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Absolute & Qualified Covenants

LEASE CONSENTS – THE BASICS

Following on from our previous blogs its time to see how your lease works in detail. What if you need to make a change?

It is quite normal that during the course of a lease a tenant may need to approach the landlord for consent for covenants that requires the landlords consent to proceed.  As we have pointed out in previous blogs as each lease differs it is essential to read the lease at an early point to avoid costly mistakes.

The distinction between ‘absolute’ covenants, those that prohibit the act, and ‘qualified’ covenants, those that require the landlord’s consent for that act, need to be understood and they contain certain requirements of both the landlord and the tenant. So be aware of the type of covenant and what you need to do. Here are some pointers;

Tenants request for a change of use;

Absolute Covenant – if the lease clause simply prohibits a change of use then there is no implied term to the effect that consent should be granted by the landlord. You cannot proceed.

Qualified Covenant – this may state that the change of use is permissible subject to obtaining the landlord’s consent.  This may go on to say that the landlord’s consent should not be unreasonably withheld or delayed. What is reasonableness? Well, there is case law on the question of reasonableness, under the Landlord and Tenant Act 1927 s.19 if the landlord grants consent he cannot charge more than expenses and compensation for loss in value provided that the change of use does not include structural alterations to the property.

Tenants request for alterations;

Absolute Covenant – again there are no implied terms. Qualified Covenant – if the lease clause states that such change is subject to the landlord’s consent it is also implied that the consent cannot be unreasonably withheld or delayed.  The landlord may require payment for compensation for loss in value of the property and expenses and he may also look for re-instatement provided it is reasonable and the improvement did not add value to the property.  Again there is case law which defines what an improvement is and we recommend you take advice. Again, there is case law on the test of reasonableness.

Requests for Assignment & sub-letting;

Absolute Covenant – again, statute does not imply any requirement or the landlord to give consent when there is a prohibition to assign or sublet. Qualified Covenant – where the lease clause states that assignment or subletting is permissible with the landlord’s consent, statutes assists;

Landlord and Tenant Act 1927 s.19 – there is a proviso that consent cannot be unreasonably withheld and it permits the landlord to recover his reasonable expenses. Landlord and Tenant Act 1988 s.1 – this provides that landlords are liable for unreasonably withholding and/or delaying consent.  The landlord must provide written reasons for refusing consent or conditions. Landlord and Tenant (Covenants) Act 1995 – modern leases now specify circumstances when it will be reasonable for a landlord to refuse consent.  Consider this when negotiating and drafting a lease.

Landlord’s advice;

If you are granting a new lease or renewing an old, think carefully about the circumstances in which you would refuse consent to an assignment or subletting. You should also be aware that the more restrictive a lease is the bigger impact it will have on its valuation.

If you receive a tenant’s application then you should act promptly;

Check the lease

Obtain valuation and/or accounting advice.

If you need more time then keep the tenant informed.  If you want more information ask for what you reasonably need and why you need it.

If you want to refuse consent, spend time drafting your response as you only have that one opportunity to explain your reasons.  Provide the supporting advice from your professional team’

Tenant’s advice;

Again, and as always, read the lease for the conditions that need to be performed in relation to your application and meet them.

Check that you are not in breach of any lease covenants. 

Put your request for consent in writing and make it clear what you are asking for. Set a reasonable date for your landlord’s decision and quote the statues above. This shows you know your position and your rights.  Send it by post and recorded delivery.

Pre-empt the landlord’s request for information by providing everything with your application.

If you believe the landlord is stalling, tell him so in writing but carry on dealing with his enquires.

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Home » Expertise » Real estate » Property entrepreneurs » FAQs for property entrepreneurs » Dealing with tenant requests for alterations and assignment

FAQs - Dealing with tenant requests for alterations and assignment

Alterations, when is a landlord’s consent required to make alterations.

If the lease contains no restrictions, the tenant has absolute freedom.  If the lease contains an absolute prohibition then the landlord can refuse or impose unreasonable conditions.  If the lease contains a qualified condition then the landlord’s consent is deemed not to be unreasonably withheld where work is “improvement” (s.19 (2) LTA 1927).  If the lease contains a fully qualified covenant, the landlord’s consent is not to be unreasonably withheld.

What are the statutory duties/restrictions?

Under s.19 (2) LTA 1927 (only where qualified or fully qualified covenant), the landlord can require the tenant to:

• pay its costs
• reinstate; and/or
• pay compensation for the diminution in the value of reversion.

What is the burden of proof if the landlord fails to comply with his/her duties?

The burden of proof is on the tenant to show that the landlord is unreasonably withholding consent and to establish losses.

What remedies does the tenant have?

Although damages are not available, the tenant has two remedies:

• Self-help: This is where the tenant carries out the improvements.  Firstly, the tenant should send a letter before action to get the landlord’s consent as this avoids problems later.  The tenant should also ask the landlord to confirm that he/she will not peaceably re-enter.  Although this is less risky than on alienation, the tenant may be required to reinstate.
• Court proceedings: This is for a declaration that the landlord has unreasonably withheld consent and/or no further act of consent is required from the landlord.

What remedies does the landlord have if the tenant uses the self-help remedy?

The landlord has three remedies:

• Forfeit lease: by peaceable re-entry or court proceedings.  If the landlord has complied with his/her duties, the tenant will have to remedy the breach to get relief from forfeiture and pay the landlord’s costs and compensation.  Note that a rent stop should be put on the account and the lease should not be treated as continuing.
• Damages against the tenant: firstly, the landlord can claim for compensatory damages to reflect the sum the landlord might have demanded to relax the covenant against the tenant ( Crestfort v Tesco ) at the date of the contract/tort of interference with the contract with the tenant by the sub-tenant. Secondly, it is possible to recover damages from both the tenant under the lease and the sub-tenant under tort of interference with the contract if the sub-tenant had intended to procure that breach ( Crestfort v Tesco ).
• Injunction: The landlord can apply for an injunction against the tenant such as ordering a surrender of unlawful sub-lease ( Crestfort v Tesco ). This action would be  particularly appropriate if the landlord does not want to forfeit in a falling market.

When is a landlord’s consent required to assign a lease?

If the lease contains no restrictions then the tenant has absolute freedom.  If the lease contains an absolute prohibition then the landlord can refuse or impose unreasonable conditions.  If the lease contains a qualified condition, then the landlord’s consent is deemed not to be unreasonably withheld (s.19 (1) LTA 1927).  If the lease contains a fully qualified covenant, then the landlord’s consent is not to be unreasonably withheld.

Under s.1 LTA 1988 (only where qualified or fully qualified covenant) on written application by the tenant for consent, the landlord must within a reasonable time:

• give consent (unless reasonable not to); and
• give the tenant a written notice of the landlord’s decision stating, where consent is given, any reasons which the landlord imposes or, where consent is refused, the reasons for refusal.

Under s.2 LTA 1988, the landlord must pass on any written application to the superior landlord within a reasonable time.

What is the burden of proof if the landlord fails to comply?

The burden of proof is on the landlord to show that they complied with statutory duties and on the tenant to establish losses.

The tenant has thee remedies:

• Self-help: where the tenant assigns anyway.  Firstly, the tenant should send a letter before action to get the landlord’s consent as this avoids problems later.  The tenant should also ask the landlord to confirm that he/she will not peaceably re-enter.  If the landlord does not confirm, the tenant should consider seeking an injunction restraining the landlord from re-entering until the question of whether there is a breach is resolved by agreement or the courts.
• Tenant issues court proceedings: for a declaration that the landlord has unreasonably withheld consent and/or no further act of consent is required from the landlord.
• Tenant issues a damages claim: for breach of a statutory duty under LTA 1988:
• Consider causation eg would the proposed assignment abort anyway?  If so, there is no loss.
• Consider the foreseeability of losses.
• The tenant must mitigate its loss and must try and remarket the premises in the best terms available in the open market as soon as possible.
• Consider measures of damages: Firstly, compensatory damages such as rent and the liabilities the sub-tenant would have to pay. For example, in Blockbuster v Barnsdale , the tenant recovered £70,000 where the proposed sub-rent was £56,000 because of insurance and rates recovery in addition to  loss of premium, abortive costs, loss of opportunity (if the tenant is able to transfer dilapidations liability). Secondly, exemplary damages if the landlord acted obstructively or to gain an advantage from refusal of consent. For example, there were exemplary damages of £25,000 in Design v Thurloe where the landlord wanted the assignment to fail to get surrender and to then re-let on better terms.

What remedies does the landlord have if the tenant uses self-help remedies?

