Covenants in Lease - Essay Example

In order to advise the tenant with regard to the types of disposal impacting the lease in relation to the proposed sale to the purchaser, the centralissues are as follows 1) Ability of the tenant to assign the lease to the purchaser and landlord’s consent; 2) Liability of tenant on assignment both in relation to the original landlord and subtenant; 3) Subtenant’s position under assured shorthold tenancy and ability to terminate the sublease. 1. Landlord’s Consent to Assignment Firstly, with regard to the terms of the original tenant’s lease, the lease was for a term of ten years granted in 2001 and includes numerous leasehold covenants. In addition to the express leasehold covenants, the law will imply covenants into a lease1, which include the following: 1) Covenant to allow the tenant quiet enjoyment of the property; 2) Covenant not to derogate from grant; 3) Covenant to pay taxes and rates on the property; 4) Covenant to make good waste; and 5) Covenant to keep the interior in good repair2. In the current scenario, there is an express prohibition on assignment of the lease and therefore for any sale of the lease, the tenant will have to obtain consent of the landlord. The general legal position is that if prior consent to an assignment is required, then under section 1(1) of the Landlord and Tenant Act 1988, a landlord cannot “unreasonably” withhold their consent3. The definition of what constitutes “unreasonable” is not legally defined and will ultimately depend on the circumstances of the case4. In the current scenario, the financial circumstances of the purchaser may impact the landlord’s consent. For example, in the case of Landlord Protect Limited v St Anselm Development Company Limited5, a buyer had entered into a contract to purchase a leasehold property and the landlord’s consent to assignment was dependent on the buyer providing a guarantor, which would be released on assignment (as the lease pre-dated the Landlord & Tenant (Covenants) Act 1995, which provides for the automatic release of guarantors)6. The landlord refused to agree to this and the buyer attempted to argue that refusal to consent on these grounds was unreasonable. In refuting the buyer’s argument it was held that the landlord’s requirements were actually reasonable as the requirement was to provide appropriate security and did not attempt to confer additional rights other than those which the landlord already enjoyed under the lease7. In the current scenario, the purchaser is solvent but has provided an oral statement that his father will be prepared to back him for the approximate sum of £70,000. However, this is not guaranteed and the bank reference unequivocally asserts that the purchaser is “unlikely to enter into obligations which he would be able to meet”. Therefore it is highly likely that the landlord may refuse consent on grounds that the purchaser cannot provide adequate security. Additionally, as the lease in the current scenario is post 1995, issues of the benefit and burden of landlord covenants or tenant covenants are governed by the provisions of the Landlord and Tenants (Covenants) Act 1995 (LTA 1995). As such, the general position is that the benefit and burden of both landlord and tenant covenants in the whole and each and every part of the demised premises and of the reversion in them, will pass on assignment of the whole or any part of the premises or of the reversion8. Moreover, section 3(1) of the LTA 1995 provides that the “benefit and burden of all landlord and tenant covenants of a tenancy: a) Shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them; and b) Shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and c) Shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them”. Additionally, the LTA 1995 removes the privity of contract rule and section 5(1) of the LTA 1995 provides that this section applies where the tenant assigns premises demised to him under a tenancy”. Section 5(2) further provides that “if the tenant assigns the whole of the premises to him, he – (a) is released from the tenant covenants of the tenancy”. On these grounds, the fact the proposed purchaser’s financial position is precarious may pose problems in obtaining the landlord’s consent to assignment particularly if the purchaser cannot provide an adequate guarantee9. Alternatively, the landlord may provide consent if the tenant was to required to enter into an authorised guarantee agreement to guarantee liability for the purchaser’s compliance with covenants in the original lease10. However, this is clearly undesirable as it exposes the tenant to liability and even if the purchaser was to give the tenant a personal guarantee as security, the guarantee would only be as good as the level of the purchaser’s ability to comply with the guarantee11. 