Time to reform the Landlord and Tenant (Covenants) Act 1995

In the winning entry from the Professional Bar Association’s annual student essay competition, Henrietta Boyle argues in favour of reforming the Landlord and Tenant (Covenants) Act 1995. “Why was the Landlord and Tenant (Covenants) Act 1995 [the 1995 Act] enacted with, apparently, so little regard to the practical reality of how assignments work in the world of commercial landlord and tenant?” So asked an editorial to The Conveyancer and Property Lawyer in 2016, and so, regrettably, lawyers will keep asking themselves after the Law Commission overlooked commercial leasehold reform relating to the 1995 Act in its Thirteenth Programme of Law Reform. The aim of the 1995 Act was noble: to stop original tenants being bound by covenants in their lease after it had been assigned. The 1995 Act prohibits parties from entering contracts which allow a tenant or guarantor to remain liable for the lease liabilities after assignment. This legislation was much needed at the time, as during economic recessions in the 1980s and 1990s it was not uncommon for landlords to demand payment of rent from former tenants if their current tenants defaulted. So keen was parliament to ensure that the aims of the 1995 Act would be carried out that it included an anti-avoidance provision, voiding any tenancy agreement that would exclude, modify or frustrate the 1995 Act. The problems The main problem with the 1995 Act is that it rides roughshod over the concept of freedom of contract. Even if all parties consent, a guarantor of a lease cannot guarantee an assignee of that lease or become an assignee of that lease, nor can he provide a repeat guarantee to a group company assignee. This causes particular issues for companies and partnerships. In 2016, the Bar Council wrote to the Law Commission recommending that it include change to the 1995 Act in its Thirteenth Programme of Law Reform. The first example it gave of problems caused by the 1995 Act was that it prevents company restructuring. If a parent company is a guarantor for a lease held by a subsidiary company, and the companies wish to restructure so that the parent company remains the guarantor but the lease is assigned to a different subsidiary company, this cannot happen under the 1995 Act. Therefore, if no other company is financially capable of becoming a guarantor, no restructuring can take place. The second example was that the 1995 Act causes chaos in partnership contexts. Where partners T1, T2, T3 and T4 are tenants under a firm’s lease and partners G1, G2 and G3 are guarantors, if T1 wishes to retire, T2, T3 and T4 will need to assign the lease to a new partner. The 1995 Act, however, prevents G1 joining T1, T2 and T3 as tenants once T1 retires, prevents T2, T3 and T4 assigning the lease to themselves, and prevents G2 and G3 providing a repeat guarantee. As a result, T1 may have to remain a tenant and rely only on an indemnity from his firm for the lease liabilities. This demonstrates, as the Law Commission itself has recognised, that the 1995 Act stifles legitimate commercial transactions, and prevents businesses doing what they want, in the name of “protection”. The exception The 1995 Act does contain an exception: if the tenant gives an authorised guarantee agreement (AGA), this allows an assignor tenant to guarantee the performance of the relevant covenant by the assignee. However, no exceptions are made for guarantors. As a result, to try to get around the statute, some guarantors provide “sub-guarantees”, where they guarantee the assignor’s liabilities under the AGA. However, there is uncertainty as to whether sub-guarantees are actually allowed, as references to them in case law have been obiter. Uncertainty results in potentially invalid guarantees, which the Law Commission admits cause huge losses to the value of freeholds (over £100m in one case). Greater certainty is vital to prevent commercial leasehold transactions being fettered by confusion. It is clear from any analysis of recent case law in this area that reform is necessary. In K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] EWCA Civ 904; [2011] 2 EGLR 11, Lord Neuberger said that “even where it suited the assignor, assignee and the guarantor that the assignee should have the same guarantor as the assignor… they could not offer that guarantor”, before going on to say that it would appear that “the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it”. Furthermore, in EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] EGLR 26, Amanda Tipples QC, sitting as a deputy High Court judge, observed that the fact that it is unattractively limiting and commercially unrealistic that a guarantor cannot become an assignee is neither here nor there. In disregarding freedom of contract and producing commercially unrealistic outcomes, the 1995 Act leads to absurdities which could easily be prevented. Proposals for reform The Property Litigation Association has proposed a number of amendments to the 1995 Act to solve current problems. It submits that there should be clarification that the guarantor of an assignor can provide a sub-guarantee of the assignor’s AGA, that an assignor should be allowed to provide a repeat guarantee to a group company assignee, that an assignor’s guarantor should be allowed to be the assignee of a tenancy, and that A, B, C and D should be allowed to assign to B, C, D and E in partnership situations. These simple clarifications would take little effort on the part of the legislature, would be cheap, and would affect the anti-avoidance provision minimally. Nor would they present any policy difficulties (provided all parties to a transaction consent to it). Rather, there is an overwhelming policy reason that reform should occur: the very tenants whom the 1995 Act sought to protect are currently prevented from entering into agreements they actively want to enter into. Commercial real estate contributes more than £94bn to the UK economy (5.4% of its GDP), according to the British Property Federation. It is therefore in the government’s interests to ensure that the industry functions as efficiently as possible. Reform of an Act that hinders such efficiency cannot come quickly enough. Henrietta Boyle is a student at the City Law School, City, University of London PBA student essay competition 2019 Entrants were asked: “Which area of land law is most in need of reform?” The top three were placed by the chair, vice-chair and secretary of the PBA committee, Joanne Wicks QC, Brie Stevens-Hoare QC and Simon Allison. Henrietta Boyle claimed first prize – £1,000, a copy of Megarry and Wade: The Law of Real Property and publication in EG. The judges praised her entry as “an excellent read”, adding: “The author shows an impressive grasp of a highly complex piece of legislation and the practical difficulties it causes, and offers pragmatic solutions.” Click here to read the second and third prize winning entries, by Andrew Martin and Benjamin Cartwright.