Leasehold Covenants and Enforceability — SQE1 FLK2 Land Law

Your client has just been sent a bill for £30,000. It is for repairs to premises it walked away from in 2015, when it lawfully assigned its lease with the landlord's consent. It gave no guarantee to anyone. It has not been a tenant of anything for ten years. And it is going to have to pay. Why? Because the lease was granted in 1992.

One date decides this entire topic. Get it wrong and every answer that follows is wrong with it. This is Leasehold Covenants and Enforceability, the eleventh topic in Land Law. It is really two systems running side by side: the old common law, and the statute that replaced it for leases granted from 1996. Keep your client in mind. We are coming back for it.

Here is the route. What a leasehold covenant is, and the terms the law puts into every lease whether you write them or not. Then the two relationships that do the work: privity of contract and privity of estate. Then how the benefit and the burden pass on an assignment. Then the 1995 Act, where your client's problem lives. And last, alienation: when a landlord can stop you assigning at all.

Start with what a leasehold covenant actually is. It is a promise contained in the lease, made between landlord and tenant. Some are positive: pay the rent, keep the premises in repair, insure, decorate. Some are restrictive: do not sublet without consent, do not alter, do not keep pets. And here is the first thing to fix. Unlike freehold covenants, the burden of a positive leasehold covenant can pass to a successor.

Why does leasehold law manage what freehold law cannot? Because a lease has a dual nature. It is a contract, creating personal obligations between the two people who signed it. And it is a property right, creating an estate in land that binds whoever holds it. Two relationships, running at once, over the same premises. Almost every question in this topic is really asking which of the two you are in.

Before the two relationships, the terms the law puts in whether or not anyone writes them down. First, quiet enjoyment, implied into every lease, commercial as well as residential. And forget the word quiet. It has nothing to do with noise. It is a promise that the landlord, and anyone claiming under the landlord, will not substantially interfere with the tenant's possession.

Try one. A landlord wants a rent increase the tenant has refused, so he boards up the whole shopfront and padlocks the delivery door. They stay up for six weeks and takings collapse. He says the shop is commercial and the hoardings made no noise. Breach? Obviously. Customers can neither see nor enter, and the motive makes it worse rather than better.

But notice the limit, because this is where candidates overreach. The covenant is prospective. It promises no interference after the grant. It gives no warranty about the state of the premises as they stood when the lease was granted. A council let flats in a block converted in 1919 with no sound insulation, so a tenant heard every footstep next door. The block was in exactly that condition when her tenancy began, and the neighbours behaved reasonably. No breach.

Second implied term, and this one is residential. A dwelling let for a term of less than seven years must be fit for human habitation when the lease is granted, and must stay fit throughout the term. That is section 9A of the Landlord and Tenant Act 1985, inserted by the Homes (Fitness for Human Habitation) Act 2018. Damp, ventilation, water supply, facilities for cooking and sanitation all come into it.

Everything else is express: whatever the parties actually wrote. Rent, repair, insurance, permitted user, controls on dealings. These are read like any other contractual provision, by asking what the words mean in the context of the lease as a whole. Genuine ambiguity is read against the party who drafted the clause, which in a lease is almost always the landlord.

Now the two relationships. Privity of contract is the ordinary principle that only the parties to a contract can sue and be sued on it. The original landlord and the original tenant are in privity of contract. It is personal. It is about the people. And it does not care in the least who is currently occupying the building.

Privity of estate is the other one, and it is about the land. It exists between whoever currently holds the landlord's reversion and whoever currently holds the tenant's leasehold estate. It arises when an assignee takes the lease, and it ends the moment that assignee parts with it. Privity of contract is about the people. Privity of estate is about the land. Hold those two sentences and half this topic is already done.

For an old lease, a covenant only runs under privity of estate if it touches and concerns the land. That means it must affect the parties in their capacity as landlord and tenant and relate to the premises themselves, rather than being purely personal. Rent, repair, user restrictions and insurance all touch and concern. A promise to repay a personal debt does not.

So try this. A 1990 lease of a workshop contains the usual covenants, and one more. The tenant promises to repay a personal loan of £15,000 the landlord made before the lease was granted. Nothing to do with the workshop. The tenant assigns. Is the assignee bound to repay the loan? No. It is written into the lease, but it does not touch and concern the land, so its burden never passed. The landlord must look to the original tenant.

