Landlord and Tenant (Covenants) Act 1995: the potted guide

In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to assignments being rendered void for contravening the Landlord and Tenant (Covenants) Act 1995 1995 Act checklist What is the Landlord and Tenant (Covenants) Act 1995 (“the Act”) driving at? What are the relevant rules that the Act lays down?  Are there any exceptions? What is the effect of those rules? Does it matter that the Act gives rise to uncommercial results in striking down provisions freely entered into by legally advised parties? Does section 3 avoid the uncommerciality of the Act? Can a tenant assign to its own guarantor? Can an existing guarantor (“G1”), having been released from liability from guaranteeing a tenant (“T1”), then guarantee, not T2, but T2’s own assignee T3? What does it mean that the agreement which frustrates the Act is “void”?   What is the Landlord and Tenant (Covenants) Act 1995 (“the Act”) driving at? In order to understand the Act, it is necessary to recall the law as it was before the Act. In this situation, an original tenant was liable on the covenants in a lease for the entirety of the contractual term. The guarantor of that original tenant was also liable for the entire currency of the contractual term, because the guarantor’s liability was normally drafted so as to be co-extensive with the original tenant’s liability. It was also common for assignees of the tenancy to be liable for the whole of the term: although the assignee’s privity of estate would strictly only have required it to be liable under the tenant’s covenants for the duration of its own period as tenant, landlords were prone, on an assignment, to require the assignee to enter into an express covenant with the landlord to comply with the covenants for the whole of the remainder of the term. The same therefore went for the guarantor of that assignee, on the same basis. This created injustice and unfairness. As was pointed out in the Law Commission Report in 1988 (No 174) that gave rise to the Act, tenants who had long departed premises found themselves pursued years after they had forgotten about their liability, as did their guarantors. It was considered unfair that they should be held to burdens under a contract in respect of which they no longer derived any benefit and over which they no longer had any control. The Act was designed to, and did, change the law profoundly. In Wallis Fashion Group Ltd v CGU Life Assurance Ltd (2001) 81 P&CR 28, Neuberger J (as he then was) said that it represented “a sea change in the law relating to a tenant’s liability after he assigns the lease, and it also alters the law relating to the landlord’s power to impose terms on assigning the lease.” What are the relevant rules that the Act lays down? In order to deal with that perceived injustice and unfairness, the Act lays down three relevant rules: (1) Under section 5(2), upon an assignment of the lease, a tenant must be released, as from the assignment, from its “tenant covenants” – by section 28(1) – the “covenant[s] falling to be complied with by the tenant of premises demised by the tenancy”; (2) a guarantor must be released “to the same extent” as was the tenant whose covenants it guaranteed; and (3) the Act cannot be contracted out from – under section 25(1) “any agreement relating to a tenancy is void to the extent that it would exclude, modify or otherwise frustrate the operation of any provision of… [the]… Act”. Are there any exceptions? There are only two exceptions to the rules. The first is that an assigning tenant can give the landlord an authorised guarantee agreement under section 16 – an “AGA”. This has a rather specific and limited nature: it only guarantees the tenant’s covenants of the actual assignee during the particular currency of its position as tenant. Following K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] 2 EGLR 11, it is also permissible for the assignor’s guarantor to guarantee the assignor’s AGA (ie enter into a sub-guarantee). The second exception is “excluded assignments”, under section 11 of the Act, an assignment either in breach of a covenant in the lease or by operation of law. What is the effect of those rules? The stark effect of those rules was first illustrated (at the prompt of David Holland QC) in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), [2010] Ch 426; [2010] 1 EGLR 29. Newey J held that the Act prevented a person who had guaranteed a tenant’s obligations under a lease from being required to give a further guarantee in respect of an assignee of the lease. Any requirement that an existing guarantor should be required to enter into a further guarantee when the lease was assigned, would “frustrate the operation of any provision of” the Act. Such a clause was therefore held to be void. Good Harvest was approved by the Court of Appeal in K/S Victoria Street. Any contractual arrangement, whether contained in the tenancy, prior agreement or even subsequent transaction, which imposes an obligation on an existing or prospective guarantor of the tenant’s liabilities, to guarantee the liabilities of a future assignee, is, whatever the parties want or wanted, void. It is irrelevant that none of the parties in fact intended to evade the provisions of the Act. The anti-avoidance provision in the Act (section 25) is based on its effect not on its intention. In UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch); [2015] EGLR 20 Morgan J summarised the