A landlord’s continuing liability to its tenant exposes it to financial risks that could push it into insolvency

Under the Landlord and Tenant (Covenants) Act 1995, outgoing tenants are released from liability to their landlords when a lease is lawfully assigned to a third party. By contrast, landlords remain liable on their covenants after the sale of a reversion, unless and until they are expressly released. The litigation in Reeves v Sandhu [13/01/2015], which has not yet been fully reported, highlights the risks attached to such liability. The landlord had transferred premises to a company in his ownership, shortly after letting them to a tenant, without applying to be released from liability under the lease. Several years later, the tenant issued proceedings against the original landlord – apparently by mistake – claiming that the landlord was in breach of his insuring obligations under the lease. The tenant alleged that he had not been appropriately reimbursed for losses caused by a fire at the premises and that the remedial work was unsatisfactory. The landlord resisted the claim on the ground that he was not the owner of the premises, but the High Court upheld the tenant’s claim and made a bankruptcy order against the landlord. The judge ruled that the tenant had been entitled to pursue a claim against the landlord, who had not been released from liability to the tenant when he transferred the property to his company. Consequently, he and his company were jointly and severally liable to the tenant under the lease. The 1995 Act includes a statutory procedure that enables landlords to apply to be released from liability on their covenants either before, or within four weeks of, a sale. A landlord that seeks to take advantage of these provisions must serve a statutory notice on its tenant, giving the tenant four weeks in which to respond. If the tenant fails to do so, the outgoing landlord will be released from liability under the lease. However, if the tenant objects, the landlord will have to apply to the court for a release. The statutory procedure is not widely used – possibly because landlords have found an alternative method of procuring a release instead. The efficacy of covenants that seek to ensure that a landlord’s liabilities on its covenants will cease when it sells was in doubt until Avonridge Property Co Ltd v Mashru [2005] UKHL 70; [2006] 01 EG 100. There was an argument that provisions like this would fall foul of the anti-avoidance provisions in section 25 of the 1995 Act, but the House of Lords decided that such provisions are effective because the legislation does not prevent parties from undertaking only limited obligations from the outset. As a result, landlords who have included provisions in their leases limiting their liability to the period of their ownership need not be concerned about continuing liability to their tenants. However, those without the benefit of such protection will need to consider their position carefully on any sale of the reversion. In some cases, it may be advisable not to seek a release but to insure against the possibility of a claim.   Allyson Colby is a property law consultant