Leasehold real estate law and practice - Leasehold covenants

Learning Outcomes

This article covers leasehold covenants, privity and enforcement in commercial and residential property, including:

• Classification of leasehold covenants (absolute, qualified, and fully qualified) and their practical operation
• Distinction between privity of contract and privity of estate, and allocation of liability over time
• Application of the post-1995 regime under the Landlord and Tenant (Covenants) Act 1995 to release and continuing liability on assignment
• Assessment of whether covenants “touch and concern” the land and the consequences for passing benefit and burden
• Use and effect of Authorised Guarantee Agreements (AGAs), guarantor issues, and chains of indemnity on assignment
• Selection and sequencing of remedies for breach (debt, forfeiture, CRAR, damages, specific performance, injunction, and self-help under a Jervis v Harris clause)
• Evaluation of landlord consent requests under alienation and alterations covenants in light of section 19 of the Landlord and Tenant Act 1927 and the Landlord and Tenant Act 1988
• Procedural requirements for enforcement, including section 146 notices under the Law of Property Act 1925 and recovery of fixed charges via section 17 of the 1995 Act

SQE2 Syllabus

For SQE2, you are required to understand the law and practice governing leasehold covenants and their enforceability between original parties and successors, including privity of contract and privity of estate, assignment, Authorised Guarantee Agreements (AGAs), and remedies for breach, with a focus on the following syllabus points:

• The nature and classification of leasehold covenants (positive/restrictive), including absolute, qualified, and fully qualified covenants
• Legal principles of privity of contract and privity of estate in leases, including effects before and after the Landlord and Tenant (Covenants) Act 1995
• Passing of the burden and benefit of covenants on assignment (tenant and landlord, pre- and post-1996), including “touch and concern” tests and personal covenants
• Purpose and effect of Authorised Guarantee Agreements (AGAs), guarantor issues, and chains of indemnity
• Remedies for breach of leasehold covenants: forfeiture (including section 146 notice content and relief), action in debt, damages (including section 18(1) LTA 1927), specific performance, injunction, CRAR, and self-help (Jervis v Harris clause)
• The impact of alienation covenants and statutory restrictions on assignment and subletting, particularly section 19 LTA 1927 (improvements) and the Landlord and Tenant Act 1988 (duties on consent)
• Procedural and practical points on landlords’ release (sections 6–8 of the 1995 Act) and recovery of fixed charges from former tenants/guarantors (section 17 of the 1995 Act)

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What distinguishes privity of contract from privity of estate in the context of leaseholds?
2. Is an outgoing tenant always released from lease covenant liability after assignment? In which cases can liability persist?
3. Name two remedies available to a landlord for a tenant’s breach of leasehold covenants, other than for non-payment of rent.
4. What is the effect of an Authorised Guarantee Agreement (AGA) after assignment of a lease granted after 1995?

Introduction

Leasehold covenants are central to the landlord and tenant relationship in both commercial and residential property. A clear understanding of their enforceability, the operation of privity rules, and the remedies available for breach is essential for the SQE2 exam. This article covers the key legal and practical aspects of leasehold covenants and their enforceability both before and after assignment, providing worked examples in line with assessment style. It explains how liability differs for “old leases” (granted before 1 January 1996) and “new leases” (granted on or after that date), how benefit and burden pass by privity of estate for covenants that touch and concern the land, and when parties can be released or remain liable by contract or statutory regime. It also sets out the main landlord and tenant remedies and the constraints and procedures governing them.

Types and Nature of Leasehold Covenants

A lease will include terms that require a party to do (positive covenants) or refrain from doing (restrictive covenants) something relating to the premises. The form and wording of a covenant do not conclusively determine its nature; substance prevails. For example, “not to allow the property to fall into disrepair” is positive in substance because compliance requires expenditure.

Key Term: leasehold covenant
A formal promise by a landlord or tenant in a lease to perform (or not perform) specified acts regarding the leased premises.

Key Term: absolute covenant
A prohibition without qualification (e.g., “no structural alterations”). The only routes around an absolute covenant are the landlord’s express waiver/variation or any statutory modification in particular contexts.

Key Term: qualified covenant
A prohibition that permits the action with landlord’s prior consent (e.g., “no internal alterations without consent”).