• Forfeit lease: by peaceable re-entry or court proceedings.  If the landlord has complied with duties, the tenant will have to remedy the breach to get relief from forfeiture and pay the landlord’s costs and compensations. Note that a rent stop should be put on the account and the lease should not be treated as continuing.
• Damages against the tenant: firstly, compensatory damages to reflect the sum the landlord might have demanded to relax the covenant against the tenant ( Crestfort v Tesco ) at the date of the contract/tort of interference with the contract with the tenant by the sub-tenant.  It is also possible to recover the damages from both the tenant under the lease and the sub-tenant under the tort of interference with the contract, if the sub-tenant had intended to procure that breach – see Crestfort v Tesco .
• Injunction against the tenant: for example, ordering a surrender of an unlawful sub-lease ( Crestfort v Tesco ), particularly if the landlord does not want to forfeit in a falling market.

How may a landlord refuse consent?

The landlord must give reasons for any refusal of consent.  The landlord is confined to the reasons given in his written statement so he cannot add other reasons or later justify refusal on other grounds.  The landlord and tenant may agree (either in the lease or before the application for the licence) any circumstances or conditions subject to which the licence may be granted which are not then subject to a test as to what is reasonable.

What is reasonable?

What is reasonable is a question of fact ( Bickel v Duke of Westminster [1977] QB 517).  The landlord need not show that his objections are objectively justifiable, only that reasonable landlords acting prudently and competently would also rely on them ( Pimms Ltd v Tallow Chambers Co [1964] 2 QB 547 at 564).

Generally, a landlord need only consider its own interests but, if there is such a disproportion between the benefit to the landlord and the detriment to the tenant in refusing consent, then it may be unreasonable to withhold consent (International Drilling Fluids).  The landlord is entitled to be told the true nature of the proposed transaction and so will not unreasonably withhold consent if this has not happened.  The landlord is fully entitled to look critically at any matter relating to the proposed assignee that would reduce the value of his interest, especially if he intends to sell it.

The purpose of the covenant against assigning without the landlord’s consent is to protect the landlord from having its premises used or occupied in an undesirable way or by an undesirable tenant or assignee (International Drilling Fluids).  A refusal must relate to the landlord and tenant relationship in regard to the subject matter of the lease, so:

• it will normally be reasonable to refuse consent or impose a condition if such refusal or condition is necessary to prevent the tenant from acting to the prejudice of the landlord’s existing rights; and
• it will normally be unreasonable to impose a condition which would increase or enhance the control which the landlord was entitled to exercise under the terms of the lease and the general law (a ‘collateral advantage’).

What are the grounds for refusing alterations (fully qualified covenant)?

If the alterations reduced the value of the reversion, then the landlord should ask the tenant for compensation on that basis.  Reasonable refusal will usually have to be based on:

• evidence of long term structural instability ( Igbal v Thakar [2004]); and/or
• the commercial impact on the landlord’s business that cannot easily be qualified ( Sargeant v Macepath (Whittlebury) [2004]).

What are the grounds for refusing assignment (qualified/fully qualified covenant)?

There are several ground for refusal including:

• The financial strength of the assignee
• Any breach of covenant by the tenant
• The superior landlord’s consent; and/or
• Any change of use/alterations.

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News | March 15, 2022

Assignment – how uncooperative can a landlord be.

Matilda Jacobs

Corporate Occupiers & Tenants

Real Estate Investment

Most commercial leases allow a tenant to assign its lease subject to obtaining landlord consent. While in theory this may seem relatively straightforward, recent case law has provided a stark reminder of the difficulties a tenant will encounter if the landlord is unwilling to cooperate, and the importance of adhering to procedure.

What is the law?

Covenants restricting a tenant’s right to assign fall into two categories: absolute and qualified.

An absolute covenant prohibits a tenant from assigning its lease. A qualified covenant prevents the tenant from assignment, except with landlord consent. Qualified covenants can be further categorised, into those which are subject to consent, but which place no restrictions on the landlord’s decision-making process, and fully qualified covenants, whereby consent must not be unreasonably withheld.

The Landlord and Tenant Act 1988 (“ 1988 Act “) imposes certain duties on a landlord in respect of fully qualified covenants, including an obligation to give consent (save where it is reasonable not to) and to respond to requests within a reasonable time.

If a landlord unreasonably withholds consent, then under Section 4 of the 1988 Act, the tenant can assign the lease without consent, and seek a declaration to that effect.

Crucially, these statutory obligations are only triggered when a landlord is served with a valid written application for consent.

What constitutes a valid application was a key issue in the recent case of Gabb v Farrokhzad.

Gabb v Farrokhzad [2022] EWHC 212 – the Facts

The claimant, Mr Gabb, had a 189 year lease of an apartment in Kensington Park. His relationship with the landlord was fractious and in October 2020 he negotiated a sale of his lease. Pursuant to the terms of his lease, which contained a fully qualified covenant, he approached his landlord, Mr Farrokhzad, for consent to assign. 15 months later Mr Gabb was still awaiting consent. During this period, one potential assignee had withdrawn from the process citing ongoing delays.

Mr Gabb claimed that in refusing to consent, Mr Farrokhzad had acted unreasonably, and as such he was entitled to a declaration and damages under the 1988 Act to compensate him for the losses suffered.

In response, Mr Farrokhzad claimed that his actions had not been unreasonable, but even if they had been, Mr Gabb’s requests had been invalid under the 1988 Act and therefore no liability arose. 

What constitutes a valid application?

Section 1(3) of the 1988 Act states that a “written application” must be “served.”

It is accepted that an email can be a “written” application, however, the court carefully considered what constitutes service under the 1988 Act.

Section 5(2) provides that an application is served if it is “served in any manner provided in the [lease]” and if there are no relevant provisions, as was the case here, if it is served “in any manner provided by section 23 of the Landlord and Tenant Act 1927.” The judge held that an application will therefore be “served” where it has been “caused to be received.” This was the case here. Mr Gabb’s email requested that Mr Farrokhzad set out his “requirements in relation to the licence to assign” which was clearly understood to be a request for consent.

Mr Gabb’s application was valid, and as such Mr Farrokhzad was obliged to give consent (unless it was reasonable not to) and to serve written notice on the tenant of his decision.

Was Mr Farrokhzad’s conduct unreasonable?

The judge held that Mr Farrokhzad’s conduct was unreasonable. He had “embarked on an extended campaign of delay,” expressly instructed managing agents to delay their response times, and in respect of the second buyer, had developed a “sudden desire to require financial references from a man recognised by all involved to be a billionaire.”

The court held that Mr Gabb was entitled to a declaration and damages (which included the abortive sale costs, council tax and interest on mortgage payments which would otherwise have been avoided).

However, exemplary damages are only appropriate where a landlord pursues a “deliberately obstructive policy” ( Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC 324 (Ch)) and in this case Mr Farrokhzad’s motives were unclear. Similarly, given that the declaration would permit Mr Gabb to assign his lease without consent, an injunction was unnecessary.

Key points:

• If a court finds that a landlord has unreasonably refused to consent to assignment, a tenant has the right to assign his lease without consent and a right to damages.
• To trigger liability under the 1988 Act, the application for consent has to be in writing and served on the landlord.
• If the landlord fails to respond within a reasonable time, it is equivalent to refusing to consent without valid reason.

The landlord in this case , Mr Farrokhzad, has applied for permission to appeal to the Court of Appeal and a further update will be provided in a future edition of QIA.

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Dealing with an application for consent to assign – when is it reasonable to say no.

If a lease is silent or simply states that a tenant may assign, then the tenant can assign without the need for the landlord's consent.

In reality, most commercial leases prevent the tenant from assigning without first obtaining the landlord’s consent.

Section 19(1) of the Landlord and Tenant Act 1927 (LTA 1927) provides that any qualified covenant in a lease against assigning, underletting, charging, or parting with possession of the premises or any part without the landlord’s consent, is subject to a statutory duty that consent is not to be unreasonably withheld.

The inclusion of this statutory provision raises the question “what constitutes unreasonably withholding?” There is not a straightforward answer. It requires consideration of statute and case law. This is no doubt why this application for consent to assign has landed on your desk this morning!

The impact of The Landlord and Tenant (Covenants) Act 1995

The Landlord and Tenant (Covenants) Act (LTCA 1995) inserted into s19 of the LTA 1927 a new subsection 19(1A) which provides that, in new tenancies, the parties can set out in the lease, or by other documentation, the circumstances in which consent to an assignment can be withheld and/or conditions subject to which consent may be given.

