Leasehold covenants

Leasehold covenants sit at the intersection of contract and property. A lease is both a contract between landlord and tenant and a proprietary estate in land. The difficulty is that the contract is usually made by A and B, while performance may be required years later from C or D after the term or the reversion has been assigned. The central questions are therefore: who can sue, who can be sued, and on what juridical basis?

The topic is best organised by a chronological divide. Leases granted before 1 January 1996 are governed by the old law: common law rules of privity of contract and privity of estate, supplemented by sections 141 and 142 of the Law of Property Act 1925. Leases granted on or after 1 January 1996 are governed principally by the Landlord and Tenant (Covenants) Act 1995. The old law remains examinable because long commercial leases still exist and because many of the conceptual distinctions, especially the idea that covenants must touch and concern the land, explain the mischief to which the 1995 Act was addressed.

In practical terms, leasehold covenants are the machinery by which the economic content of a lease is allocated. A covenant to pay rent, repair, insure, use the premises only for a stated purpose, refrain from assignment without consent, or keep open for trade may determine the value of the lease and reversion. The same is true of landlord covenants to repair common parts, provide services, insure the building, or permit quiet enjoyment. The value of both estates depends on whether those covenants bind successors.

For Durham Land Law, the topic should be linked to the earlier weeks on estates, registration, priorities and lease creation. The leasehold covenant is not usually a free-standing interest competing for priority like an easement or equitable charge. Rather, the covenant derives its enforceability from the lease, and the lease may itself be legal or equitable, registered, noted, or overriding according to the rules already studied. A registered leasehold title carries the leasehold estate; a purchaser of the reversion takes subject to the lease according to priority rules; and the statutory rules decide which covenants travel with the assigned lease or reversion.

The core exam skill is to keep four distinctions separate. First, distinguish the original parties from assignees. Secondly, distinguish assignment of the term from assignment of the reversion. Thirdly, distinguish pre-1996 and post-1995 Act leases. Fourthly, distinguish the benefit of a covenant from its burden. Most weak answers collapse these distinctions and simply state that covenants run with the land. That phrase is too crude. In leasehold law, there are several different routes of enforceability, and each has its own limits.

The historical law of leasehold covenants developed from the uneasy coexistence of contract and estate. At common law the parties to the lease were bound by privity of contract: the original landlord and original tenant could enforce the lease covenants against one another even after assignment, unless released. That result reflected ordinary contract doctrine but produced severe practical consequences. An original tenant who had assigned a long commercial lease could remain liable decades later for the rent or repairs owed by a remote assignee. The landlord could choose the solvent original tenant rather than the current tenant in occupation. Commercial landlords valued that security; tenants and their guarantors regarded it as a trap.

Alongside privity of contract stood privity of estate. The assignee of the leasehold term and the assignee of the reversion were not parties to the original contract, but they stood in the estate relationship of tenant and landlord while they held their respective estates. The common law therefore allowed certain covenants to be enforced between them. The doctrine was narrower than contractual liability. It depended on the covenant sufficiently relating to the land. Spencer's Case established the germ of the rule that covenants concerning the thing demised may bind assignees, whereas merely collateral covenants do not. Later authority refined this into the familiar requirement that the covenant must touch and concern the land.

The Law of Property Act 1925 rationalised but did not abolish this structure. Section 141 annexed to the reversion the benefit of rent and tenant covenants having reference to the subject matter of the lease. Section 142 dealt with the burden of landlord covenants. These provisions assisted assignees of the reversion and mitigated technical conveyancing difficulties, especially where reversions were severed. They did not, however, remove the original tenant's continuing contractual liability. Nor did they provide a fully coherent system for modern investment leases.

By the late twentieth century the old law was widely criticised. The Law Commission identified continuing original tenant liability as unjust and commercially distorting, particularly after property market collapse left former tenants exposed for arrears generated by insolvent assignees. The 1995 Act responded by adopting a more transfer-based model for new tenancies. The general principle is that, on assignment, the benefit and burden of landlord and tenant covenants pass to the assignee and the assignor is released. Landlords were given compensating protection through authorised guarantee agreements, but only within statutory limits.