Key Term: fully qualified covenant
A qualified covenant which additionally provides that the landlord’s consent “is not to be unreasonably withheld” (often also “or delayed”).

In practice, commercial leases commonly impose:

• An absolute covenant against structural/external alterations.
• A qualified or fully qualified covenant for non-structural internal alterations and changes to service media.
• No consent requirement for minor works (e.g., demountable partitioning).

Statutory modification of qualified covenants applies where proposed works amount to “improvements.” Section 19(2) of the Landlord and Tenant Act 1927 implies that consent to improvements under a qualified alterations covenant must not be unreasonably withheld; reasonable conditions can include payment of costs, reasonable compensation for diminution in the value of the reversion, and reinstatement obligations. Even an absolute covenant may be overridden by the section 3 LTA 1927 “improvements” procedure, under which the tenant can serve notice, the landlord can object or offer to do the works for a reasonable rent increase, and, failing objection or in appropriate cases, the court may authorise the improvements. Where equality duties require adjustments (e.g., disabled access), absolute covenants are treated as fully qualified so that consent cannot be unreasonably withheld.

Where consent is given, landlords typically document it by licence (e.g., licence to alter), setting out works methodology, professional oversight, conditions, costs, and reinstatement at term end.

Privity of Contract and Privity of Estate

Every lease creates two important relationships:

Key Term: privity of contract
The ongoing obligation between the original parties to the lease, persisting for the contract's duration unless released by law or agreement.

Key Term: privity of estate
The legal relationship existing between the current landlord and current tenant, based on the existence of the lease.

During the lease, as parties assign or dispose of their interest, these relationships determine who remains liable or entitled under lease covenants. Under privity of estate, only covenants that are “real”—those that touch and concern the land—pass to successors. The accepted test looks to whether the covenant affects the nature, quality, mode of user, or value of the demised premises, benefits landlords or tenants qua such, and is not expressed as personal. Covenants like rent payment, repair, user, and alienation typically meet this test; a purely personal promise does not.

Worked Example 1.1

A landlord grants a 20-year lease to T1. After two years, T1 assigns the lease to T2. The freehold is later sold to L2.

Question: Who can L2 claim unpaid rent from for the period when T2 is in possession?

Answer:
Rent can be claimed from T2 (privity of estate) as current tenant, and from T1 (privity of contract) if the lease was originally granted before 1 January 1996, as T1 remains liable for the whole term unless released.

The Landlord and Tenant (Covenants) Act 1995

The 1995 Act fundamentally changed the law for leases (“new leases”) granted on or after 1 January 1996.

• Outgoing tenants are automatically released from lease covenants upon lawful assignment—unless an AGA is required and given.
• Incoming assignees become liable for covenants from the moment of assignment.
• Covenants burdening and benefiting landlords pass automatically on disposal of the reversion, but outgoing landlords are not automatically released unless they use the statutory procedure.

Landlord release under sections 6–8 of the 1995 Act requires notice to the tenant (before or within 4 weeks of the transfer), a 4-week response window, and if objected to, a court application for a declaration that release would be reasonable. Standard practice often includes an “Avonridge clause” limiting landlord liability to periods when they hold the reversion, endorsed judicially.

Key Term: Authorised Guarantee Agreement (AGA)
An agreement where an outgoing tenant guarantees the immediate assignee's performance of lease covenants, often required as a pre-condition of assignment in commercial leases.

For leases ("old leases") granted before 1 January 1996, original tenants and landlords usually remain liable by virtue of privity of contract throughout the term. It is common in old leases for landlords to require each assignee to enter into a direct covenant to observe and perform lease covenants for the remainder of the term, effectively recreating privity of contract with successive tenants. Indemnity chains between successive tenants operate to shift ultimate responsibility back along the chain to the party in breach.

Guarantors of outgoing tenants under new leases are released on assignment and cannot be required to guarantee the obligations of future assignees, though they may guarantee the outgoing tenant’s obligations under an AGA (indirectly guaranteeing the immediate assignee).

Worked Example 1.2

A lease is granted in 1997 to Tenant A. In 2001, A assigns the lease to B, giving an AGA to the landlord. In 2005, B assigns to C.

Question: If C breaches a repair covenant, who can the landlord sue?

Answer:
The landlord may claim from C (current tenant). B may also be liable through the AGA if C defaults. A is released by law on assignment and not liable for C's breaches.

