Leasehold Covenants — SQE1 FLK2 Property Law and Practice

A man took a lease of a shop in 1990, for a term of twenty-five years. He ran his business there, and then he assigned the lease and moved on. He has had nothing to do with the building since. The assignee sold on, and the business after that one has stopped paying. The landlord has now sent the man a demand for £42,000 of rent arrears he had no part in running up. Does he have to pay it?

Yes. Once a tenant, always a tenant, and that is the problem this whole topic exists to explain. This is Leasehold Covenants, and the first question you ask about any of it is when the lease was granted. Keep that man in mind. We come back for him.

Here is the route. How covenants bind people who never signed the lease. Then the great divide of 1996, and what each side of it does to an outgoing tenant. Then guarantors, and the landlord's own way out. Then breach: waiver, forfeiture, and taking goods for rent. Then repair. And finally what a tenant can do when the landlord is the one in default.

Start with why anyone other than the original parties is liable at all. Lease covenants run with the land. When the lease is assigned, the assignee takes the benefit of the landlord covenants and the burden of the tenant ones. When the landlord sells the reversion, the buyer takes the mirror image. That relationship between the current landlord and the current tenant is privity of estate, and it is what lets a landlord sue a tenant who never signed anything.

Privity of contract is different. It is the bare fact that two people made a promise to each other. And for leases granted before 1 January 1996 it never goes away. The original tenant promised to perform the covenants for the whole term, and assigning the lease does not unmake that promise. So the landlord gets a choice of defendants: the current tenant, the original tenant, or anyone in between.

Which is our man with the demand. His lease is from 1990, so it is an old tenancy. He is liable for arrears run up by a business he has never heard of, years after he walked away. There is one brake on it, and it matters in practice. Section 17 of the 1995 Act does apply to old tenancies. A landlord cannot recover a fixed charge from a former tenant unless it serves notice within six months of the charge falling due.

So the old regime punished the wrong people. Parliament changed it. The Landlord and Tenant (Covenants) Act 1995 applies to leases granted on or after 1 January 1996. Under s.5, the tenant is released from the tenant covenants on a lawful assignment. Automatically. No agreement required, and no landlord goodwill needed.

And note how wide that release is. It is not confined to rent. It covers the tenant covenants generally, service charge included, and it runs from the date of the assignment. What survives is only liability for breaches that had already happened, which is s.24(1). So a landlord chasing an outgoing tenant for a service charge that fell due after the assignment is chasing the wrong person.

Unless there is an authorised guarantee agreement. Get s.16 the right way round, because this is a common slip. It does not require an AGA. It permits the landlord to ask for one as a lawful condition of consenting to the assignment, where it is reasonable to do so. So the AGA is a bargaining chip, not an automatic statutory burden.

And an AGA is narrow in two ways. It can guarantee only the person to whom the outgoing tenant assigns, nobody further down the chain. And it can impose no liability for any time after that assignee is itself released. So hold this one. A company assigns in 2022 and gives an AGA expressed to last until the end of the term, whatever happens. Its assignee assigns on in 2025. It comes back at the quick check.

Now a distinction that catches people out. A woman holds a ten-year lease of a shop. Two years in, with consent, she underlets the whole shop and moves her business elsewhere. Her undertenant stops paying, so she stops paying, and the landlord comes after her. She says the undertenant is the real tenant now. Is she still liable?

Yes. Underletting is not assignment. She has carved a lesser interest out of her own and kept the headlease, so she is still the tenant, and s.5 has nothing to release. The release mechanism bites on assignments only. If you want out, you assign. If you underlet, you stay in the chain and you carry your undertenant's default.

Guarantors follow the tenant. Where a tenant is released under s.5 on a lawful assignment, s.24(2) releases that tenant's guarantor to the same extent, whether the guarantor agrees or not. And a landlord cannot claw that back by requiring the outgoing tenant's guarantor to guarantee the incoming assignee instead. An agreement to that effect frustrates the Act and is void under s.25.

There is one thing the landlord can lawfully ask for. A sub-guarantee: the guarantor guaranteeing the outgoing tenant's own liability under its AGA. That keeps the guarantor one step removed from the new tenant, which is the distinction the anti-avoidance rule turns on. Guaranteeing the assignee is void. Guaranteeing your own tenant's guarantee is not.