Therefore, your first step is to consider the lease and associated documentation to see whether there is any such provision. If there is such a provision in place at the time the request for consent is made, the landlord will not be held to be unreasonable in either refusing consent if the relevant circumstances exist or imposing any of the listed conditions (that is, entering into an Authorised Guarantee Agreement (“AGA”)) as are set out in the agreement entered into under s19(1A) LTA 1927.

Section 1 of the Landlord and Tenant Act 1988 (LTA 1988)

Sections 1 and 2 of the LTA 1988 impose certain duties on landlords in dealing with a written application for consent to assign, underlet, charge or part with possession.

The landlord must:

• give consent (except where it is reasonable to withhold it) and to do so within a reasonable time
• serve on the tenant written notice of their decision whether or not to give consent. The written notice should detail any conditions that the consent is subject to and if the consent is withheld, the reasons why.
• pass on applications for consent to others whose consent is also needed (that is, superior landlords or freeholders) within a reasonable period of time.

Under the LTA 1988 the burden of proof is on the landlord to show that they are acting reasonably in withholding consent.

When is it reasonable to withhold consent?

A test for reasonableness was laid down by the Court of Appeal in  International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch. 513.  The following points incorporate the guidance given by the Court of Appeal in this case:

The purpose of a covenant against assignment without the consent of the landlord (not to be unreasonably withheld) is to protect the landlord from having his premises used or occupied in an undesirable way or by an undesirable assignee.

A landlord cannot refuse consent to assign on grounds which have nothing to do with the relationship of landlord and tenant with regard to the lease of the premises

Generally, a landlord cannot refuse consent simply because the landlord is able to identify a breach of covenant in the lease. The question is whether the breach of covenant is of a nature which justifies the refusal of consent and whether the landlord has been prejudiced by the breach  (Ansa Logistics Ltd v Towerbeg Ltd [2012] EWHC 3651 (Ch)).

It is not necessary for the landlord to prove that the conclusions which led them to refuse consent are justifiable. What has to be shown is that those conclusions might be reached by a reasonable person in the circumstances.

In the case of  No1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch) , it was held to be reasonable in the circumstances for the landlord to require a bank reference and to arrange for its surveyor to inspect the property to check for breaches of covenant, despite the fact that these requirements were not actually specified under the lease.

Refusal of consent on the basis of good estate management may be considered reasonable, but the landlord will be expected to provide detailed evidence of the relevant policy ( Ashworth v Frazer Ltd v Gloucester City Council [2001] UKHL 59 ).

It may be reasonable for the landlord to refuse consent because of the purpose to which the proposed assignee intends to use the premises, even though that purpose is not prohibited under the lease.

There is a lot of case law surrounding this point. Some examples of where it has or has not been reasonable to refuse consent to assign are:

• where the landlord reasonably considers that the use proposed by the assignee will result in a breach of user covenant that they could enforce against, it may be reasonable to refuse consent. However, if the lease allows for only one use of the premises and the proposed use falls within that specified use it may not be reasonable to withhold consent  ( In ternational Drilling Fluids). 
• where the landlord was concerned that the proposed assignee may use the premises in a way that undermines their standing as a high class restaurant, it was held to be reasonable to refuse consent  (Rossi v Hestdrive Ltd [1985] 1 EGLR 50).
• where the landlord was concerned that the manner in which the proposed assignee is intending to trade from the restaurant is likely to undermine the premises and the premises around it, it was held to be reasonable to refuse consent  (Tollbench v Plymouth City Council (1988) 56 P & CR 194).
• where the assignee is a business rival who may cause an adverse reaction to the landlord’s trade in neighbouring premises, it may be reasonable to refuse consent  (see Sargeant v Macepark (Whittlebury) Ltd [2004] EWHC 1333 (Ch)and Sportoffer Ltd v Erewash Borough Council [1999] L & TR 433).

It may be reasonable for the landlord to refuse consent because of concerns that their contractual rights under the lease may be prejudiced by the assignment.

In the case of  British Bakeries (Midlands) v Testler & Co [1986] 1 EGLR 64,  the judge said: “A reasonable landlord is concerned with the tenant’s ability to meet the obligations under the lease as those obligations fall due”. Therefore, where the proposed assignee’s references call the assignee’s ability to pay the rent and fulfil their obligations under the lease into question, the landlord will normally be justified in withholding consent.

If the proposed assignee refuses to produce accounts or is unable to produce accounts because they are a newly incorporated company, it may be reasonable to refuse consent  (Landlord Protect Ltd v Dolman [2007] 2 EGLR 21).

If the purpose of the assignment is that the assignee can take advantage of a break clause, it may be justified for the landlord to withhold consent ( see Olympia & York Canary Wharf Ltd v Oil Property Investment Ltd (1995) 69 P & CR 43 and Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59).

Landlords usually only need to consider their own interests and not those of the tenant. However, there may be cases where the disproportion between the benefit to the landlord and the detriment of the tenant is such that to withhold consent would be unreasonable.

A landlord can be reasonable in refusing consent if the proposed assignment would bring about the diminution in value of the landlord’s reversion. However, there are important caveats to this principle. There needs to be a genuine foreseeable prospect of the landlord wanting to realise the value of his reversion. Further, if there is a large disparity between the benefit to the landlord and the detriment to the tenant it will not be reasonable to refuse consent  (Footwear Corporation Ltd v Amplight Properties Ltd [1999] 1 WLR 551).

What if the landlord withholds consent and the tenant doesn’t agree?

If the landlord withholds consent to the assignment and the tenant thinks they are being unreasonable, there are the following options for the tenant:

• Proceed without obtaining consent. This is risky because the landlord may bring a claim for damages and/or an action for forfeiture.
• Make an application to court for a declaration that consent has been unreasonably withheld and seek damages.

Who bears the burden of proof?

Since the introduction of sections 1 and 2 of the LTA 1988, the burden of proof is on the landlord to justify, with reasons, that they have acted reasonably in refusing consent and within a reasonable time. Therefore landlords should react promptly to an application for consent to assign. They need to consider all the facts of the matter as what is considered “unreasonable” very much turns on the individual facts of each case.

This article was first published in the PLC Property Litigation Blog .

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• > Enforceability of leasehold covenants: more questions...

Article contents

Enforceability of leasehold covenants: more questions than answers.

Published online by Cambridge University Press:  02 January 2018

The enforceability of the convenants in a lease after an assignment, whether by the landlord or the tenant or both, is a matter of considerable practical importance. In the case of long leases, assignments of the leasehold estate and of the reversion are a common occurrence; both will often change hands many times before the end of the term, creating a welter of potential parties to any action on the covenants. In addition, there may be sureties who have undertaken to guarantee performance of the tenant's covenants. The basic principles governing the parties' rights and liabilities in this field under the present law are well known, centring upon privity of contract, privity of estate and upon statutory rules found in ss 141 and 142 of the Law of Property Act 1925. The area is one of vital commercial significance to landlords, and which potentially affects the residential security and amenity enjoyed by tenants (in the case, for example, of landlords' covenants to renew or to repair). It is also a field in which many of the issues and concepts have been the subject of judicial and academic consideration for more than a century, yet a surprising number of uncertainties remain. The law consists of a complex set of rules, which together form something resembling an intellectual jigsaw puzzle, and one from which several pieces are still missing. The aim of the first part of this article is to highlight some of these gaps.

Access options

1. Landlord and Tenant: Privity of Contract and Estate; Duration of Liability of Parties to Leases , Law Commission Working Paper No 95 (London, HMSO, March 1986).

2. Landlord and Tenant Law: Privity of contract and Estate , Law Commission No 174(London, HMSO, November 1988). The proposals are summarised by Harold Wilkinson, ‘An Underdog's Charter?’ (1989) Conv 145.

3. To be legal, an assignment must be by deed; a lease must either by by deed or fall within the exception in Law of Property Act 1925, s 54(2).

4. See, for example, Smith , R. J. , ‘ The Running of Covenants in Equitable Leases and Equitable Assignments of Legal Leases ’ ( 1978 ) CLJ 98 CrossRef Google Scholar .

5. Walker v Harris (1587) Co Rep 22a at 23a.

6. Allied London Investments Ltd v Hambro Life Assurance Ltd (1985) 50 P & CR 207.

7. Thames Manufacturing Co Ltd v Perrotts (Nichol & Peyton) Ltd (1985) 50 P & CR 1.

8. Warnford Investments Ltd v Duckworth [1979] Ch 127.

9. Orgill v Kemshead (1618) Cro Jac 521; House Property and Investment Co Ltd v Bernardout [1948] 1 KB 314.

10. Centrovincial Estates plc v Bulk Storage Ltd (1983) 46 P & CR 393.

11. Selous Street Properties Ltd v Oronel Fabrics Ltd (1984) 270 EG 643.

12. Baynton v Morgan (1888) 22 QBD 74.

13. (1984) 269 EG 41.

