A tenant's charter

As more controversial legislation caught parliamentary interest, the Landlord and Tenant (Covenants) Act 1995 passed quietly into law and has been in force since the turn of the year.

But the 1995 Act, with its far- reaching reforms of privity of contract and privity of estate, has also failed to capture the interest of the legal fraternity.

The Act provides an answer to the old difficulty which faces those who assign their interest in a leasehold property. Before January 1996, a tenant who assigned his interest in a lease remained bound by the burden of all covenants owed to the lessor. Invariably the most important of these was his obligation to pay the lessor rent. In cases where the recalcitrant assignee became either insolvent or unwilling to pay rent, the assignee was effectively left stranded as a target for the lessor in recovering arrears of rent.

This was widely regarded as iniquitous and to an extent discouraged free movement in the leasehold market.

The 1995 Act has sought to address the difficulty by reversing the common law rule that a party was not entitled to assign the burden of covenant.

Although there are certain safeguards and exceptions, today the position is that an assignment of a leasehold interest will also transmit all the benefits and burdens of that interest (section 3).

This is the case regardless of whether the covenants touch and concern the land. In practice, as a general rule, the assignee (lessee or lessor) will be responsible for any default under covenant obligations.

In the past, although a landlord was also bound by the burden of covenants, it was widely accepted that the law impinged most harshly upon tenants.

The effect of the 1995 Act is to dramatically swing the pendulum back in their favour. Landlords will no longer be able to pursue the original tenant with demands for years of arrears that have accumulated under the assignee tenant.

The 1995 Act has, however led to criticism that tenants may abuse the position by assigning interests to unreliable or insolvent assignees so as to obviate duties presently owed. This was a particular criticism made on behalf of commercial landlords and led to some amendment of the Bill during its passage through Parliament.

The most important qualification of the Act's effect is the provision which allows a landlord to enter into a contract with an assignor tenant whereby that assignor tenant guarantees the performance obligations by the assignee tenant (section 16). This is an exception to the general scheme of the Act, from which the parties ordinarily cannot contract out of (section 25). The guarantees are described as “authorised guarantee agreements” (AGAs) and, as their title suggests, the circumstances in which they can be made is heavily prescribed in the Act.

The most important restriction of this aspect of the Act is that the assignor tenant will not be bound by an AGA after his assignee has, in turn, assigned the interest. In effect this puts a limit on the extent of the assignor's guarantee such that he will only ever guarantee his landlord or be responsible for the default of one assignee tenant. He bears no responsibility for and cannot be made to guarantee the performance of any subsequent assignee tenant.

This is a fair position in that the assignor tenant is in a position to assess the credibility and likelihood of his immediate assignee defaulting, something which he is unable assess about subsequent assignees.

There are a number of other provisions in the legislation which modify a landlord's duties on assignment of a leasehold interest. In particular, a landlord who sells his interest in a lease made after January 1996 is now able to apply to court to be released from his obligations under it. Further, the restrictions that a landlord can impose upon a tenant assigning the lease are relaxed by the Act, to allow the AGA mechanism to work. At present there is no case law to help in the interpretation of the Act's very broad provisions. However, given the sweeping changes that it makes, it can only be a matter of time before the Act is considered by the appellate courts.

Lawyers should also be aware of another sweeping change that will radically alter landlord and tenant law. The Disability Discrimination Act 1995, which passed through Parliament in a flurry of publicity is due to come into force this summer. The basic tenet of the Act, as it affects tenancies, is that it will make it unlawful to discriminate against disabled persons in the disposal of premises (section 16). Although there are a variety of exceptions to the principle, the definition of disability is drawn very widely and the Act looks set to significantly augment the obligation of commercial landlords to the disabled community.