment unless further guarantees are stipulated.
  3. Enforcement: Landlords can enforce AGAs without pursuing the current tenant first.

Practical Applications and Exam Focus

Lease Drafting Tips

  1. User Clauses: Balance landlord control and tenant needs.
  2. Repair Duties: Outline landlord and tenant responsibilities clearly.
  3. Assignment Terms: Ensure compliance with reasonableness standards.

Due Diligence in Lease Assignments

For lease assignments, consider:

  1. Checking AGA requirements.
  2. Evaluating the new tenant's financial health.
  3. Negotiating limits on outgoing tenant liability under AGAs.

Dispute Resolution Approaches

  1. Mediation: A cost-effective step for resolving covenant issues.
  2. Expert Opinion: Helpful for technical disputes, such as repair issues.
  3. Litigation: Last choice, mindful of potential cost consequences.

Conclusion

The 1995 Act reshapes leasehold covenants, affecting both landlord and tenant responsibilities. Candidates for SQE1 FLK2 must understand these updates for effective leasehold property management.

Key exam points:

  1. Automatic tenant release upon assignment unless an AGA is involved.
  2. AGAs provide a method for landlords to maintain security with assigned leases.
  3. The Act reinforces covenant enforceability for future property owners.