14. Baker v Merckef [1960] 1 QB 656; Re Savile Settled Estates [1931] 2 Ch 210.

15. [1982] Ch I.

16. (1974) 27 P& CR482.

17. (1983) 267 EG 1039.

18. Law Commission No 174 (above), para 2.8.

19. [1982] Ch 1 at 10.

20. Keeues v Dean [1982] 1 KB 685 at 690.

21. J essamine Investment Co v Schwartz [1977] 2 WLR 145 at 153.

22. Law of Property Act 1925, s 77(1)(c) and Sch 2, Part IX; Land Registration Act 1925, s24(1)(b).

23. Moule v Garrett (1872) LR 7 Exch 101 at 104. For a recent application of the principle, see Selous Street Properties Ltd v Oronel Fabrics Ltd (above).

24. Baton Dickinson UK Ltd v Zwebner [1988] 3 WLR 1376.

25. Wolveridge v Steward (1833) 1 C & M 644 at 658.

26. Harris v Boots Cash Chemists (Southern) Ltd [1904] 2 Ch 376.

27. [1963] Ch 459. The case in fact concerned an obligation to rebuild a factory on the demised land.

28. The main cases upon which Lord Denning relied were Martyn v William (1857) I H & N 817 and Flight v Bentley (1835) 7 Sim 149.

29. [1971] Ch 764. The court expressly overruled Flight v Bentley (above), preferring the authority of Rickett v Green [1910] 1 KB 253.

30. Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] AC 99.

31. Congleton Corpn v Pattison (1808) 10 East 130, per Lord Ellenborough CJ at 135.

34. (1583) 5 Co Rep 16a.

33. Onslow v Corrie (1817) 2 Madd 330.

34. Paul v Nurse (1828) 8 B & C 486.

35. Odell v Wake (1813) 3 Camp 394.

36. Harley v King (1835) 2 Cr M & R 18.

37. Grescot v Green (1700) 1 Salk 199; Churchwardens of St Saviour's, Southwark v Smith (1762) 3 Burr 1271.

38. William v Bosanquet (1819) I Brod & B 238; Walker v Reeve (1781) 3 Doug 19.

39. Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592.

40. J Lyons d Co Ltd v Knowles [1943] KB 366.

41. Chancellor v Poole (1781) 2 Doug 764.

42. [1972] EGD 924.

43. Ibid , p 926.

44. Law Commission Working Paper No 95 (above), para 6.2.

45. P & A Swift Investments (a firm) v Combined English Stores Croup plc [1988] 2 All ER 885 at 887.

46. A surety undertaking to guarantee T2′s obligations will correspondingly be liable only for breaches occurring while privity of estate continues between his principal and the landlord.

47. Samuel v Howarth (1817) 3 Mar 272.

48. See Allied London Investments Ltd v Hambro Lfe Assurance Ltd (above).

49. Pinemain Ltd v Welbeck International Ltd (1984) 272 EG 1166; Re Dirtributors and Warehousing Ltd [1986] 1 EGLR 90; Coastplace Ltd v Hartley [1987] QB 948.

50. [1987] 3WLR 1167.

51. See above.

52. [1989] 1 All ER 979.

53. [1949] 2 KB 500.

54. Ibid , p 506 ( per Tucker LJ).

55. See Megarry , and Wade , , The Law of Real Property , 5th ed ( London , 1984 ), p 762 Google Scholar .

56. Cole v Kelly [1920] 2 KB 106.

57. Re Lyne-Stephens and Scott-Miller's Contract [1920] 1 Ch 472.

58. Thursby v Plant (1669) Wms Saund 268; Bickford v Parson (1848) 5 CB 920.

59. [1971] 1 WLR 1080.

60. Ibid , p 1082.

61. See above.

62. Stuart v Joy [1904] 1 KB 362; Both v Bowles (1905) 93 LT 801.

63. See above.

64. Per Cozens-Hardy LJ at pp 367-368.

65. [1965] 3 All ER 334.

66. Ibid , p 336.

67. National Conditions of Sale , 20th ed, conditions 18(3) and 19(6); General Conditions of Sale , 1984 revision, condition 17(4); Eagon v Dent (above).

68. [1987] 1 WLR 1085.

69. Ibid , p 1087.

70. For examples of cases where L2 was not bound due to non-registration of the estate contract, see Eagon v Dent (above); Phillips v Mobil Oil Co Ltd [1989] 1 WLR 888.

71. Eccles v Mills [ 18981 AC 360.

72. L2 will be liable, however, for continuing breaches ofcovenant, such as a simple backlog of disrepair from before the date of assignment.

73. [1986] CL 173.

74. [1989] 2 EGLR 38.

75. Grescot v Green (above).

76. This is the interpretation suggested by David Gordon, ‘The Burden and Benefit ofthe Rules of Assignment’ (1987) Conv 103 at p 107.

77. Harley v King; Omlow v Corrie (above).

78. Landlord and Tenant Act 1985, s 3(3A), inserted by Landlord and Tenant Act 1987, s 50.

79. [1986] 1 WLR 666.

80. [1987] 1 WLR 291.

81. Ibid , p 296.

82. Law commission Working Paper No 95 (above), para 2.1 1, note 33.

83. Harley v King; Omlorn v Corrie (above).

84. [1986] 1 WLR 666 at 672.

85. City and Metropolitan Properties Ltd v Grvcroft Ltd (above).

86. Law Commission No 174 (above), para 2.1.

87. Auriol v Mills (1790) 4 TR 94 at 99.

88. See Landlord and Tenant Act 1927, s 19(l) ( a ); Landlord and Tenant Act 1988. Note also the possibility or an absolute covenant against assignment: see, for example, Property and Bloodstock Ltd v Emerton [1968] Ch 94.

89. Harris v Boots Cash Chemists (southern) Ltd (above).

90. Law Commission No 174 (above), para 3.14.

91. Ibid , paras 3.17-3.19.

94. Ibid , para 2.19.

93. Ibid , para 2.16.

94. Ibid , para 3.15.

95. Law Commission Working Paper No 95 (above), para 1.1.

96. Law Commission No 174 (above), paras 3.6-3.7.

97. Ibid , para 3.20.

98. Ibid , para 2.23.

99. See above.

100. Law Commission Working Paper No 95 (above), para 6.2.

101. Law Commission No 174 (above).

104. Draft Bill, clause 1.

103. Ibid , clause 2.

104. Landlord and Tenant Act 1988, s l(4).

105; Draft Bill, clause 2(d).

106. Ibid , clauses 4 and 6.

107. Ibid , clause 4(3).

108. Law Commission No 174 (above), para 4.24.

109. Draft Bill, clause 4(4).

110. Ibid , clause 7.

111. Ibid , clause 10(l)( a ).

112. Ibid , clause 13[2) and Schedule.

113. Ibid , clause 9.

114. Ibid , clause 3[1).

115. Note, however, the Law Commission's proposal that a 'termination order' be made available to tenants: Forfeiture of Tenancies , Law Commission No 142 [London, HMSO, 1985).

116. Law Commission No 174 (above), para 2.8

117. Ibid , para 3,1(i).

118. See above.

119. See above.

140. [1986] 1 WLR 666 and [1987] 1 WLR 291.

121. Draft Bill, clause 1(3)( b ).

122. See above.

123. See above.

124. [1986] 1 WLR 666 at 672.

125. Draft Bill, clause 4(4)( a ).

126. Law Commission No 174 (above), para 4.26.

127. Draft Bill, clause 4(1) .

128. Ibid , clause 8(1).

129. See Law Commission No 174 (above), para 4.16, which denies any need for 'radical change' in this area.

130. See above.

131. Law Commission No 174 (above), para 4.49.

132. See above.

133. See above.

134. See above.

135. See above.

136. See above.

137. See Kumar v Dunning (above).

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• Volume 11, Issue 1
• Rosy Thornton (a1)
• DOI: https://doi.org/10.1111/j.1748-121X.1991.tb00622.x

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bits of law

Main section, land | ownership, leasehold covenant: enforcement, revision note | degree, introduction.

