Looking at Covenants Licences and Leases - Case Study Example

Order 147845 To be able to answer the problem posed by the question it is necessary to conduct an analysis of the legal relationships of the parties.There needs to be discussion on privity if contract and privity of estate and then an in depth analysis of the covenants made to establish which of those covenants can be binding on subsequent tenants or owners of the land and which covenants cannot be so enforced. From this it is possible to establish who has the burden and the benefit of the covenants and any breaches of these covenants can be highlighted. Having decided what breaches have occurred it is necessary to look at ways in which these breaches could be resolved. Addressing the issue of privity of contract first it can be noted that as Target And Leslie PLC are the original parties to the contract there is both privity of contract1 and privity of estate2 between the parties. When Target assigned the lease to Ace he created a new relationship between Ace and Leslie Plc. As there is no contractual relationship between Ace and Leslie the relationship between these would only be one of privity of estate. Likewise when Leslie Plc sold the property to Rake the relationship between Rake and Target or Rake and Ace would only exist as privity of estate3 as there is no contractual relationship between these parties4. The sublet of part of the property to Simon creates neither privity of estate nor privity of contract as there was no agreement with Rake to allow this sublet. As there is no privity of estate between Rake and Simon Rake cannot force Simon to adhere to the covenants5. The case of R v Tottenham and District Rent Tribunal Ex p. Northfield (Highgate) [1957]6 gives rise to the implication that where a privity of contract exists all covenants are binding whereas the case of Pacific Wash-a-Matic v RO Booth Holdings [1978]7 would appear to suggest under privity of estate only the covenants which are regarded as typically part of the landlord and tenant relationship will be bound8. The burden and benefit of covenants where there is only a privity of estate only cover covenants that touch and concern the land as was decided in Spencers Case (1585) 9. Having discussed the relationships of the parties and established with whom there is privity of estate and privity of contract and with whom there is neither it is necessary to examine the circumstances when the burden and the benefit pass with the assignment. For completeness it is important to consider the position if the lease had been created before 1996 as well as the position for leases created after this date. With pre 1996 leases the general rule was that the original tenant could not pass the burden to the assignee. If the lease had been created prior to 1996 the assignment of the tenancy would not prevent Target from being held liable10 in accordance with the contract11. Effectively under this ruling Target would remain bound by the Covenants throughout the duration of the lease even though he had assigned any interest in the lease to Ace12. Pre 1996 covenants in leases were deemed to be made on behalf of the covenantor and his successors in title unless those making the covenants expressed otherwise13. With leases that where issued prior to the Landlord and Tenants (Covenants) Act 1995 the original tenant continued to have liability for the covenants even though they would have no control over the actions of the assignee14. It can be seen from the above that the burden of the covenants would not pass to the assignee with leases issued pre 1996. It would still be the norm, despite this, for the landlord to seek redress from the assignee in the first instance15 although there was no requirement in law for the landlord to proceed in this manner. The landlord had the option of seeking redress from the original lessee16 without even attempting to seek redress from the assignee. Being able to do this was extremely useful where the assignee had become insolvent17. If Target had asked for an indemnity from Ace the burden of the covenant could pass to him18. Ace would not be directly liable to the landlord if he further assigned the lease to another party19 but he would still be liable to Target under the indemnity20. In this particular scenario that lease was not created until 2001 which is after the Landlord and Tenant (Covenants) Act 1995 so therefore Target would be able to rely on the protection afforded by s5 of this Act which releases him from the burden of the covenant and passes the burden to Ace21. Under s3 of this Act the benefit and burden of all covenants is annexed to every part of the premises and passes on assignment22. Unlike with pre 1996 leases it was held in Oceanic Village Ltd v United Attractions Ltd [2000]23 that the test of touching and concerning does not apply. The Act also stipulates that covenants that are expressed in a personal way will not be transferred to the assignee24. Had there been no agreement between Target and Leslie Plc for the assignment of the lease to Ace then Target and Ace would be jointly and severally liable for any breaches of the covenants25. There are two types of covenants against assignment that can be stipulated by the person making the covenants these are absolute covenants26 and qualified covenants27. With an absolute covenant no assignment or subletting of the lease is allowed. If the landlord makes a qualified covenant than the tenant is entitled to sublet or assign the lease with the permission of the landlord28. It was decided in Mahon v Sims [2005]29 that if the covenant is a qualified one the landlord cannot withhold consent to assign or sublet unreasonably30. Attempts to withhold consent must be backed up with proof that such withholding was not unreasonable31. There is no definition in law as to what is reasonable, but case law has attempted to define this32. Leslie Plc could also have insisted upon an authorised guarantee agreement when the assignment was accepted by her33. From the information above