Passing the Benefit and Burden of Leasehold Covenants

Whether a party is liable for (the burden of) or can benefit from leasehold covenants upon assignment depends on the date the lease was granted and the nature of the covenant.

• Old leases (pre-1996): Outgoing tenants/landlords generally remain liable/enjoy rights through privity of contract. Incoming parties are bound/enjoy benefits only while the lease or reversion is vested in them (privity of estate) for covenants that touch and concern the land. Chains of indemnity and direct covenants may supplement these relationships.
• New leases (post-1996): Liability for covenants passes automatically to the incoming tenant or landlord on assignment. The outgoing tenant/landlord is released unless an AGA is entered into (or for landlords, unless statutory procedure for release has not been followed or the lease contains an Avonridge-type limitation clause).

Key Term: assignment
The act of transferring the interest of a lease or its reversion from the current tenant or landlord to another party.

For old leases, a statutory indemnity is implied on assignment of a registered lease or on assignment of an unregistered lease for value; best practice is to include an express indemnity in the deed of assignment where liability may persist. For new leases, an express indemnity is sensible where an AGA is given so that the outgoing tenant can recover losses from its assignee if called upon under the AGA.

Worked Example 1.3

A 1993 lease is granted to T1 for 35 years. T1 assigns to T2 in 2000, who assigns to T3 in 2015. In 2024, T3 fails to pay the rent.

Question: Who is liable for the unpaid rent?

Answer:
The landlord can claim from T3 (current tenant, privity of estate) and T1 (original tenant, privity of contract). T2 remains liable only while the lease was vested in them; T1 may look to indemnities down the chain if T1 pays.

Worked Example 1.4

A lease is granted to E for 10 years in 2010 (post-1996 lease). E assigns to F in 2013, giving an AGA. In 2015 F assigns to G.

Question: Who is liable for covenant breach after 2015?

Answer:
G (as current tenant). E remains liable only for breaches by F while F was the tenant under the AGA but is released after the next lawful assignment. F is released on assignment to G unless an AGA was imposed at the second assignment.

A landlord seeking to recover a “fixed charge” (e.g., rent, service charge) from a former tenant or guarantor must serve a section 17 notice under the 1995 Act within six months of the sum falling due. A former tenant who pays following such a notice can demand an overriding lease, making them the immediate landlord of the defaulting tenant and giving them the landlord’s remedies against that tenant.

Enforceability of Leasehold Covenants on Assignment

• Privity of contract: Original parties in ‘old leases’ are liable for the full term.
• Privity of estate: The party currently entitled to the lease or reversion is liable/entitled for covenants that ‘touch and concern’ the land (i.e., “real” covenants—those not expressed as personal).
• After 1996, liability for covenants (except “personal” ones) passes on assignment to successors. Outgoing tenants and landlords are released, unless the outgoing tenant provided an AGA or outgoing landlord failed to seek proper release.

When advising on assignment of a lease, ensure the deed modifies covenants for title so the assignor does not warrant the physical state: the implied covenants under the Law of Property (Miscellaneous Provisions) Act 1994 should be expressly disapplied to tenant covenants relating to the physical state of the property (consistent with caveat emptor).

Key Term: forfeiture
The landlord’s remedy of ending a lease early and re-entering for serious covenant breach, usually reserved expressly in the lease instrument.

Remedies for Breach of Leasehold Covenants

Potential landlord remedies:

• Debt action: Court claim for arrears without ending the lease. Limitation is six years from the due date. Consider insolvency routes where appropriate; statutory thresholds apply for bankruptcy and winding up. A debt action can sour relations and should be balanced against prospects of recovery.

• Forfeiture: Termination of the lease for serious breach, often requiring prior notice for non-rent breaches. For rent, a section 146 notice is not required; for other covenants, a section 146 LPA 1925 notice must specify the breach, require remedy (if capable of remedy), and demand compensation. The lease must contain a re-entry clause. Relief from forfeiture is at the court’s discretion and is commonly granted for rent if arrears and costs are paid promptly; for other breaches, relief may involve undertakings to remedy. Beware waiver: conduct recognising continuation of the tenancy (e.g., accepting rent accruing after knowledge of a once‑and‑for‑all breach or granting a licence to alter) can waive the right to forfeit for that breach.