• tenants may assign lease & landlord may assign freehold reversion, question: extent to which successor in title able to enforce covenants?
• whether benefit & burden of covenant passes will depend on whether tenant is allowed to assign lease (when granting lease landlord may restrict tenant's ability to deal with leasehold interest) & there is no restriction on landlord's ability to sell freehold reversion Landlord and Tenant (Covenants) Act 1995 (LTCA) made changes to leases granted after 1 January 1996 ( new leases ) & old leases were made prior to this date

Enforcement of covenants: old leases

• lease creates estate in land (creates privity of estate - landlord & tenant relationship) & is also contract ( privity of contract between parties, enforceable throughout duration by parties)
• privity of contract & privity of estate allow for parties to sue if breach occurs
• if original tenant/landlord assigns lease: privity of contract between original tenant & landlord not ended privity of estate between original tenant & landlord ended no privity of contract between landlord & assignee privity of estate between landlord & assignee same rules apply if landlord assigns reversion
• if both original parties assign interest: privity of contract between original parties privity of estate between assignees
• if original tenant sublease to subtenant: privity of contract & estate remain between tenant & landlord privity of contract & estate exist between tenant & subtenant no privity of contract & estate between subtenant & landlord

Old leases: benefit

• L (covenantor) & T (covenantee) original landlord & tenant & T subleases to ST L in breach of covenant entered into with T & covenant would benefit ST & ST wishes to enforce

Law of Property Act 1925

• s .78 : deemed to be made with the covenantee... and the persons deriving title under him or them

Smith & Snipes Hall Farm v River Douglas Board [1949] 2 KB 500

• tenant was able to enforce covenant made with freeholder
• for parties who enter into lease on or after 11 May 2000 may be assisted by Contracts (Rights of Third Parties) Act 1999 & lease or sublease may expressly state third parties (subtenant or superior landlord) have benefit of covenants entered into with tenant

Old leases: burden

• T entered into covenant with L: ST (in occupation of premises) is person who caused covenant breach no privity of contract or estate between L & ST can burden pass to ST so L can enforce directly?
• burden of covenant ( positive or negative) does not run at common law
• burden of positive covenant does not run in equity

Tulk v Moxhay (1848) 2 Ph 774

• burden of negative or restrictive covenant may run in equity if: covenant benefits land of covenantee & parties intend burden to run (purchaser acquiring land with notice of covenant will be bound by it)

Hall v Ewin (1887) 37 ChD 74

• principle in Tulk v Moxhay applies if underlessee acquires an underlease with notice of covenants contained in head lease
• confirmed in Hemingway Securities v Dunraven (1994) 71 P & CR 30

Land Registration Act 2002

• s.29(1) : if purchase of the registered title for value (registrable disposition for valuable consideration) completed by registration any right not protected as described under s.29(2) not binding
• s.29(2) : priority of an interest is protected if - s.29(2)(b ): in case disposition of leasehold estate, if the burden of interest is incident to the estate
• under s.29 LRA 2002 : restrictive covenant binding on ST as he takes land subject to all implied & express covenant's incident to the leasehold estate
• indirect enforcement : L can sue T, who in turn may sue ST or if forfeiture clause L will be able to forfeit head lease & end ST's underlease, subject to availability of relief
• L granted lease to T (containing covenants by both L & T) & L has assigned reversion to L1 & T assigned lease to T1
• lease between L & T creates privity of contract & privity of estate between them
• for covenants entered into by L & T to be effective: necessary capable being enforced by L1 & T1, law imprints contractual obligations on the estate (but may not imprint all covenants)

Spencer's Case (1583) 5 Co Rep 16a

• covenants that touch & concern the land: benefit of L's covenants with T will run with land (pass to T1) & burden of T's covenants with L also runs with term (bind T1)
• in relation to covenants having reference to the subject matter of the lease
• s.141(1) : benefit of T's covenants with L will runs with reversion (pass to L1)
• s.141(2) : benefit of L's covenants with T will runs with reversion (bind L1)

Old leases: touching & concerning

• in principle L1 & T1 are bound by obligations entered into by original parties but may be limited

Grant v Edmondson [1931] 1 Ch 1

• In connection with the subject of covenants running with the land, it is impossible to reason by analogy. The established rules concerning it are purely arbitrary and the distinctions for the most part quite illogical.
• question: whether covenant touches & concerns the land or has reference to the subject matter of the lease

Congleton Corporation v Pattison (1808) 10 East 130

• must either affect the land itself during term ( such as those which regard the mode of occupation ) or affect the value of the land at the end of the term ( not merely from collateral circumstances )

P & A Swift Investments v Combined English Stores [1989] AC 632

• landlord (L) was a lessee & granted underlease to tenant (T)
• T was a subsidiary of the defendant (D) & D entered into covenant with L guaranteeing performance by T of covenants
• reversion assigned to claimant (C) with no express assignment of benefit of D's guarantee
• T defaulted in paying rent & went into liquidation
• was C entitled to benefit of the guarantee given by D?
• s.141 LPA 1925 applies to covenants by lessee & provides that benefit is annexed to & goes with reversionary estate
• covenant not entered into by lessee (T) but by parent company (D): privity of contract between D & L but no privity of estate no privity of contract or privity of estate between C & D
• no express assignment of benefit of contract statutory rules could not apply
• depends whether benefit ran under common law (C required legal estate & covenant had to touch & concern the land
• House of Lords: T's covenants touched & concerned the land & therefore D's guarantee must also
• guidance for covenants that touch & concern: 1. benefits only the reversioner for the time being & if separated from the reversion, ceases to be of benefit to the covenantee 2. affects the nature, quality, mode of user or value of the land of the reversioner 3. not expressed to be personal (specific to reversioner or tenant) 4. paying of sum of money not prevent form touch & concern land, providing 1 - 3 are satisfied & covenant is connected with something to be done on or in relation to the land
• option : to buy an estate or renew lease, gives person entitled right to compel owner to sell or grant estate, but he is free to exercise option or not
• covenants containing options may be included in leases
• X granted A a lease with option for to purchase freehold reversion. X sold freehold reversion to Y & A assigned lease to B (with no mention of option). B wants to exercise option.

Woodall v Clifton [1905] 2 Ch 257

• option to purchase freehold: not touch & concern land
• option to renew a lease: does touch & concern land

Griffith v Pelton [1958] Ch 205

• the mere assignment of the term operates to assign the benefit of the option
• other ways burden may bind S: if registered title: estate contract is an interest affecting a registered estate & should be protected by entry notice on charges register ( s.27 LRA 2002 ) & notice would bind Y if not would take free however as B in actual occupation option gives him proprietary right & he can claim overriding interest under sch.3 para.2 LRA 2002 ( s.29 LRA 2002 ) & enforce option against Y

Old leases: assigning & subletting

• landlord's may seek control, though covenants, over the tenant's ability to deal with the lease
• lease may contain covenant by the tenant that imposes a restriction on the tenant's ability to alienate the lease
• absolute covenant : tenant cannot assign or sublet
• qualified covenant : tenant cannot assign or sublet without landlord's prior written consent
• fully-qualified covenant : tenant cannot assign or sublet without landlord's prior written consent & consent cannot be unreasonably withheld

Landlord and Tenant Act 1927

• s.19(1)(a) : if lease contains qualified covenant proviso implied that consent cannot be unreasonably withheld

Landlord and Tenant Act 1988

• s.1(3)(a) : in reasonable time consent must be provided unless unreasonable to do so
• s.1(3)(b) : in reasonable time written notice of decision specifying if consent is subject to conditions or reasons if consent is withheld
• s.1(4) : reasons for withholding consent must not be unreasonable
• s.1(6) : person who duty under s.1(3) should be able to demonstrate that gave consent within reasonable time, if he placed conditions that they were reasonable, if he refused consent that it was reasonable & that he served notice within a reasonable time
• s.4 : breach of duty under this Act gives rise to civil proceedings (claim in tort for breach of statutory duty)

International Drilling Fluids v Louisville Investments [1986] Ch 513

• consent may not be withheld on grounds that he may has nothing to do with the landlord & tenant relationship

West Layton v Ford [1979] QB 593

• refusal of consent on grounds that subtenant will acquire the protection of the Landlord and Tenant Act 1954 (security of tenure as business tenant) but tenant does not have that protection: may be valid

Norwich Union v Shopmoor [1999] 1 WLR 531

• refusal of consent must within reasonable time: failure to give a valid written reason for refusal within a reasonable time, places landlord under duty to give consent

Milmo v Carreras [1946] KB 306

• granting sublease for term equal to or greater than the term of the lease takes effect as an assignment of the lease