key propositions established by K/S Victoria Street: “(5) there was no distinction between a guarantee freely offered by the guarantor and a guarantee insisted upon by the landlord; (6) there was no distinction as to the effect of the 1995 Act on an agreement to give the guarantee and a guarantee actually given; (7) the [very important qualification, which relates to AGAs under section 16], was that if the assignor gave an AGA in relation to the assignee, the guarantor of the assignor (whilst it was the tenant) could also give a guarantee in relation to the assignor’s liability under that AGA; (8) if a tenant assigns and the tenant and the tenant’s guarantor are thereupon released, there is nothing to stop that guarantor becoming a guarantor again on a subsequent assignment; (9) the proposition in (8) above applies not only where the subsequent assignee is a new party but also where the subsequent assignee is an earlier tenant whose liabilities were guaranteed by that guarantor.” Does it matter that the Act gives rise to uncommercial results in striking down provisions freely entered into by legally advised parties? No. Each time the Act is considered it is recognised that the correct construction of section 25 may give rise to results which could appear to be arbitrary and uncommercial and that the Act has an unattractively limiting and commercially unrealistic effect. However, the policy of the Act is taken to justify that outcome and it is nonetheless the law. Does section 3 avoid the uncommerciality of the Act? Section 3 provides that the benefit and burden of all landlord and tenant covenants of a tenancy shall pass on an assignment of the whole or any part of those premises or of the reversion in them. In addition, where the assignment is by the tenant under the tenancy, then as from the assignment the assignee becomes bound by the tenant covenants of the tenancy. Can this section operate to vest the tenant covenants in the assignee before any question of it being void arises? Powerful voices think that section 3 is capable of averting the more uncommercial aspects of the working of the Act – see Morgan J’s talk to the Property Bar Association at its Conference on 4 November 2015, entitled “The Landlord and Tenant (Covenants) Act 1995: 20 Years On”. However, this was not the view taken by the judge in EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] PLSCS 87. Because the release of the tenant and guarantor under sections 5 and 24 of the Act operate “as from” the assignment and the imposition of the burden of the tenant covenants takes effect “as from” the assignment, there is no room for any distinction between the timing of these events. There is no “scintilla” as to allow section 3 to rescue the situation. It was also the judge’s view in EMI Group that section 3 is not directed to the main thrust of the Act, namely that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability. It is only part of the “tidying up” that took place as a result of the reforms recommended in the Law Commission’s report. Can a tenant assign to its own guarantor? No, not as the law presently stands: see para 37 of K/S Victoria Street and EMI Group. In the latter case, the judge held that “The ‘whole thrust of the Act’ is that there should be no re-assumption or renewal of liabilities, whether on the tenant or the guarantor. That is the effect of 5(2)(a) in the case of tenants and section 24(2)(a) in the case of a guarantor or ‘other person’ bound by the tenant covenants. This means that, if a tenant and the tenant’s guarantor are each liable for the same or essentially the same liabilities as a result of the tenant’s covenants of the tenancy, the guarantor cannot as a result of assignment by the tenant to it of the tenancy re-assume those very same, or essentially the same, liabilities as the tenant. Or, using the terminology used in some of the cases, G1 cannot on an assignment by T1, become T2.” Can an existing guarantor (“G1”), having been released from liability from guaranteeing a tenant (‘T1”), then guarantee, not T2, but T2’s own assignee T3? Yes, see K/S Victoria Street and Morgan J’s proposition (8) from UK Leasing. What does it mean that the agreement which frustrates the Act is “void”? In Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA Civ 1215; [2014] 3 EGLR 36 Patten LJ said that although the words “void to the extent that” indicate that parliament did not intend to invalidate more of the relevant agreement than was necessary to safeguard the objectives of the Act, the court should take a “balanced approach to invalidation which, whilst neutralising the offending parts of the contract, does not leave it emasculated and unworkable…”. In EMI Group the entire assignment from the tenant to its own guarantor was held to be void and treated as if the whole transaction had never occurred in the first place. The court set the parties back to square one. Leading authorities Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29 K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] 2 EGLR 11 Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA Civ 1215; [2014] 3 EGLR 36 UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch); [2015] EGLR 20 EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch); [2016] PLSCS 87 Seitler’s leading practitioners Roger Cohen, Berwin Leighton Paisner Clive Chalkley, Gowling WLG  Bonnie Martin, Clarke Willmott  Stephen Parker, Paul Hastings Harvey Posener, GSC Solicitors