Chris Alexander: Old and New Leases: The Subtle Differences
Chris Alexander is a property litigation solicitor at SA Law LLP and for this article he is taking a look at the subtle differences between “old” and “new” leases due to the working of the Landlord and Tenant (Covenants) Act 1995 (“the Act”). It is a more academic approach than practical analysis because whilst for the most part tenants with long residential leases will not notice the difference, there will be occasions where such differences have a bearing.
In 1988 the Law Commission recommended major reform to the rules of enforceability of leasehold covenants. This was primarily because the doctrine of privity of contract meant that the original parties to a lease remained liable to each other throughout the term even once their respective interests had long since been assigned. This was considered to be unfair on the original parties and the Act was designed to remedy this.
There was also a second aspect to the reforms, which was supposed to regularise which covenants were enforceable against successors in title.
In general a new lease is one granted on or after 1 January 1996 and an old one was granted prior to that date (there are some exceptions).
Privity of Contract
The primary impact of the Act was felt in the commercial market. Tenant insolvencies before the expiry of commercial leases often left landlords chasing original tenants for an indemnity many years after an assignment.
Tenant insolvency was less of an issue in the residential market because a long lease generally had a marketable capital value which gave the landlord some security. This meant that in the residential market there would often be little incentive or need for a landlord to seek to enforce against a predecessor tenant as the current tenant was usually ok.
For old leases, when pursuing ground rent or service charge arrears under the Act, technically a landlord can give an original tenant a specific notice within 6 months of the sum in question falling due, to preserve the current liability against the original tenant. If they do not then recovery from this predecessor will be barred. In practice, this rarely happens in a residential context, because the sums involved do not generally justify the investigative works needed.
For new leases the Act cleaned up this area by automatically releasing assigning tenants from further liability unless an Authorised Guarantee Agreement was put in place. I have yet to see such an agreement used in a purely residential context and so those who hold a new lease can in general rest easy after assignment (except for any pre-existing breaches!).
Transmission of Covenants
The benefit and burden of the landlord’s and the tenant’s covenants in a lease have long passed to their assignees. For an old lease, the rules relating to this were derived from the Law of Property Act 1925 and the sixteenth century decision of Spencer’s Case. These rules provided awkward tests of whether the covenant touched and concerned the land and had reference to the subject matter of the lease in order for them to remain enforceable against assignees.
New leases don’t have to worry about satisfying those tests as the benefit and burden of all covenants passes under the Act unless they are expressed to be personal to the original parties. Purely personal covenants in lease may avoid the benefit and burden passing to a new tenant and the operation of statutory release from liability. Therefore, if you are taking a new lease watch out for any purely personal covenants, it may be an idea to try and resist them as you could be bound for the duration of the lease even though performance will be beyond your control!