Old Grovebury Manor Farm v W Seymour Plant Sales (No. 2) [1979] 1 WLR 1397

• if tenant proceeds with the transaction without applying for consent: assignment will be effective & assignee will be new tenant
• if tenant does not apply for consent: will have breached covenant & landlord may seek to forfeit the lease
• s.144 : no fine or sum of money in the nature of a fine is to be payable for the giving of consent ( s.144 may be expressly excluded in lease)

Enforcement of covenants: new leases

• new lease is granted on after 1 January 1996 (except if pursuant to contract or court order made before - remain old leases)
• original tenant under old leases may face liability despite years having passed
• Pre- 1996: L granted lease to T L assigned reversion to L1, who has assigned reversion to L2 T assigned lease to T1, who has assigned lease to T2 T2 has failed to pay rent & is in breach of repairing covenant

Re King [1963] Ch 459

• once benefit of covenants pass under s.141 LPA 1925 original assignor can no longer sue if breach occurs, right passes to reversion assignee
• L2 may sue T2: T2 is current tenant & L2 current landlord (there is privity of estate between them) >burden of covenants will have passed to T2 on assignment to extent they touch & concern land ( Spencer's Case )
• L2 may also sue T: T was originally bound by all tenant's covenants privity of contract between L & T & T remains liable under contract throughout entire term of lease benefit of L's contract with T has now passed to T2

Landlord and Tenant (Covenants) Act 1995

• s.2(1) : Act does not distinguish between: covenants which have reference to the subject matter of the lease & those that do not or whether covenant is express or implied
• s.3(1) : benefit & burden of all landlord & tenant covenants passes to successors in title
• s.3(2) : on assignment burden of tenant's covenants will pass except where: s.3(2)(a)(i) : assignor was no longer bound by it at the date of the assignment s.3(2)(a)(ii) : covenant falls to be complied with in relation to a part of the leased property that is not comprised in the assignment
• s.3(2)(b) : benefit of landlord's covenants will pass
• s.3(6)(a) : covenant will not pass to successor in title if it was expressed to be personal
• s.5(2)(a) : tenant released from burden of tenant's covenants when assigns lease
• s.5(2)(b) : tenant no longer entitled to benefit from landlord's covenants when assigns lease
• s.16(1) : tenant who assigns lease may be required to enter into an Authorised Guarantee Agreement ( AGA )
• s.16(3) : landlord can require an AGA if lease subject to an absolute or qualified covenant against assignment & condition of AGA imposed on consent
• s.16(4) : AGA can only impose obligation to guarantee the liability of his immediate assignee & can only last as long as lease vested in immediate assignee
• s.6(2)(a) : landlord must apply to tenant for release from burden of covenants on assigning the reversion
• s.8(1) : landlord serves notice on tenant, either before or within four weeks beginning with the date of the assignment (telling tenant of the assignment & requesting release)
• s.8(2) : landlord only released if tenant agrees or fails to respond within four weeks of service of notice or court declares release reasonable
• s.3(5) : landlord may enforce restrictive covenants as to user directly against a subtenant (as an occupier of the land)
• landlord's can still rely on Tulk v Moxhay to enforce other types of restrictive covenants
• s.22 : introduces subsections to s.19 LTA 1927 ( 1A - 1E ) apply to assignment of qualifying lease : new tenancy of property not used wholly or mainly as a single private residence landlord can agree with tenant circumstances when consent to an assignment may be withheld & state conditions subject to which consent to assignment will be given if landlord refuses consent on already specified grounds, tenant cannot use s.19(1)(a) LTA 1927 to argue unreasonable

Old leases: protecting former tenant

• s.17(1) : former tenant after assignment bound by covenant liable for fixed charge (old lease or AGA)
• s.17(2) : former tenant only if served with notice within 6 months of charge becoming due
• s.17(6) : fixed charge includes rent & service charges
• s.19 : if notice served & arrears recovered from former tenant tenant entitled to claim overriding lease lease granted out of landlord's reversion for the unexpired term of the original lease plus three days (effect: former tenant landlord of current tenant & may forfeit lease & recover possession of premises

Assignment and underletting

In the absence of any provision in the lease to the contrary, a tenant has the right to assign its interest in the lease and to create underleases. It is, however, a rare lease which does not restrict the tenant's freedom in this respect. Restrictions on alienation generally take the form of covenants on the part of the tenant prohibiting certain types of dealing. Those prohibitions may be 'absolute', 'qualified' or 'fully qualified' in form.

An absolute covenant (one that prohibits an action without allowing for landlord’s consent) is a complete bar if it covers the proposed transaction. Covenants that restrict the tenant's ability to assign or underlet are construed against the landlord. Key principles to emerge from case law are:

a covenant against assignment does not prohibit underletting

a covenant against assignment or underletting of 'any part' of the premises prohibits assignment or underletting of the whole as well as part only

a covenant 'not to underlet the premises' does not prohibit an underletting of part ( Wilson v Rosenthal (1906) 22 TLR 233 (not reported by LexisNexis®))

a covenant not to part with possession

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Heads of Terms: Alienation and transferability of the lease (Part 3/8)

Our eight-part series highlights the important aspects of negotiating Heads of Terms in a commercial lease and what tenants and landlords should consider and why.

Read the full series:

• What are they, and why are they important?
• Negotiating a commercial lease  

Alienation and transferability of the lease

• Rent-free periods and break clauses
• Service charge and insurance provisions
• The tenant's covenant to repair
• Making alterations to the property
• Final boilerplate provisions in a commercial lease  

Alienation is the general term for the tenant’s ability to deal with the lease. Most commonly, this will refer to the tenant’s ability to either;

• transfer the lease to a third party;
• underlet the whole or part of the premises; or
• share occupation of the premises.

It is equally important for both a tenant and a landlord that the agreement in relation to alienation is clearly set out in the heads of terms and followed through in the lease. 

Failure to consider these terms could result in the landlord giving the tenant complete freedom to deal with the premises however they wish, or could result in the tenant not having the flexibility to assign the lease when circumstances change.

Assignment involves the transfer of the whole, or part of, the lease to a third party. The assignee becomes responsible for rent and other obligations under the lease, and so the landlord will want to ensure that it is of good financial standing. 

Without an express restriction on assignment, the tenant’s benefit in the lease can be freely transferred to another party. For this reason, commercial leases will often contain restrictions on the tenant’s ability to do this. These terms should be clearly defined and agreed upon in the Heads of Terms so that there is no dispute when drafting the lease.

Under-letting

Underletting, or subletting, is where the tenant retains its own lease, but a new lease is granted to a third party from the tenant’s own lease. There are several situations where this arrangement is appropriate (for example, where there is an area of the premises which is surplus to the business requirements). However, landlords will want to retain a degree of control over any subletting, as there are circumstances where the sub-tenant can become the immediate tenant of the landlord.

Sharing occupation

Covenants that prohibit a tenant from sharing occupation prevent them from granting a licence to third parties for the use of part of the premises, and therefore sharing occupation of the premises. 

It can also prevent sharing with companies from within the same group. Therefore, tenants should resist an absolute bar against this type of restriction unless they can be sure that they will not require to share possession of the premises in the future.

Restrictions on alienation

As you can see, these provisions have the potential to cause dispute, given the differing requirements of the landlord and tenant. Therefore, Heads of Terms should record what restrictions have been agreed upon on the tenant’s ability to deal with the lease.

An absolute covenant against dealings would be unusual in a business lease because a tenant is unlikely to agree on a complete bar on their ability to deal with the lease. A tenant should resist any such restriction except in very short business leases.

A common compromise is for the lease to prohibit assignment of part of the premises but allow the tenant to assign the whole of the lease with the landlord’s consent. 

Where a lease does permit assignment with the landlord’s consent, it is implied by Section 19(1) LTA 1927 that such consent cannot be unreasonably withheld. This should still be expressed in the lease . 

IMPORTANT - As a tenant, you must remember that the requirement for the landlord to act reasonably does not prevent them from requesting that the tenant pays their reasonable legal or other expenses in connection with the consent.

It is usual for assignment of part to be restricted in the lease as this would raise issues to do with apportionment of rent and service charge, which could be a complication. 

However, the wording must be carefully considered as a simple covenant not to assign or underlet any part of the premises could result in a complete restriction of assignment of the whole of the premises ( Field v Barkworth [1986] 1.E.G.L.R. 1).

As a result of the LT(C)A 1995, s19(1A) was inserted into the LTA1927, whereby the landlord can stipulate certain conditions that must be met if they are to grant their consent to any assignment. 

The landlord can withhold its consent on one of the agreed grounds without acting unreasonably. 

The type of conditions that can be imposed are left to the parties to decide and should be recorded in the Heads of Terms.