Now turn the whole thing around and look at the landlord, because the Act is deliberately asymmetric. A tenant is released automatically. An assigning landlord is not. Under ss.6 to 8 it must apply for release, by serving notice on the tenant before the assignment of the reversion or within four weeks after it. The tenant may object, and then the county court decides whether release is reasonable.

Miss that procedure and the original landlord stays bound by its covenants alongside the new reversioner. So a tenant burnt out of premises by a fire, with an insurance covenant that nobody honoured, can pursue the landlord who sold up years ago. There is no automatic exit for a landlord, only a procedure, and a landlord who wants certainty has to limit its liability by drafting from the outset.

One more on sales of the reversion, and it turns on the lease date again. For a new tenancy, s.23 of the 1995 Act says that transferring the reversion does not pass the right to sue for breaches that happened before the transfer. Those accrued rights stay with the seller unless expressly assigned. For an old tenancy, s.141 of the Law of Property Act 1925 did the opposite, carrying accrued rent claims to the buyer and stripping them from the seller.

Breach next. Start with waiver, because it is the trap that loses landlords their best remedy. If the landlord, knowing of the breach, does something that treats the lease as continuing, it waives the right to forfeit for that breach. Demanding or accepting rent is the classic example. Accept a quarter's rent knowing about the unauthorised alterations and the forfeiture for those alterations is gone.

Forfeiture itself has a gate in front of it. For any breach other than non-payment of rent the landlord must first serve a notice under s.146 of the Law of Property Act 1925. It must specify the breach, require it to be remedied if it can be, and require compensation. Then it must give the tenant a reasonable time to comply. Only then may it forfeit, by court proceedings or by peaceable re-entry.

And forfeiture is rarely the end of the story, because the tenant can ask for relief. The court has a broad discretion, and it is exercised proportionately: a landlord should not receive a windfall out of all proportion to the breach. Even where the landlord has already changed the locks, the tenant can still apply. A landlord who has re-entered peaceably is still treated as proceeding to enforce its right of re-entry.

For rent arrears specifically, there is a remedy that needs no court at all. Commercial rent arrears recovery, under the Tribunals, Courts and Enforcement Act 2007, lets the landlord send enforcement agents to take control of the tenant's goods. But it is deliberately narrow. Premises let and occupied wholly as commercial premises. Principal rent only, with interest and VAT on it.

So try this. The lease reserves service charge and insurance as rent, and the tenant owes all three. Can the agents be sent in for the lot?

No. Only the principal rent, however the lease dresses the other sums up. Two numbers go with it. The net unpaid rent must be at least seven days' rent before you can use CRAR at all. And the tenant must be given notice of enforcement of at least 14 clear days before goods are taken into control, raised from seven with effect from 1 May 2026.

Repair now, because that is where the large sums are. The standard depends on the age, character and locality of the building, and on the words used. A covenant to keep in repair can require you to renew subsidiary parts. What falls outside it is renewal or reconstruction of substantially the whole. That line comes from Lurcott v Wakely.

Then two statutory brakes on a landlord suing for disrepair. Under s.18(1) of the Landlord and Tenant Act 1927, damages are capped at the amount by which the disrepair reduces the value of the reversion. And the second limb of the same section goes further. No damages at all where the premises are to be pulled down at or shortly after the end of the term. The same goes if they are to be so structurally altered as to make the repairs valueless.

That second limb is brutal in practice. A landlord with planning permission and a signed building contract to demolish ten weeks after expiry recovers nothing, however carefully its schedule of dilapidations was prepared. The repair state of a building about to come down adds nothing to the value of the reversion.

There is also the Leasehold Property (Repairs) Act 1938. It applies to a lease granted for seven years or more with three or more years still to run. A landlord claiming damages or forfeiture for disrepair must serve a notice telling the tenant of its right to a counter-notice, and then get the leave of the court. Two hoops before you start.

Which is why well-drafted leases contain a self-help clause. The landlord enters, does the repairs the tenant should have done, and recovers the cost. And here is why it is worth having. That claim is a claim in debt, not damages for breach of the repairing covenant, so the s.18(1) cap does not apply to it and neither does the 1938 Act. That is Jervis v Harris, and it is the route that gets the works done and the money back.