Now make the covenants move. The benefit first, because it is the easy half. Assign the lease and the new tenant can enforce the landlord's repairing covenant. Sell the reversion and the new landlord can enforce the tenant's covenants, including the right to the rent. Nobody assigns the benefit separately. It runs with the land, and for an old lease the reversion side of that is LPA 1925 section 141.

The burden is where the difficulty lives, and it is where the oldest case in this topic still governs. Spencer's Case, decided in 1583, established the rule. For leasehold covenants, both the benefit and the burden run with the land to an assignee who has privity of estate, provided the covenant touches and concerns the land. Positive or restrictive, it makes no difference. That is why a leasehold repairing covenant binds an assignee who never promised anything.

So the current tenant is liable. Here is the sting. Under an old lease, the original tenant is liable as well, and stays liable, because privity of contract does not end when the estate is assigned. It runs for the whole of the contractual term. Which is why your client, who has not been anyone's tenant for ten years, is looking at a bill for £30,000 of somebody else's disrepair.

Ten years out of possession, and still liable. That was thought extremely harsh, and it is the problem the legislation set out to solve.

There is one limit worth having, though. The original tenant promised to pay the rent for the term, and the term means the contractual term. So what happens when the contractual term expires and the tenant in occupation holds over under the statutory continuation for business tenancies? In City of London Corp v Fell, the House of Lords held that the original tenant is not liable for rent accruing during that continuation. The statute prolongs the assignee's tenancy, not the original tenant's contract.

Now the reform. The Landlord and Tenant (Covenants) Act 1995 applies to tenancies granted on or after 1 January 1996. Section 5 is the headline: on an assignment of the whole, the tenant is released from the tenant covenants. The original tenant walks away. Section 3 does the other half of the job. It passes the benefit and burden of the covenants to the assignee, so the landlord can enforce against whoever currently holds the lease.

Section 3 changed something else that catches people out. For a new tenancy, the requirement that a covenant touch and concern the land is gone. Every covenant of the tenancy passes except one expressed to be personal. An assignment covenant, a deposit covenant, an insurance covenant, a repairing covenant, all pass alike. The only question is whether the lease says the covenant is personal.

Which leaves landlords needing something back, and section 16 gives it to them. As a condition of consenting to an assignment, a landlord may require the outgoing tenant to enter into an authorised guarantee agreement, guaranteeing the assignee's performance. It is a separate contract, and it survives the statutory release, which is exactly the point of it.

But it guarantees a person, not the lease. It can guarantee only the immediate assignee. When that assignee lawfully assigns on, it is released under section 5, and the guarantee falls away with it, because there is nothing left to guarantee. A landlord who wants continuing cover has to take a fresh guarantee from that year's outgoing tenant. That single rule is what stops the chains of guarantors the old law produced.

And now the question that decides everything. When was the lease granted? Not when it was assigned. Granted. A lease granted before 1 January 1996 stays an old tenancy for the whole of its life, however many times it changes hands afterwards. Assign a 1993 lease in 2020 and the 1995 Act still does nothing for you. Many commercial leases running today were granted before 1996 on terms of twenty-five years or more.

Try the trap in its usual form. A three-year lease of a small storage unit, granted in 2019, assigned last year with consent, no guarantee given. The landlord says the statutory release is for commercial leases of seven years or more and a unit this size is beneath the notice of the legislation. Is the outgoing tenant released? Yes. The Act applies to every tenancy granted on or after 1 January 1996, whatever the length of the term and whatever the premises. There is no seven-year threshold.

Last heading. Alienation, which is the landlord's control over who ends up holding the lease. Everything turns on how the clause is drafted. An absolute prohibition says the tenant shall not assign. Full stop, no mention of consent. That is a valid clause. The tenant cannot assign at all, and the landlord need not justify anything, because there is nothing to justify.

A qualified covenant is the common one: not to assign without the landlord's consent. Into that, section 19 of the Landlord and Tenant Act 1927 implies a proviso that consent is not to be unreasonably withheld, whether or not the lease says so. The Landlord and Tenant Act 1988 adds teeth. On a written application the landlord must decide within a reasonable time, and serve written notice of the decision with any conditions or reasons. It carries the burden of proving that a refusal was reasonable.