One of the conditions that is most onerous for the tenant is that they may be asked to provide an Authorised Guarantee Agreement (AGA) on any assignment. 

This is where the outgoing tenant is required to guarantee the assignees obligations under the lease and is one of the most common restrictions that a Landlord may request. The AGA itself must comply with the requirements of S.16(2) LCTA1995, and importantly will only apply for as long as the assignee is liable. 

Tenants should consider whether it is appropriate in the circumstances for them to provide an AGA, particularly if it is likely that they will assign to someone in a better position. 

IMPORTANT - It is also important for corporate tenants to always ensure that any director of the company is not required to provide an AGA for any incoming tenant on assignment, otherwise this could result in them becoming personally liable for the lease obligations, including payment of the rent.

Another common condition that the landlord can impose in the lease is that a person of standing acceptable to the landlord, acting reasonably, enters into a guarantee and indemnity of the tenant covenants of this lease. 

A tenant must consider each of the conditions carefully and decide whether, in the circumstances, it is appropriate. From the landlord’s point of view, extensive restrictions on alienation are not always a sensible idea as they can have a downward effect on rent at rent review as it can result in the lease being less marketable.

Certain restrictions may also apply to subletting. For landlords, they should consider whether they should require that the sub-lease contains provisions that require the subtenant to enter into direct covenants with them, prohibit any further dealings of the sublease or require the subtenant to comply with all covenants with the head lease. 

Tenants should consider each restriction carefully as they can restrict the pool of tenants that can be let to. For example, where there is a provision preventing the tenant from subletting at less rent than currently payable under the head lease, if rents have fallen since the latest rent review, then it may prove challenging to sublet.

You can see that it is, therefore, key for landlords and tenants to agree on all aspects of alienation during negotiations for the lease and ensure that the heads of terms reflect the agreement. 

This guarantees that the lease does not become a burden to the tenant if they cannot dispose of it. It also allows the landlord to keep control over dealings with the lease to ensure that any incoming tenant is of good financial standing and will not negatively affect the landlord’s other existing tenants.

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Leasehold Covenants

8 Leasehold Covenants Revision objectives Chapter Map Introduction All leases contain covenants: promises contained within the lease that the landlord or tenant will carry out, or refrain from carrying out, certain acts in respect of the leasehold property. These covenants could cover anything from a covenant by the tenant to pay rent, or to keep the premises in repair, to a covenant by the landlord to insure the property. Leasehold covenants can be either expressly contained within the lease, or implied into the lease under common law or by statute. Implied covenants By the tenant To pay rates and taxes At common law there is an implied covenant on the part of the tenant to pay all rates and taxes payable on the property. To use the property in a tenant-like manner This is a very basic common law obligation to look after the property in a general fashion, but one which does not extend to the repair of the property. It might include things such as turning off the water if the tenant is going away, cleaning the chimneys and the windows, mending the electric light when it fuses and unblocking the sink when it is blocked by his waste ( Warren v Keen [1954] ). Not to commit waste This is where the tenant has carried out an unauthorised act or an omission which physically alters the state of the land. Waste can be: If there is nothing in the lease to the contrary, all tenants are liable for voluntary waste ( Yellowly v Gower (1855) 11 ExD 274). However, the extent of liability for permissive waste depends on the type of lease. A tenant of a fixed-term lease will always be responsible for permissive waste, unless the lease states otherwise; but the liability of a periodic tenant will depend on the length of the periodic term. Generally speaking, the shorter the term is, the less onerous the tenant’s responsibility. To allow the landlord to enter and view Where the landlord has either an implied or express obligation to repair, there is an implied obligation on the tenant to allow the landlord access to the premises to inspect them and carry out necessary repairs ( Mint v Good [1951] 1 KB 517). By the landlord Quiet enjoyment At common law, every tenant has the benefit of a covenant implied into their lease that the landlord will not breach the tenant’s quiet enjoyment of the premises; in other words, the tenant will be allowed by the landlord to occupy the premises undisturbed. A breach of quiet enjoyment must amount to an actual disturbance of the tenancy: actions by the landlord that cause a mere inconvenience to the tenant will not be sufficient to amount to a breach in this context. Case precedent – Browne v Flower [1911] 1 Ch 219 Facts: The landlord built an external staircase outside the tenant’s premises which affected the tenant’s privacy. Held: There was no breach of the tenant’s quiet enjoyment, as the landlord had done nothing to prevent or hinder the tenant in her ordinary use of the property. Principle: A mere inconvenience to the tenant will not amount to a breach of quiet enjoyment. Application: Use the facts of this case to support your argument that a breach of quiet enjoyment must amount to an actual disturbance of the tenancy. Common Pitfalls A covenant of quiet enjoyment does not usually relate to noise made by the landlord, although it may do if the noise is continuous and excessive to the point where the tenant is prevented from enjoying the use of the property ( Southwark LBC v Mills [1999] 4 All ER 449). Not to derogate from grant The landlord, having let the premises for a particular purpose, cannot then do anything that would prevent them from being used for that same purpose ( Southwark Borough Council v Mills ). Case precedent – Harmer v Jumbil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200 Facts: A landlord let a warehouse to a tenant to store explosives, for which he required a licence. One of the terms of the licence was that there were to be no other buildings within a certain radius of the storage unit. The effect of this was that the landlord was prevented, under the implied covenant of non-derogation from grant, from building within that radius. Principle: The landlord, having let the premises for a particular purpose, cannot then do anything to frustrate that purpose. Application: Use this case as an example of derogation from grant by the landlord. Repair At common law there is no implied covenant on the landlord to keep the premises in repair; however, there are a number of limited circumstances in which covenants relating to repair will be implied on the landlord, either at common law or by statute. These are as follows. Fitness for human habitation There is an implied covenant at common law in respect of furnished lettings of residential property that the premises will be fit for human habitation when they are let (but not subsequently – see Sarson v Roberts [1895] 2 QB 395). Case precedent – Smith v Marrable (1843) 11 M&W 5 Facts: A landlord had let a property to a tenant, which turned out to be infested with bugs. The property was found not to be fit for human habitation and the tenant was held by the court to be entitled to quit the premises immediately without giving notice under the lease. Principle: A furnished letting of residential property must be fit for human habitation when let. Application: Compare this case with the facts in your own scenario to determine whether or not the property is fit for human habitation. Defective Premises Act 1972 Wherever a landlord is responsible for the repair of a building, or if they have a right to enter leased premises to carry out repairs or maintenance, then a statutory duty will be implied for the landlord to keep ‘all persons who might reasonably be expected to be affected by defects in the premises’ reasonably safe from injury or damage on account of defects in the property (s 4 Defective Premises Act 1972 ). The obligation applies in respect of any person either visiting or occupying the premises. The duty applies wherever the landlord either knows about the defect or ought to have known about it. It is therefore up to the landlord regularly to check the condition of the building and keep up with repairs. There will be no liability if the damage or lack of repair was outside the scope of the landlord’s duties, however ( McNerny v Lambeth LBC [1989] 1 EGLR 81). Case precedent – Clarke v Taff Ely Borough Council (1980) 10 HLR 44 Facts: A woman fell from a table whilst redecorating because the table leg went through a rotten floorboard. Held: The landlord was liable. The age and construction of the house was such that it had been reasonably foreseeable that the floors in the building might rot due to dampness. He should therefore have carried out regular inspections of the property and undertaken a structured programme of maintenance in respect of it. Principle: Where the landlord is responsible for repair, the landlord is also responsible to keep tenants and their visitors reasonably safe from injury or damage. Application: Use this case to illustrate the type of injury for which a landlord will be responsible under the Defective Premises Act 1972 . Landlord and Tenant Act 1985 The landlord of any dwelling house let for a period of less than seven years shall be responsible for keeping in repair the structure and exterior (including drains and gutters) of the property, and to keep in repair and proper working order the installations in the house for the supply of water, gas and electricity and for sanitation and heating (s 11). Contrary to the position under the Defective Premises Act 1972 , the landlord’s obligation under the Landlord and Tenant Act 1985 does not arise until the landlord is notified of the disrepair. Once notice has been received, the landlord must carry out any necessary repairs within a reasonable time ( O’Brien v Robinson [1973] 2 WLR 393). The structure of the dwelling house is not confined to the load-bearing structure, but rather it ‘consists of those elements of the overall dwelling-house which give it its essential appearance’. This means that the landlord’s liability will extend to the repair or replacement of windows and doors, but will not include the redecoration of the exterior, unless this is necessary in order to keep the property wind- and water-tight ( Irvine’s Estate v Moran [1992] 24 HLR 1). Keeping the premises in repair does not extend to the rectification of an inherent defect in the property’s design: Case precedent – Quick v Taff-Ely BC [1986] QB 809 Facts: The original house meant that the house suffered from condensation. Held: The council was not liable under the 1985 Act. There was no actual disrepair to the building; rather, the damage was the product of a simple design defect in the house. Principle: Keeping the premises in repair does not extend to the rectification of an inherent defect in the property’s design. Application: Use this case to show the difference between a design defect and a lack of repair, under the Landlord and Tenant Act 1985 . As for the term ‘proper working order’, this means that the water and other installations in the house are in good mechanical order; in other words, that they are in proper working condition. Case precedent – Wycombe HA v Barnett (1982) 47 P&CR 394 Facts: A failure on the part of the landlord to lag the water pipes was not considered by the court to be a breach of his statutory duty to repair under the Act. If the water pipe had burst due to being rusted away, this would have fallen within the remit of the landlord’s repairing obligations, but for it to burst through freezing could not in all reasonableness be said to constitute a lack of repair. Principle: ‘Proper working order’ means in proper working condition and does not extend to a fuse blowing or pipes freezing. Application: Compare this case to the facts in your own scenario to show the extent of the repairing obligation under the LTA 1985 . Points to remember about covenants to repair Summary of implied covenants Express covenants Those you are most likely to come across are express covenants to repair, covenants not to assign or sublet, covenants to use for a particular purpose or covenants not to make alterations to the premises. Not to assign or sublet The landlord will usually make specific provision in the lease to deal with restricting assignment or subletting. The landlord may make the tenant’s covenant against assignment or subletting ‘absolute’, ‘qualified’ or ‘fully qualified’. It should be noted that a qualified covenant against assignment or subletting in the lease will be automatically converted into a fully qualified covenant under the provisions of s 19(1) of the Landlord and Tenant Act 1927 . On receiving a request to assign or sublet, the landlord must respond in writing to any request to assign or sublet within a ‘reasonable time’, giving reasons for their refusal if applicable (s 1(3) Landlord and Tenant Act 1988 ). Following NCR Ltd v Riverland Portfolio No. 1 Ltd (No. 2) [2005] 2 EGLR 42, a common-sense approach will be taken by the courts when determining what is a reasonable time: essentially, the landlord should act as quickly as is reasonable to do so under the circumstances. The reasons for refusal to a proposed assignment or subletting must also be reasonable. What is and is not will not be limited to a set of particular circumstances, but should be judged on the facts of each individual case ( Bickel v Duke of Westminster [1977] QB 517). Consent will automatically be deemed to have been unreasonably withheld if the landlord withholds consent on grounds of colour, race, ethnic or national origins or sex. This is in accordance with s 24 Race Relations Act 1976