Now the other direction. What can a tenant do when the landlord will not repair? Damages, an injunction, and specific performance where damages are inadequate, the obligation being defined enough for a court to supervise. For a dwelling there is a statutory jurisdiction too, under s.17 of the Landlord and Tenant Act 1985.

What a tenant may not do is simply stop paying rent. There is no general right to withhold. But there are two narrower routes. A tenant who has given notice and then done the work itself may recoup the proper cost out of future rent, which is Lee-Parker v Izzet. And a tenant with a damages claim on the same breach may raise it as an equitable set-off. A bare covenant to pay rent without deduction is not clear enough to shut that out.

Two last things. Some repairing obligations cannot be bargained away at all. For a lease of a dwelling granted for a term of less than seven years, s.11 of the Landlord and Tenant Act 1985 implies a landlord's covenant. Keep the structure and exterior in repair. And keep the installations for water, gas, electricity, sanitation and heating in repair and proper working order.

So the tenancy agreement says the tenant is responsible for all repairs, and the roof leaks and the boiler has failed. Whose job is it?

The landlord's, both of them. The roof is structure and the boiler is an installation for heating water, and the agreement cannot contract out of either. And finally, insolvency. Where a liquidator disclaims the lease, that ends it between the landlord and the insolvent tenant. But as against guarantors and former tenants on an AGA, the lease is deemed to continue, and their liability with it. That is Hindcastle.

A word on how SQE1 tests this. You will not be asked to recall a case name. You get a set of facts, five answers, and one job, which is to pick the best one. This topic is overwhelmingly statutory, and the dates and section numbers do the work. Learn those first.

If you keep only three names. Jervis v Harris, for the self-help clause that turns a repair claim into a debt. Hindcastle, for the disclaimer that ends the lease but not the guarantee. And Lee-Parker v Izzet, for the tenant who does the landlord's repairs and takes the cost out of the rent.

Four traps. One: the six-month notice. A landlord pursuing a former tenant or guarantor for rent, service charge or any other fixed charge must serve notice within six months of the sum falling due. Miss the window and the money is irrecoverable from that person, however good the underlying liability was.

Two: a guarantor is not discharged only by the Act. The old surety rule still bites. Vary the lease materially without the guarantor's consent and the guarantee can go altogether, which is why guarantors are joined into deeds of variation. Three: assignment does not sweep away what has already happened. The assignor stays liable for breaches committed before the assignment, which is what the indemnity in the transfer is for.

Four: mind which Act your section 17 is in. Section 17 of the 1995 Act is the six-month fixed charge notice. Section 17 of the Landlord and Tenant Act 1985 is the court's power to order specific performance of a landlord's repairing covenant in a lease of a dwelling. Same number, different statutes, opposite parties.

Quick check, and you were told to hold this one. A company assigned its lease of a retail unit in 2022, giving the landlord a guarantee of the incoming tenant's performance as a condition of consent. The guarantee is expressed to continue until the end of the term. That tenant later assigned the lease on to a third business in 2025, and that third business has now defaulted. When did the company's guarantee come to an end?

Three candidate answers. One: it has not ended, and continues for the remainder of the term. Two: it ended when the tenant it guaranteed assigned the lease on in 2025. Three: it will end only when the landlord releases the company from it in writing. Pause here if you want a moment.

The answer is two. An authorised guarantee agreement may guarantee only the person to whom the outgoing tenant assigned, and may impose no liability for any time after that assignee is released. When the guaranteed assignee assigned on in 2025, s.5 released it, and the company's guarantee ended with it.

Why the others fail. One takes the drafting at face value. Words carrying the guarantee to the end of the term do not make it so, and s.25 voids any agreement that would frustrate the Act. Three assumes the company needs to be let out. It does not: the release happened by statute, and nobody had to sign anything.

Five things to take away. One: check the lease date first, because 1 January 1996 decides everything that follows. Two: on a new tenancy the tenant is released automatically on a lawful assignment, across all the tenant covenants and not just rent. Three: an AGA guarantees one assignee only and dies on the next assignment, whatever the drafting says.

Four: the landlord has no automatic release, only a procedure under ss.6 to 8. Five: a self-help repair claim is a debt, so the s.18(1) cap and the 1938 Act both fall away. And our man with the 1990 lease pays, because his promise was for the whole term, unless the landlord let the six months run out before it asked him. Next time, the Termination of Leases.

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.