• Commercial Rent Arrears Recovery (CRAR): Available only for arrears of “pure” rent under commercial leases (not service charge or insurance even if reserved as rent). It requires service of an enforcement notice giving at least seven clear days’ notice and authorises an enforcement agent to seize tenant goods (subject to exemptions) and sell at public auction. CRAR is unavailable where any part is let or occupied as a dwelling (other than in breach).

• Damages: Compensation for loss resulting from breach, subject to contractual rules. For repairing covenants, damages are capped by section 18(1) LTA 1927—the reduction in the value of the landlord’s reversion due to the breach. If the landlord intends to significantly alter or demolish the premises, damages may be limited or nil.

• Specific performance: Occasionally granted to compel performance of precise obligations (e.g., to repair) where damages are inadequate and supervision is manageable.

• Self-help (Jervis v Harris clause): Many commercial leases allow landlords to enter, carry out specified repairs, and recover costs as a debt. This avoids section 18 damages cap and can be effective where tenants delay.

Tenant remedies (for landlord’s breach):

• Injunction or specific performance to restrain interference or compel performance (e.g., quiet enjoyment, enforcement of other tenants’ covenants where the landlord has covenanted to do so).
• Damages for loss, including consequential loss where recoverable.
• Rent set-off where provided or after carrying out remedial works in limited circumstances.

Key Term: alienation covenant
A lease provision regulating whether and how a tenant can assign, sub-let, charge, or part with possession of the whole or part of the demised premises.

Alienation covenants are usually qualified or fully qualified for assignment/subletting in commercial leases. Section 19 LTA 1927 implies a “no unreasonable withholding” term into qualified covenants for improvements. The Landlord and Tenant Act 1988 imposes duties on landlords (and superior landlords) who receive written applications: they must respond within a reasonable time, giving consent unless it is reasonable to withhold, and must provide reasons in writing for any refusal and conditions. Failure is actionable as breach of statutory duty. Compliance with the lease’s notice provisions is important; mis-served applications may not trigger the 1988 Act duties.

Typical landlord concerns include covenant strength of the assignee, use changes, rent discounting on subletting, existing tenant breaches, and negative impacts on estate management. Reasonable conditions can include rent deposits, guarantees, and (for new leases) an AGA from the outgoing tenant where specified or reasonable in the circumstances. A purported requirement for a premium for consent, unless expressly permitted in the lease, is invalid.

Where consent is given, it is documented in a licence to assign or licence to sublet, often containing:

• A direct covenant by the assignee/subtenant to observe lease (or sublease) covenants.
• Conditions on completion timetable, registration, and costs (which should be reasonable).
• Any AGA or guarantor obligations.

Care should be taken with communications; informal indications of consent can bind landlords. The licence should be carefully drafted and limited to the named transaction.

Worked Example 1.5

A tenant wishes to assign a 15-year commercial lease. The lease says any assignment requires landlord’s written consent, “not to be unreasonably withheld.” The landlord refuses consent but gives no explanation.

Question: Is the landlord’s refusal valid?

Answer:
The refusal is likely invalid. Consent to assignment/subletting for “new leases” cannot be unreasonably withheld, and statutory procedures require reasons in writing. The tenant may have grounds to pursue damages or obtain a declaration of unreasonable refusal.

Worked Example 1.6

A 2008 lease contains a proviso for re-entry for non-payment of “rent” within 21 days. Rent and service charge are separately reserved, the latter “as rent.” The tenant is two months in arrears on both, and the landlord has recently issued a licence to alter.

Question: What remedies are realistically available?

Answer:
A debt action (and possibly insolvency proceedings) are available for both arrears. Forfeiture for non-payment of rent is prima facie available, but the landlord may have waived the right to forfeit for existing arrears by dealing with the licence to alter after knowledge of breach. CRAR is available only for pure rent (not service charge), despite service charge being reserved as rent. The landlord could also pursue the former tenant under an AGA if one exists, but must serve a section 17 notice within six months of sums falling due; the former tenant might be entitled to an overriding lease upon payment.

Worked Example 1.7

A tenant under a 2012 lease with a qualified user covenant seeks to change use within the same Use Class. The landlord refuses consent citing only “estate policy,” and the tenant’s request was sent to the landlord’s property manager by email; the lease requires notices to be served at a specific registered office address.