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9 March 2021

Residential and rural update – March 2021 – 2 of 5 Insights

Alterations covenants in leases – nine months on from Duval

It's just over nine months since the ground-breaking decision in Duval was handed down by the Supreme Court. As expected, the case has thrown up a whole host of practical challenges for both landlords and tenants in the context of alterations to leasehold properties.

As a reminder, the case held that where there is an absolute covenant against a tenant's alterations in a lease, coupled with a landlord's covenant to keep the leases in a building in similar form and to enforce the tenants' covenants in those leases, a landlord cannot grant a licence to a tenant to undertake works which (without the licence) would have amounted to a breach of covenant. 

Nine months on, how have landlords been reacting to the decision and adapting their approaches to applications from tenants for consent to works, and what has been the fallout for leaseholders intent on carrying out improvements to their flats but seemingly frustrated by the impact of this decision?

It's worth recapping that there is a distinction between an absolute covenant against alterations where the drafting states that alterations (in some cases limited to those of a structural nature) are not permitted at all and a qualified covenant which states that alterations can be undertaken but only with the landlord's prior written consent. With a qualified covenant, it is implied by statute that a landlord's consent may not be unreasonably withheld. There is no such implied proviso with an absolute covenant. Duval is concerned with absolute covenants.

Not surprisingly our experience is that landlords have been taking very different approaches, often dictated by the size of the block in question. For those smaller blocks, where the freehold is owned by a tenants' company, many are giving notification of proposed works to each of the tenants in the building with a window of opportunity within which they can object to those works. If they fail to respond within a specified period, the notice provides that it is assumed there is no objection. This still carries some risk in that not all tenants may receive and acknowledge the notice but it represents a pragmatic approach where there is a general consensus within a tenant owned block that the Duval case should not prevent leaseholders from altering and upgrading their properties as they have done in the past. 

The resulting licence for alterations can incorporate an indemnity from the tenant who is doing the works to the freeholder, in the event that any of the other tenants object and threaten proceedings against the freeholder. Whether this will be commercially palatable for a tenant will depend to some extent on the nature of the intended works. A major renovation of a flat involving structural alterations, the scaffolding of the block and noisy works for in excess of six months could well give rise to a potential challenge from the owner of the flat below who may be planning to let their flat amid the ensuing noise and disruption. It's easy to see how a claim for damages could be made in these circumstances.

Other landlords are taking a very cautious approach and are following the decision in Duval carefully, by not agreeing to any works which would be in breach of the tenant's covenant in the lease. This presents its own difficulties, not just for the particular tenant who wishes to undertake works to their flat but also, in the longer term, for the remaining tenants in the block with the possible impact on the value and marketability of their properties if there is a general policy in the building against permitting alterations due to constraints in the lease. It's fair to say that an easy solution to the conundrum has not yet presented itself and seems unlikely to do so until the Duval decision has been tested by another case on similar facts. Some tentative thoughts on possible solutions have been mooted, though each is not without its complications.

Possible solutions

• As mentioned above, for smaller blocks the practical approach has been to try and establish that there is no objection from individual tenants in the block and once this has been established to grant a licence for alterations with a tenant's indemnity to the freeholder. This is working well for some set ups, albeit these are early days, but there are obvious logistical difficulties with this approach for larger blocks.
• A freeholder could consider making an application to the Lands Tribunal under Section 84 of the Law of Property Act 1925, which allows the modification or discharge of a restrictive covenant. The argument would be that the covenant impedes some "reasonable use" of the property. For Section 84 to apply, the lease must have been granted for a term of at least 40 years (which will invariably be the case) and more than 25 years must have expired. This might be suitable for a scenario where there is only one dissenting tenant and it seems clear that the works will not adversely affect the remainder of the building and so it would be reasonable for the Upper Tribunal to consider authorising the works going ahead, if not to modify the covenant itself.
• If a tenant is in the process of extending their respective lease under the statutory route, they might consider advancing an argument that an absolute covenant against all alterations is in fact a "defect." The statutory process allows the new lease to address any defect in the existing lease. This has yet to be tested but it does not seem too much of a stretch to make a case that all alterations should be subject to the provision of consent where it is reasonable that consent should be given. This does not assist those who are not currently in the position of extending their leases and so has obvious limitations.

Wider implications

Concern has been expressed as to whether Duval could have more far-reaching consequences and apply to other covenants in the lease such as an absolute covenant to keep a flat carpeted or against the keeping of pets in flats. These covenants have been routinely relaxed in deeds of variation or by informal permissions being issued, but does Duval mean that it is no longer possible to do that? It depends to a certain extent whether the requirement is listed as a covenant in the lease. If it is then on the face of it there seems no reason why the Duval principle should not be extended to this sort of scenario. If there is a carpeting requirement, or a prohibition on keeping pets is within the regulations section of the lease, where there is provision for the landlord to vary and to add to/amend the regulations over time, then it seems fair to say that the regulations were intended to build in some flexibility and so Duval ought not to apply.

For the moment, both landlords and tenant find themselves stuck. In the past it was not uncommon for premiums to be paid to relax alterations covenants in a lease or for consent to be provided to specific structural works outside of the strict requirements of the lease. Landlords have therefore lost this potential income stream and so are feeling the impact of the decision. For the moment, buyers of leasehold property should certainly look with care at the nature of an alterations covenant in the lease, with not only their own plans in mind but also with one eye on future resale. Enquiries should be made as to the freeholder's policy on alterations in the context of Duval , where any part of the alterations covenants are absolute.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Residential & Rural team.

In this series

In from the cold for commonhold the uk government renews efforts to promote leasehold alternative.

by Lisa Bevan

Pets at home? Recent developments on no pet tenancy clauses

by Clare Harman Clark

Opportunities and threats for rural landowners under the Energy White Paper

by Edward Willis

Residential news round-up – March 2021

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