Leasehold covenants and issues - Remedies for breach of leasehold covenants

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Overview

Leasehold covenants are the backbone of property agreements, outlining the roles and obligations of landlords and tenants. For SQE1 FLK2 candidates, having a strong understanding of these covenants and their breaches, along with the available remedies, is key. This article explores the various aspects of leasehold covenants, types, and effects on successors, as well as the legal responses to breaches—vital knowledge for excelling in the SQE1 FLK2 exam.

Types of Leasehold Covenants

Leasehold covenants are divided into two main types:

Positive Covenants

These require actions from the tenant or landlord, such as:

  • Maintenance and repair obligations
  • Payment of rent and service charges
  • Insurance responsibilities
  • Compliance with legal requirements

Example: A covenant requiring the tenant to "keep the interior of the premises in good and substantial repair."

Negative Covenants

These restrict certain actions, including:

  • Alterations without consent
  • Subletting or assignment without permission
  • Limitations on property use

Example: A covenant stating that the tenant "shall not use the premises for any purpose other than as a private residence."

The distinction between positive and negative covenants is important, especially when considering their enforcement against successors. Traditionally, positive covenants did not transfer with the land, as shown in Austerberry v Corporation of Oldham (1885).

Liability and Successors in Title

The Landlord and Tenant (Covenants) Act 1995 made significant changes to covenant liability for leases granted from 1 January 1996 onward.

Pre-1996 Leases

  • Governed by the doctrine of privity of contract
  • Original parties remain liable for the entire lease term
  • Liability continues even after lease assignment
  • Successors become liable through privity of estate

Post-1996 Leases

  • Original tenants are freed from liability upon lawful assignment
  • Landlords may require an Authorized Guarantee Agreement (AGA) from the outgoing tenant
  • AGAs ensure the outgoing tenant guarantees the immediate assignee's performance

Authorized Guarantee Agreements (AGAs)

  • Limited to guaranteeing the immediate assignee's performance
  • Cannot exceed the assignee's period of liability
  • Guarantor under an AGA may be required to take a new lease if the assignee's lease is disclaimed

Remedies for Breach of Leasehold Covenants

When a tenant breaches a leasehold covenant, landlords can consider several remedies:

1. Forfeiture

Allows landlords to end the lease early due to a tenant's breach.

Key aspects:

  • Statutory protection under Section 146 of the Law of Property Act 1925
  • Requires a valid forfeiture clause in the lease
  • Specific notice procedures for non-rent breaches
  • Tenant's right to seek relief from forfeiture

Example: A commercial tenant regularly breaks a covenant prohibiting subletting without consent. The landlord issues a Section 146 notice, giving 14 days to remedy before proceeding with forfeiture.

2. Damages

Landlords can seek damages for losses from a covenant breach:

  • Must be a genuine pre-estimate of loss
  • Can cover both past and future losses
  • Landlord has a duty to mitigate their loss

Example: A tenant breaches a repair covenant, causing severe property damage. The landlord claims damages for repair costs and lost rental income during repairs.

3. Specific Performance

Courts may order specific performance, compelling the tenant to meet contractual obligations:

  • Typically used for unique or critical covenants
  • Not generally granted for repair covenants due to ongoing supervision needs
  • Damages must be an inadequate remedy

Example: A tenant in a heritage property breaches a covenant to maintain specific historical features. The court may order specific performance to ensure preservation of historical integrity.

4. Commercial Rent Arrears Recovery (CRAR)

A statutory process allowing landlords to seize tenant goods to recover rent arrears:

  • Applies only to commercial premises
  • Requires written notice to the tenant
  • Subject to strict procedural rules under the Taking Control of Goods Regulations 2013

Example: A commercial tenant falls three months behind on rent. The landlord follows CRAR procedures to seize goods from the premises to the value of the arrears.

5. Debt Action

For monetary breaches, landlords can pursue a straightforward debt action:

  • Suitable for recovering unpaid rent or other financial obligations
  • Can be combined with other remedies
  • May be pursued against former tenants or guarantors, subject to statutory limitations

Example: A tenant defaults on service charge payments. The landlord starts a debt action to recover the outstanding amount.

Strategic Considerations in Remedy Selection

When advising clients on remedies for covenant breaches, legal professionals must consider:

  1. Nature of the breach
  2. Severity of the breach
  3. Tenant's financial position
  4. Long-term landlord-tenant relationship
  5. Commercial viability of each remedy
  6. Legal constraints on available remedies

Case Study: A tenant in a multi-let office building consistently breaches a 'quiet enjoyment' covenant by operating noisy machinery outside permitted hours. The landlord must assess:

  • Forfeiture's potential loss of rental income
  • Damages' effectiveness in preventing future breaches
  • Specific performance as a long-term solution
  • Negotiation to modify the covenant or tenant's operations

A staged approach might be advisable: first serve a Section 146 notice, then seek an injunction or specific performance if non-compliance continues.

Conclusion

A thorough understanding of leasehold covenants and their associated remedies is indispensable for SQE1 FLK2 candidates aiming for success in property law. Key points include:

  • The distinction between positive and negative covenants
  • The impact of the Landlord and Tenant (Covenants) Act 1995 on liability
  • The range of remedies available for covenant breaches
  • The strategic considerations in selecting appropriate remedies

By understanding these aspects, future legal professionals will be well-prepared to handle the challenges of leasehold agreements and offer effective advice in property disputes.