Question: How should the refusal be assessed?

Answer:
The 1988 Act obligations are only triggered if the application is validly served under the lease’s notice provisions. If service was defective, the landlord’s statutory duties may not have arisen. If service was valid, a bare “estate policy” reason may not be reasonable; section 19 LTA 1927 bars unreasonable withholding where the change is an improvement and prohibits fines for consent (absent structural alteration). The tenant should ensure service compliance and then challenge any unreasonable refusal.

Exam Warning

For SQE2, always establish the date the lease was granted before considering succession rights or liability. For “new leases,” AGAs, and restrictions on unreasonable refusal, apply only from 1996. In “old leases,” original tenants/landlords remain liable for the whole term unless released. Distinguish rent breaches from other breaches for forfeiture procedure. Identify whether covenants are real (touch and concern) or personal. Where pursuing former tenants or guarantors for fixed charges, do not overlook the section 17 notice deadline.

Summary

Leasehold covenants are enforceable according to privity of contract and privity of estate, with key differences for leases granted before or after 1 January 1996. For old leases, original parties remain liable throughout the term unless released, and privity of estate binds successors for real covenants only while the interest is vested. The 1995 Act introduced automatic release for tenants on lawful assignment and a structured landlord release procedure, while permitting AGAs in commercial cases so outgoing tenants can guarantee the immediate assignee’s obligations. Guarantors of outgoing tenants are released on assignment and cannot be required to guarantee future assignees, though they may guarantee the outgoing tenant’s AGA.

Alienation covenants and statutory regimes control assignment, underletting, and change of use. The LTA 1988 imposes duties to respond reasonably and promptly to consent requests; section 19 LTA 1927 modifies qualified covenants for improvements. Remedies for breach must be chosen and sequenced carefully: debt actions, forfeiture (with section 146 procedures for non-rent breaches and the risk of waiver), CRAR for pure rent, damages (particularly repair damages under section 18(1)), specific performance, injunctions, and self-help clauses for repairs. Procedural steps—like section 17 notices for recovery from former tenants and modifications to covenants for title on assignment—are critical. Correct classification of covenants and rigorous check of lease date, parties, and notice compliance underpin sound advice.

Key Point Checklist

This article has covered the following key knowledge points:

• Leasehold covenants define the responsibilities and restrictions imposed on landlords and tenants; their nature is determined by substance (positive or restrictive).
• Privity of contract and privity of estate govern who is liable or entitled to enforce lease covenants at any given time; privity of estate applies to covenants that “touch and concern” the land.
• For leases granted before 1 January 1996, original tenants and landlords remain liable/entitled unless released; for post-1996 leases, liability passes automatically, subject to AGAs and landlord release procedures.
• Authorised Guarantee Agreements (AGAs) create post-assignment liability for the outgoing tenant, but only while the immediate assignee is in occupation; guarantors of outgoing tenants are released on assignment and cannot be required to guarantee future assignees.
• Chains of indemnity help allocate liability along successive assignments; express indemnities should be included in assignment deeds where liability persists.
• Section 17 notices under the 1995 Act are required to recover fixed charges from former tenants/guarantors and must be served within six months of the sum falling due; payment may give rise to an overriding lease.
• Remedies available to landlords include debt action, forfeiture (with section 146 notice for non-rent breaches and potential relief), CRAR (limited to pure rent), damages (including repair damages capped under section 18(1)), specific performance, injunction, and self-help under Jervis v Harris clauses; tenants may seek damages, injunctions, and specific performance for landlord breaches.
• Alienation covenants regulate assignment and subletting; the LTA 1988 imposes strict duties on landlords to respond reasonably and promptly, and section 19 LTA 1927 modifies qualified covenants for improvements; consent procedures must align with the lease’s notice provisions.
• Absolute, qualified, and fully qualified covenants operate differently; statutory regimes can modify them in defined circumstances (e.g., improvements and equality duties).
• On assignment, modify covenants for title to exclude warranties of the physical condition of the premises, consistent with caveat emptor.

Key Terms and Concepts

• leasehold covenant
• privity of contract
• privity of estate
• Authorised Guarantee Agreement (AGA)
• assignment
• forfeiture
• alienation covenant
• absolute covenant
• qualified covenant
• fully qualified covenant