it would appear that since Leslie accepted the assignment to Ace there would be no breach of the covenant and the burden would pass to Ace. By assigning the reversion to Rake by selling the property to him Rake would be entitled to the benefit and the burden of the covenants34. If the lease had been pre 1996 the original landlord would also remain liable35. Having established that the assignment did not breach the covenant it is necessary to look at whether the subsequent sublet of the property to Simon did breach the covenant. Firstly it needs to be established whether the subletting amounts to a lease or merely a licence. As Simon does not have full rights of ownership36 that a lease would give him it is more likely that the courts would infer that Simon only has a licence. It was decided in Shell-Mex & B.P. Ltd. v Manchester Garages Ltd. [1971]37 that commercial agreements draw the distinction between lease and licence by examining where the control lies. In this instance Ace remains in control thereby giving Simon only a licence. The advantage this gives Simon is that if Ace attempts to revoke the licence Simon could apply for proprietary estoppel38. As there is no privity of contract or estate between Rake and Simon Rake would not be able to claim against Simon for the breach of the covenant. If Rake had agreed to the sublet then he still might face difficulty claiming against Simon for the breach of the repair covenant as it was decided in Hall v Ewin (1888)39 that only restrictive covenants can be enforced against a sub tenant. Given that Simon only has a licence this means that Ace is still regarded as the rightful tenant and therefore will still have the burden of the covenants. A breach of the repair covenant could be rectified in such an instance by Ace have the repairs done. Using the authority of Vision Golf Ltd v Weightmans [2006]40 Ace could argue that if he rectified the breach Rake should be prevented from taking forfeiture action. In this instance not only was the repair covenant breached but the covenant to sublet was also breached. This can be evidenced by the fact that Simon’s business is a separate entity to Ace’s business41. The case of Crestfort Limited v Tesco Stores Limited [2005]42 illustrated that if the courts could find no common business enterprise between the lessees and the sublet then the two would be treated as separate entities and the sub lease would be a breach of the covenant. Due to this breach Rake could take forfeiture action against Ace. Rake could also force Simon to surrender his share of the property as it had been sublet in breach of the covenant as was ordered in Homebase Ltd v Allied Dunbar Assurance plc [2002] 43. This would bring the term of the lease to a premature end and give possession of the land back to Rake. The original agreement between Leslie and Target included a condition that any breach of the covenant would entitle the covenantor to take forfeiture action44. There are some circumstances under s146 of the Law of Property Act 1925 where it is possible for the breach to be remedied; however, in this particular scenario this could only be rectified by Ace terminating the subletting agreement with Simon, which as mentioned above could be difficult as Simon might apply for proprietary estoppel. It is therefore more likely that Rake would seek forfeiture and force Simon to surrender his share as discussed above. Ashburn Anstalt v Arnold [1989] Ch 1 In constructing a report it is necessary to look at the facts of Ashburn and then analyse cases were this has either been applied or has been overruled. The facts of Ashburn are as follows: R sold to M a headlease and sublease of premises in Kensington. The sale agreement provided by clause 5 that R could remain in the premises without payment of rent as "Licensees" until M should give one quarters notice in writing and should certify that it was ready at the expiration of such notice to redevelop the premises; and further provided by clause 6 that upon completion of such redevelopment M should grant to R "a lease of a shop in a prime position at the development with an area available for trading of approximately 1,000 s. m. and with car parking facilities...". M subsequently sold the headlease and sublease to the freeholder A, who claimed that R were licensees only and sought possession. R claimed that the agreement with M created a tenancy which took effect as an overriding interest under the Land Registration Act 1925 s. 70(1)(g); alternatively that, if they were licensees only, the licence was binding upon A by reason of the decision in Errington v Errington and Woods [1952] 1 K.B. 290, or by reason of the doctrine of constructive trust. The judge held that the agreement had created a licence only, but that the licence had been binding upon A; and he refused to order possession. On Appeal the court held that the reservation of a rent is not necessary for the creation of a tenancy; the period of the occupation agreement was sufficiently certain in that the agreement could be determined by both parties in circumstances in which there could be no doubt as to whether the determining event had occurred and the agreement had accordingly created a tenancy, which took effect as an overriding interest under s. 70(1)(g) of the 1925 Act. The court also stated that clause 6 of the agreement was sufficiently clear to be capable of enforcement as a contract, and took effect as an overriding interest under s. 70(1)(g). One such case were Ashburn was applied was Canadian Imperial Bank of Commerce v Bello (1992)45 by stating that the arrangement that the plaintiff and the respondent had made was sufficient to find that a tenancy had been created. This case involved a house that required extensive refurbishment. The owner of the house contracted Bello to refurbish the property. Bello received no ore for the work at the time and the agreement made between him and the householder was that he would be entitled to live in the property until the owner returned to the UK and paid him in