Leasehold covenants

Leasehold covenants occupy the difficult boundary between contract and property. A lease is both a contract and an estate in land. Its covenants are, at their simplest, promises: to pay rent, repair, insure, use only for a permitted purpose, refrain from assignment without consent, provide services, enforce estate regulations, or keep quiet enjoyment. But because the lease is an estate capable of assignment, the law must decide whether, and on what basis, those promises bind persons who were not original parties to the bargain.

For Cambridge Part IB purposes, the topic should be organised around two questions. First, who may sue and be sued after an assignment of the lease or the reversion? Secondly, what kind of covenant is capable of passing with the term or the reversion? The answers differ sharply according to whether the lease is an "old tenancy" or a "new tenancy" under the Landlord and Tenant (Covenants) Act 1995. Most modern disputes are governed by the 1995 Act; most doctrinal explanation still requires the older common law machinery of privity of contract, privity of estate, and the requirement that a covenant "touch and concern" the land.

The pre-1996 law was famously unsatisfactory. The original tenant remained liable on the lease covenants throughout the whole term, even after assigning the lease and even where the default occurred decades later. By contrast, assignees were liable only while the term was vested in them and only in respect of covenants touching and concerning the land. The original landlord's position was more complex, mediated by the Law of Property Act 1925, ss 141 and 142. The result was a patchwork: commercially useful, historically explicable, but capable of serious unfairness.

The 1995 Act changed the centre of gravity. For new tenancies, the burden and benefit of landlord and tenant covenants are statutorily annexed to the lease and reversion, and the assignor is normally released on assignment. Yet the Act does not remove all difficulty. It introduces new litigation over authorised guarantee agreements, direct guarantees by former tenants or their guarantors, intra-group assignments, and the anti-avoidance policy of the legislation. In problem questions, these details matter.

Do not treat leasehold covenants as an isolated technical topic. They connect directly with earlier weeks. Week 8 established what counts as a lease; this week asks what travels with that lease. Weeks 2 to 4 on registration and priorities explain how the lease, and sometimes notices affecting it, bind purchasers. Week 1's distinction between estates and interests is also essential: the lease creates a proprietary relationship, but the covenants retain a contractual ancestry. A strong Tripos answer will therefore move comfortably between conceptual explanation and statutory application.

The historical law of leasehold covenants was shaped by the dual character of a lease. In medieval law a lease was not first conceived as a full proprietary estate. It began as a contractual arrangement protected by personal actions; later it became recognised as a term of years, a legal estate. That mixed ancestry left a permanent imprint. Some liabilities were explained by contract, because the covenantor had promised. Others were explained by estate, because landlord and tenant stood in a tenurial or proprietary relationship while the term and reversion were held by them.

The common law therefore developed two forms of connection. Privity of contract exists between the original landlord and the original tenant. It arises from the lease as agreement. Unless modified by statute or release, it makes each original party liable on contractual promises for the duration of the contract. Privity of estate exists between the current landlord and the current tenant while one holds the reversion and the other the term. It arises from the relationship between the estates. It is not concerned with the personal bargain as such, but with the covenants regarded as sufficiently connected with the land.

Spencer's Case is the conventional starting point. It established, in early modern form, that certain covenants in leases could run with the land, so as to bind an assignee of the term. But not every promise could run. The covenant had to concern the thing demised, or, in later language, touch and concern the land. This limitation preserved the proprietary nature of the obligation. A promise collateral to the lease bargain could not be transformed into a burden on future holders simply by being written into a lease.

The nineteenth and early twentieth centuries produced increasingly technical rules. The law distinguished between assignment of the term and assignment of the reversion; between benefit and burden; between express covenants, implied covenants and conditions; between covenants running at law and covenants enforceable in equity. The Law of Property Act 1925 rationalised part of the position. Sections 141 and 142 annexed the benefit and burden of certain covenants to the reversion and term, but did not abolish the older conceptual framework.

The most controversial feature of the older law was original tenant liability. A tenant who assigned a long commercial lease could remain contractually liable long after parting with all practical connection to the premises. Landlords valued this as security. Tenants and commentators condemned it as unjust, especially when assignees became insolvent after rent rises or market collapse. The Law Commission recommended reform, leading to the Landlord and Tenant (Covenants) Act 1995. The Act applies only to tenancies granted on or after 1 January 1996, subject to transitional rules. The date of grant is therefore a threshold issue in any problem question.