The historical divide matters in problem questions. It is not enough to say that the 1995 Act applies to leases now being litigated. It applies to new tenancies, broadly those granted on or after 1 January 1996, subject to statutory exceptions. A 1994 lease assigned in 2026 remains an old tenancy. Conversely, a 2020 lease is a new tenancy even if its form resembles an old institutional lease. The date of grant, not the date of breach or assignment, is usually the starting point.

1. Begin with the lease as both contract and estate. The original landlord and original tenant are bound by the lease as a contract. Their successors hold estates derived from that lease or reversion. Liability may therefore arise by privity of contract, privity of estate, statutory transmission, or a guarantee. In any problem question, identify the claimant, the defendant, the covenant, the date of the lease, the date of the breach, and the chain of assignments.

1. Under the old law, privity of contract remains powerful. The original tenant remains liable on tenant covenants for the whole term unless expressly released by the landlord. The original landlord remains liable on landlord covenants unless the law permits release, though the practical emphasis has usually been on original tenant liability. If T grants a lease to L in 1990 and T assigns in 1995, T may still be sued years later for rent due from a later assignee. This is not because T is in possession, but because T made the original contractual promise.

1. Under the old law, privity of estate gives current landlord and current tenant a direct relationship while the lease and reversion are vested in them. The burden of covenants may pass to an assignee of the term if the covenant touches and concerns the land. The benefit of tenant covenants may pass to the assignee of the reversion through section 141 of the Law of Property Act 1925. The burden of landlord covenants may pass to an assignee of the reversion through section 142. But privity of estate is time-limited. An assignee is liable only for breaches occurring while that assignee holds the leasehold estate, unless the covenant creates a continuing liability in respect of that period.

1. The touch and concern test is the principal filter under the old law. P&A Swift Investments v Combined English Stores gives the modern formulation. A covenant touches and concerns the land if it benefits the landlord or tenant in the capacity of landlord or tenant, affects the nature, quality, mode of user or value of the land, and is not merely collateral. Covenants to pay rent, repair, insure, use premises in a specified way, refrain from alterations, or obtain consent to assignment ordinarily satisfy the test. A personal covenant to pay the landlord's unrelated debt, to buy goods from the landlord in a separate commercial capacity, or to employ the landlord's relative would not.

The case law performs two functions. First, it explains the common law from which the statutory reforms departed. Secondly, it polices the boundaries of the 1995 Act, especially where commercial drafting seeks to preserve the landlord's security despite automatic release.

Spencer's Case is the classical starting point. It distinguishes covenants concerning the land demised from collateral promises. The decision should not be treated as a modern statement of all the rules, but it supplies the historical idea that a covenant may run because it is connected with the estate rather than merely with the persons who first contracted.

P&A Swift Investments v Combined English Stores is the modern old-law authority on the touch and concern test. Lord Oliver's formulation is useful because it gives exam answers a structured method: the covenant must benefit the reversioner or tenant as such; affect the land's nature, quality, user or value; and not be purely personal. That test is especially important where the covenant is unusual. Conventional rent and repair covenants rarely cause difficulty; bespoke commercial covenants do.

City of London Corp v Fell illustrates the harshness of old-law privity of contract. The original tenant remained liable after assignment. The case is valuable because it shows why the 1995 Act was not a technical tidying-up exercise but a major shift in risk allocation. In an essay, Fell is often the bridge from doctrinal history to reform.

Rhone v Stephens is not a leasehold covenant case in the narrow sense, but it is important by contrast. It confirms the common law reluctance to allow positive burdens to run with freehold land. Leasehold law is different because the landlord-tenant estate relationship and the statutory provisions permit positive covenants such as rent and repair to bind successors. The comparison prevents the common mistake of importing freehold covenant restrictions into leases without qualification.

Avonridge Property Co Ltd v Mashru concerns the 1995 Act's approach to release and anti-avoidance. The House of Lords treated the statutory scheme as one that permits genuine release and prevents parties from undermining the Act by drafting devices. It is particularly useful for showing that lease wording after 1995 is read against the policy of the Act.

Good Harvest and K/S Victoria Street are central to guarantor problems. They demonstrate that the Act's policy against continuing assignor liability cannot be circumvented by requiring the outgoing tenant's guarantor to guarantee the assignee directly, or by structures that in substance impose the very continuing liability the statute removed. The law here is commercially significant and doctrinally contested, but the practical point is clear: the court looks beyond labels to whether the arrangement conflicts with the statutory release scheme.

See practice questions section below.

See further reading section below.