Learning Outcomes
After reading this article, you will be able to identify, interpret, and explain the main types of leasehold covenants and their enforceability between both original parties and successors to a lease or reversion. You will understand the concepts of privity of contract and privity of estate, AGAs, assignment liability, and the remedies available for breach of covenants in leaseholds. You will also be equipped to answer SQE2-style problem questions on this key topic.
SQE2 Syllabus
For SQE2, you are required to understand leasehold covenants from a practical standpoint. Your revision should focus on:
- The nature and classification of leasehold covenants (positive/restrictive)
- 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)
- Purpose and effect of Authorised Guarantee Agreements (AGAs)
- Remedies for breach of leasehold covenants, including forfeiture, debt action, damages, and specific performance
- The impact of alienation covenants and statutory restrictions on assignment and subletting
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.
- What distinguishes privity of contract from privity of estate in the context of leaseholds?
- Is an outgoing tenant always released from lease covenant liability after assignment? In which cases can liability persist?
- Name two remedies available to a landlord for a tenant’s breach of leasehold covenants, other than for non-payment of rent.
- 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.
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.
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.
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.
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 assignment—unless an AGA is required.
- Incoming assignees become liable for covenants from the moment of assignment.
- Covenants burdening and benefiting landlords pass automatically on disposal of reversion.
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.
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 in occupation (privity of estate). 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).
Key Term: assignment
The act of transferring the interest of a lease or its reversion from the current tenant or landlord to another party.
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 in occupation and then may indemnify T1 if necessary.
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 is liable for breaches by F (while F was in occupation) but is released after G's assignment. F is released unless an AGA was imposed at the second assignment.
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.
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.
- Forfeiture: Termination of the lease for serious breach, often requiring prior notice for non-rent breaches and court order for dwellings.
- Commercial Rent Arrears Recovery (CRAR): Available only for rent arrears in commercial leases, with strict procedural requirements.
- Damages: Money compensation for loss resulting from the tenant’s breach.
- Specific performance: Rarely, a court order compelling the tenant to comply (e.g., to repair).
Tenant remedies (for landlord’s breach):
- Injunction or specific performance (compel landlord to repair, provide quiet enjoyment, etc.)
- Damages for loss
- Rent set-off (carrying out a repair and withholding equivalent rent, where allowed).
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.
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.
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.
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. The introduction of AGAs for new leases post-1996 changed how liability is passed and released. Knowledge of covenants’ benefit and burden, proper assignment procedures, and available remedies for breach is essential for exam success.
Key Point Checklist
This article has covered the following key knowledge points:
- Leasehold covenants define the responsibilities and restrictions imposed on landlords and tenants.
- Privity of contract and privity of estate govern who is liable or entitled to enforce lease covenants at any given time.
- 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.
- Authorised Guarantee Agreements (AGAs) create post-assignment liability for the outgoing tenant, but only while the immediate assignee is in occupation.
- Leasehold covenants are enforceable on assignment where benefit and burden pass according to rules of privity and statutory regime.
- Available landlord remedies for breach include debt action, forfeiture, CRAR, damages, and (rarely) specific performance; tenants may seek damages, injunction, or set-off.
- Statutory restrictions govern consent to assignment/subletting, requiring reasons and sometimes barring unreasonable refusals.
Key Terms and Concepts
- leasehold covenant
- privity of contract
- privity of estate
- Authorised Guarantee Agreement (AGA)
- assignment
- forfeiture
- alienation covenant