The 1995 Act reflects a modern proprietary theory of the lease. Burdens and benefits should attach to the current estate-holders, not indefinitely to former parties. Yet Parliament preserved limited landlord protection through authorised guarantee agreements, by which an outgoing tenant may guarantee the immediate assignee. Much subsequent litigation has concerned how far such guarantees may go without frustrating the statutory release policy. That litigation is central to the contemporary law.

Begin every leasehold covenant problem with classification. The first distinction is temporal: old tenancy or new tenancy. An old tenancy is, broadly, a tenancy granted before 1 January 1996. A new tenancy is governed by the Landlord and Tenant (Covenants) Act 1995. Do not assume that a current assignment date is decisive. The relevant question is the date of the grant of the lease, not the date of breach or assignment.

For old tenancies, organise the analysis around privity of contract and privity of estate. The original landlord and original tenant are in privity of contract. The original tenant remains liable on tenant covenants even after assignment. The original landlord remains liable on landlord covenants unless released or unless the contractual construction and statutory provisions produce a different result. The assignee of the term and the assignee of the reversion are in privity of estate with each other while they hold those estates. Their liability is not general contractual liability; it is liability on those covenants which run with the land.

The classic test is whether the covenant touches and concerns the land. The language is old, but the practical idea is manageable. A covenant touches and concerns the land if it affects the nature, value, mode of occupation or enjoyment of the demised premises, and is not merely personal or collateral. Rent, repair, user, insurance, alienation, and service-charge covenants will usually qualify. A covenant to pay a sum unconnected with the premises, or to do something personal to the original parties, may not. P & A Swift Investments v Combined English Stores remains the leading modern formulation.

The landmark cases fall into three groups: the old common law cases on running covenants; the late twentieth-century authorities exposing the defects of original tenant liability; and the modern cases on the 1995 Act.

Spencer's Case is the historical foundation. It is not useful because of its archaic facts, but because it established the organising idea that some leasehold covenants pass to assignees because they concern the demised land. Its language should not be treated as a modern statutory test, yet it explains the persistence of the touch-and-concern inquiry in old tenancy cases.

P & A Swift Investments v Combined English Stores is the leading modern old-law authority on whether a covenant touches and concerns the land. Lord Oliver's formulation is routinely used: the covenant must benefit the reversioner in the capacity of reversioner, affect the nature, quality, mode of user or value of the land, and not be expressed merely as personal. The case is important because it translated older formulae into a functional test suitable for commercial leases.

City of London Corporation v Fell illustrates the severity of original tenant liability. The original tenant could be pursued after assignment because privity of contract survived. The case is often cited as an example of the mischief at which the 1995 Act was aimed. It also warns students against assuming that fairness to the former tenant was enough to defeat liability under the old law.

Centrovincial Estates v Bulk Storage is useful on the breadth of the touch-and-concern concept in commercial contexts. Covenants regulating premises, rent, use and obligations associated with the lease are likely to be treated as sufficiently connected with the land. The courts did not confine running covenants to narrow physical obligations.

The modern authorities concern authorised guarantee agreements and anti-avoidance. Good Harvest established that a guarantor of an outgoing tenant cannot simply be required to guarantee the assignee in a way that circumvents the statutory release scheme. K/S Victoria Street v House of Fraser confirmed and developed the point: direct guarantees by the outgoing tenant's guarantor for the assignee's obligations are generally void where they frustrate the Act. Friends Life v A & A Express then showed that a guarantor may validly guarantee the outgoing tenant's obligations under an authorised guarantee agreement: the so-called sub-guarantee or GAGA structure is permissible if properly framed.

London Diocesan Fund v Avonridge Property is also central. It emphasises the breadth of the 1995 Act's anti-avoidance provision. Contractual drafting which appears formally effective may be struck down if its effect is to evade the Act's release policy. The case is a reminder that the Act is not merely default law. It embodies a legislative policy about the transfer of leasehold obligations.

In examination answers, use cases economically. For old tenancies, cite Spencer's Case and P & A Swift for the running of covenants, and City of London v Fell for continuing original tenant liability. For new tenancies, cite Avonridge, Good Harvest, Victoria Street and Friends Life when analysing guarantees and avoidance. The best answers do not list cases; they use them to justify each doctrinal step.

See practice questions section below.

See further reading section below.