Do a good deed

The Landlord and Tenant (Covenants) Act 1995 may have settled the political debate on original tenant liability but it is unlikely to be the end of the story. Lawyers acting for landlord or tenant must now be aware of new issues raised by the Act and how these will impact on the drafting and enforceability of leases.

The strength of the tenant's covenant has always been one of the prime concerns of any landlord. In the past, however, this has been considered in conjunction with the strength of any surety offered by the tenant.

But is it still safe do so?

By section 24 of the Act, the surety's liability is released when the tenant is released. But if the tenant is required to enter into an authorised guarantee agreement under section 16 or takes an overriding lease under section 20 there is no provision for joining in the surety.

Should landlords insist on the proposed surety joining in as a co-tenant instead? Section 19 of the Landlord and Tenant Act 1927 has been changed to allow landlords to impose conditions before the tenant can assign. One such condition may be that the assignee is of equivalent covenant strength.

This raises a number of problems for the draftsman: Whose covenant strength is being considered – the tenant alone or the tenant and surety – and how do you define covenant strength?

How do you prove covenant strength? What tests do you put in the lease? Are references and company accounts merely historical snapshots or future hopes, or can they be relied on?

By section 19 (1C) the landlord has to act reasonably in determining whether any condition has been complied with or the lease must provide for the point to be determined by an ascertainable independent person. It is, therefore, important that any condition is drafted with certainty.

The simple solution may be to impose an absolute prohibition on assignment on the basis that the landlord will then have a free hand. How will this impact on rents and the drafting of rent review clauses? Will it be necessary to insert an assumption that the alienation covenant in the hypothetical lease is not so restricted?

The Act removes privity of contract for tenants in respect of new tenancies. It then sets out elaborate provisions to impose new liabilities on landlords. Each successive landlord is jointly liable for a breach of the landlord's covenants unless released under sections 6 to 8 of the Act. Under a lease of whole this may be of little consequence to the average landlord.

Where, however, the reversion is of a shopping centre or other property in multiple occupation the position could be very different. Credit Suisse v Beegas is an example of damages awarded against a landlord for breach of a repairing covenant – some £4 million. Can the lease be drafted so the landlord is automatically released on assignment?

Section 25 contains extensive anti-avoidance provisions. Any agreement to “exclude modify or otherwise frustrate the operation of any provision” of the Act is void. Section 26 provides that nothing in the Act shall prevent a tenant from releasing a landlord. Can this section be relied on to make the landlords' covenant limited to seisin?

The answer is no. There is a big difference between an agreement to release and a release itself. A simple provision that the landlord is not bound after an assignment of the reversion or that the tenant must then release the landlord must fall foul of section 25.

Peter Taylor is a partner at DJ Freeman.