2. Position of Sub-tenant With regard to the sub-tenant’s legal position, there appears to be no requirement to obtain the consent of the sub-tenant to the assignment of the sublease to the potential purchaser. Therefore if the purchase was to proceed, at most the tenant would have to notify the subtenant of the proposed sale under section 2 of the Landlord and Tenant Act 198812. Again, as the sublease was granted after the LTA 1995, the tenant’s obligations will be released under the terms of the sublease if the sale to the purchaser goes ahead, unless the tenant is required to enter into an authorised guarantee agreement in respect of the sublease as part of the negotiations with the purchaser. Alternatively, if the tenant goes ahead with the sale, we know from the facts provided that the purchaser wants to set up their own business. Whilst they cannot change the use of the flat as a residential property without obtaining planning permission to change usage and obtain prior consent of the landlord to do so; the purchaser may nevertheless want to terminate the sublease as part of negotiations. There is no indication in the factual scenario that this is the purchaser’s intention. However, if the sublease was to be terminated, as the arrangement was created after 28 February 1997, the lease constitutes an assured shorthold under the Housing Act 1996. As the landlord of the sublease the client may seek to terminate and gain possession of the assured shorthold by serving a section 8 notice and providing one or more of the statutory grounds specified by the Housing Act 1996. Under the Housing Act 1996, the landlord of the sublease will be able to within six months recover possession without a court order. However the landlord of the sublease would have to serve notice on the subtenant two months before he wishes to retake possession. The notice can be served during the initial tenancy term, after the first six months, which means that subtenant’s rights are only protected for six months and that after the first six month period, the sublease landlord can give two months’ notice to quit at any time13. If the term has not expired, then the landlord of the sublease can give two months notice and apply to the court for a possession order14. Such an order under the Housing Act 1996 will generally be granted if the sale of the property is necessary to pay off mortgage loan and the tenant is more than eight-week arrears of rent15. Alternatively, the order may be granted at the discretion of the court in the following cases: 1) If the subtenant has breached the tenancy agreement; 2) If the subtenant has created actionable nuisance; or 3) The subtenant has been using the property for an illegal purpose. Accordingly, provided the six month grace period of the lease has passed, the landlord of the sublease will be able to commence proceedings under Section 8, however the procedure is cumbersome and the onus will be on the sublease landlord to satisfy grounds for possession. Alternatively, there is another method available for getting possession under section 21 of the Housing Act 1988 by issuing the subtenant with a section 21 Notice. This notice must: 1) Be in writing, however there is no prescribed form; and 2) Give a minimum of two months’ notice to a tenant, which: i. if a fixed term Assured Shorthold Tenancy must be given to the tenant on or on before the date of the tenancy expires; ii. and be expressed to expire on the last day of the period of the tenancy; which date must be no earlier than the tenancy could have been determined at common law16. Accordingly, under the section 21 provisions, the sublease landlord would be able to seek possession upon two months written notice to the subtenant, however the sublease would not terminate earlier than the expiry of the two year period agreed. Alternatively, the landlord of the sublease could issue a notice to quit under the common law17. In order to be a valid notice to quit (NTQ) at common law, the NTQ must be of correct length and correspond to the length of the tenancy18. For example, a weekly tenancy requires at least 2 weeks’ notice and a monthly tenancy requires a month’s notice19. There are however two exceptions to this rule. Firstly, a yearly tenancy requires only a 6 month NTQ and the parties can contract to a different length, which can be a shorter or longer period. If we apply this to the current scenario, we are not aware of any express notice provisions in the written agreement itself, it would appear that the landlord of the sublease would have to give the subtenant at least six months notice to get possession under the common law. Bibliography Blackstone’s Statutes on Property Law., (2007-2008). 15th Edition Oxford University Press. M. Dixon (2005) “Principles of Land Law”, 5th Edition. Routledge –Cavendish Publishing J MacKenzie& M Phillips (2005). Land Law. 10th Edition Oxford University Press. Megarry and Wade., (2007) The Law of Real Property. 7th Edition Sweet & Maxwell R J Smith (2003) Property Law 4th Edition, Longman Legislation & Websites Law of Property Act 1925 Landlord and Tenant Act 1954 Housing Act 1988 Landlord and Tenant Act 1988 Landlord and Tenant Act 1995 Housing Act 1996 www.opsi.gov.uk Read More