full. The mortgagees attempted to take possession of the property and Bello appealed stating that the occupation of the property should amount to a tenancy. The court applied the judgment of Ashburn and held that the circumstances were sufficient for a tenancy to be inferred. In IDC Group Ltd v Clark (1993)46 the courts refused to accept that the grant of a licence in a lease did not create an easement which binds a successor. In this case the courts considered Ashburn but came to the conclusion that a licence was distinct from a lease and could not be binding on successors, and could not find, as they did in Ashburn, that they conduct of the parties gave rise to the creation of a tenancy as opposed to a licence. The case of Prudential Assurance Co Ltd v London Residuary Body [1992]47 also overruled the decision in Ashburn. In this case the courts held that a lease that states that land is leased until it is required for a certain purpose is void through uncertainty. The court held that a lease must be for a certain or determinable period of time. The court further decided that as the tenant paid yearly the lease would be a yearly a yearly lease which the owner could lawfully terminate. Part B My research looked at the relationships of the parties concerned to analyse what relationships existed at the time of making the contract and what relationships continued to exist after the assignment of the lease and the assignment of the reversion. I explained privity of contract and estate and explained how the rights over the enforcement of the covenant can be directly affected if there is only privity of estate. For completeness I included the rules both pre and post 1996. I identified the covenants that can be made and analysed when the burden and the benefit of the covenants can transfer between the various parties. I also dealt with the possibility of the use of indemnity. I then analysed when the breaches had occurred and who was responsible for those breaches. I reached the conclusion that Ace should be held liable for the breaches as it was he who sublet without the agreement of Rake. I compared leases created before the 1995 Act with the changes introduced by the 1995 Act. This was done to show that when advising a client as to whether a covenant is binding on an original covenantor and covenantee it is essential to know when the lease was created. From the research done I was able to state that the covenant to repair was still the responsibility of Ace as he still had possession of the property whilst Simon only had a licence to use part of the property. In the research I explained the difference between licences or lease this affects the position as to the binding nature of covenants. In my research I looked at the position that Simon would be in if a lease could be inferred and contrasted that with the position he would be in if a licence was inferred. Having discussed the differences between a licence and a lease I suggested that Simon might be able to claim proprietary estoppel if Ace attempted to revoke the licence. To back up my argument I supported as many points possible by case law and legislation. My main source of electronic research was Westlaw for cases to support my argument and www.opsi.gov.uk for relevant legislation. I also used electronic search engines to get up to date information on any recent changes surrounding the law on covenants. I also used www.baillli.org as well as Lexis Nexis. A useful site that looked at a situation very similar to the one outlined above was http://www.propertylawuk.net/ltssublettingandsharingoccupation.html. This particular site highlighted several similar cases some of which have been cited in the report above. The information gleaned from this site helped me to reach the conclusion that Rake would be able to force Simon to surrender his share of the property as the sublet had occurred in breach of the covenant. I was able to back up my argument with case law that had been used on this site. My overall conclusion was that Rake should take forfeiture action as using this he could force Simon to surrender his share of the property. Simon would not be able to claim proprietary estoppel under these circumstances as the sublet was made in breach of the covenant. Bibliography Bryn Perrins, Understanding Land Law, 3rd Ed, 200, Cavendish Publishing Ltd Gravells, N P, Land Law Text and Materials, 2nd Ed, 1999, Sweet and Maxwell Thomas, M, Statutes on Property Law, 8th Ed. 2001, Blackstone’s Transfer of land: The Law of Positive and Restrictive Covenants (1984) Law Commission No 127 Law Commission Report No 238, Landlord and Tenant: Responsibility for State and Condition of Property (1996) http://www.landregistry.gov.uk http://www.propertylawuk.net www.opsi.gov.uk www.westlaw.ac.uk www.bailli.org Table of Cases Addiscombe Garden Estates Ltd. v Crabbe [1958] 1 Q.B. 513 Allied London Investments Ltd v Hambro Life Assurance Ltd (1985) 50 P & CR 207 Amsprop Trading Ltd v Harris Distribution Ltd [1997] 1 W.L.R. 1025 [1997] 2 All E.R. 990 [1997] 2 E.G.L.R. 78 [1997] 47 E.G. 127 [1996] N.P.C. 154 Times, November 13, 1996 Arlesford Trading Co. 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DG19 Times, December 28, 2002 Spencers Case (1585) 5 Co.Rep. 16a; 77 E.R. 72 (M&B(L) 503) Street v Mountford [1985] A.C. 809 (M&B(L) 417; G 386) Stuart v Joy [1904] 1 K.B. 362 Thames Manufacturing Co Ltd v Perrots (Nichol & Peyton) Ltd (1984) 50 P & CR 1 Unity Joint Stock Banking Association v King (1858) 25 Beav. 72; 53 E.R..563 Vision Golf Ltd v Weightmans [2006] EWHC 1766 Walkers Case (1587) 3 Co.Rep. 22a; 67 E.R. 676 Wallis Fashion Group Ltd v CGU Life Assurance Ltd (2000) 81 P. & C.R. 28 Warnford Investments Ltd v Duckworth [1979] Ch 127 Waycourt Ltd v Viscount Chelsea [2006] EWCA Civ 511 Table of Statutes Land Registration Act 1925 Landlord and Tenant (Covenants) Act 1995 Landlord and Tenant Act 1927 Landlord and Tenant Act 1985 Landlord and Tenant Act 1987 Landlord and Tenant Act 1988 Law of Property Act 1925 Law of Property Act 1926 Read More