So what is reasonable? Grounds about the assignee, or about the use. Poor financial standing, a history of breaking covenants, a proposed use the lease does not permit, or the tenant being in breach when it asks. What is not reasonable is using the consent clause to get something the lease never gave you. Wanting the premises back, or wanting to re-let at today's rents, is the classic example. So is refusing to engage at all.

One drafting trap worth knowing. Where a lease bars assignment in one clause and, pages later, promises that consent will not be unreasonably withheld, the two are read together. A reading that leaves one clause with nothing to do is avoided, so the bar is treated as qualified: the tenant may assign with consent, which cannot be unreasonably withheld. And subletting follows the same rules, except that it transfers no leasehold estate, so the tenant stays liable under the head lease.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn what each rule does, and let the names be memory pegs.

If you keep only three things, keep these. Spencer's Case, from 1583, for the rule that benefit and burden both run to an assignee with privity of estate where the covenant touches and concerns the land. Section 5 of the 1995 Act, which releases the tenant on assignment, with section 3 carrying the covenants across to the assignee. And section 19 of the Landlord and Tenant Act 1927, the proviso that turns a consent clause into something a landlord has to justify.

Five traps. One, and it costs whole questions: the regime is fixed by the date the lease was granted, never the date it was assigned. Two: touch and concern is an old-lease test only. For a new tenancy section 3 abolished it, and the only covenant that does not pass is one the lease says is personal.

Three: there is no seven-year threshold in the 1995 Act. Seven years belongs to registration of leases, and to the fitness term for dwellings. The statutory release applies to a tenancy of any length. Four: an authorised guarantee agreement guarantees a person, not the lease. Once the assignee you guaranteed has lawfully assigned on, your guarantee is spent.

Five: an absolute prohibition on assignment is perfectly valid. It is not void as a restraint on alienation, and section 19 does not reach it, because there is no consent requirement for the proviso to attach to. A landlord under an absolute bar may refuse for a good reason, a bad reason, or none at all.

Quick check. A tenant holds a unit in a parade of shops under a fifteen-year lease. Clause 12 says simply that the tenant shall not assign the lease. No other clause deals with assignment, and none mentions consent. The tenant wants to retire and has found a well-funded assignee for the same trade. The landlord refuses outright and will not discuss it. The neighbouring units are all let on leases forbidding assignment without consent, not to be unreasonably withheld.

Can the tenant challenge the refusal as unreasonable? Three candidate answers. One: yes, because a requirement of reasonableness is implied into every restriction on assignment. Two: yes, because an absolute bar on assignment is void as a restraint on alienation. Three: no, because the statutory proviso applies only where the lease requires the landlord's consent. Pause here if you want a moment.

The answer is three. Clause 12 is an absolute prohibition: it forbids assignment outright and says nothing about consent. Section 19 of the Landlord and Tenant Act 1927 operates only on a qualified covenant, one against assigning without licence or consent. With no consent mechanism there is nothing for the proviso to attach to, so no reasonableness requirement arises, and the landlord need justify nothing.

The tenant can try to persuade the landlord to grant a licence as a matter of bargain. Or deal with the premises in some way the lease does not forbid.

Why the others fail. One would make section 19 apply to every restriction, which is exactly what it does not do. Two is tempting and simply wrong: a lease may lawfully be made non-assignable. And the neighbours' leases are beside the point, because each lease is its own bargain.

Five things to take away. One: privity of contract is about the people, privity of estate is about the land. Almost every question is asking which one you are in. Two: for an old lease the burden runs to an assignee only if the covenant touches and concerns the land. The original tenant stays liable for the whole contractual term.

Three: for a tenancy granted on or after 1 January 1996, section 5 releases the tenant on assignment. Section 3 carries the covenants to the assignee, touch and concern having gone. Four: an authorised guarantee agreement survives that release, but only for the immediate assignee. Five: a qualified covenant against assignment attracts the section 19 proviso; an absolute one does not.

And your client, with its bill for £30,000? The lease was granted in 1992. That is an old tenancy, and it stays one for the whole of its life, whatever happened in 2015. Your client was never released, and it pays. Ask the date first. Always. Next time, Lease Termination and Remedies.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.