Regular updates on relevant case law and legislation - October 2009

CHAPTER 16 LEASEHOLD COVENANTS

A landlord’s covenant for quiet enjoyment (page 395)

In Heronslea (Mill Hill) v Kwik-Fit Properties [2009] EWHC 295 (QB), [2009] All ER (D) 75 (Mar), the lease allowed the landlord to enter the premises to undertake a survey, which here entailed drilling boreholes. Although the case was about the legal interpretation of the word ‘survey’, it was also said that allowing such an activity would undermine the landlord’s covenant for quiet enjoyment. If the landlord had intended such an activity, it should have been more clearly stated at the start of the lease.

A covenant by the tenant not to assign or sublet the leased premises (page 409)

In Landlord Protect Ltd v St Anselm Development Co Ltd [2009] EWCA Civ 99; [2009] 2 P&CR 9, it was held that first, the landlord could refuse consent if his rights would be prejudiced by the assignment. Secondly, the landlord is not allowed to impose a condition which increases or enhances his rights. In the case the landlord wanted the guarantor of the assignee to remain liable after any further assignment. This was rejected because it would enhance the landlord’s rights. If the landlord didn’t think any proposed assignees were suitable, he should ask for extra security instead.

In Royal Bank of Scotland v Victoria Street (No 3) [2008] EWHC 3052 (Ch); [2009] L&TR 17, the lease stated that Royal Bank of Scotland (the Bank) could not assign the lease without the consent of Victoria Street. Victoria Street could not refuse consent if the proposed assignee was respectable and responsible. The Bank wanted to assign to Office Investments Bishopsgate Limited (OIB). Consent was refused on the basis OIB had only recently been incorporated and was not respectable and responsible. The Bank wanted a quick summary judgement that Victoria Street had unreasonably refused consent. The application for summary judgment was dismissed because there was a chance that Victoria Street had a case and so it should go to full trial. Victoria Street had no information about OIB’s financial strength or that it could meet the obligations in the lease and the rent deposit was insufficient. The three overriding principles that had been given in Ashworth Frazer Limited v Gloucester City Council [2001] 1WLR 2180 (page 410 in Making Sense of Land Law) were repeated. Mr Brilliant argued that the landlord could rely on the continuing liability of the Bank on the covenants to put right anything that OIB didn’t do. He said that the only time a landlord could refuse consent was where the value of the reversion would be damaged. The court disagreed. Even though the Bank had continuing liability, it still couldn’t control the activities of OIB on the land. It was also unsatisfactory that a landlord had to chase up the assigning tenant (the Bank) if the assignee (OIB) didn’t pay the rent and it would be better to avoid any breach of covenants in the first place rather than assign to a tenant who was not respectable or responsible.

Reform (page 414) In August 2008 the Law Commission published its report Housing: Encouraging Responsible Letting. Reform is proposed in stages by promoting self regulation and building on existing voluntary initiatives. We are waiting now for a government response.

Authorised Guarantee Agreements (page 433)

In Shaw v Doleman [2009] EWCA Civ 279; [2009] 2 P &CR 12, the tenant, Ms Shaw, had assigned the tenancy to the Ceramic Cafe Limited (CCL). At the same time she had entered into an AGA with the landlord. The AGA provided that the guarantee by the outgoing tenant, Ms Shaw, would apply "throughout the period during which the assignee is bound by the tenant covenants of the lease". CCL went into liquidation and the liquidator disclaimed the lease. Disclaiming the lease meant that CCL had no further obligations concerning covenants in the lease. The court decided that Ms Shaw did have these continuing obligations despite the ending of the lease. Whilst section 178(4) of the Insolvency Act ended CCL’s obligations under the lease, it did not end the liabilities of any other person. Under the terms of the AGA, Ms Shaw was liable for the arrears of rent and could also be required to take over the lease for the remainder of the term. If the parties had wanted anything different, they should have agreed it. Tenants should note carefully what they are signing up to in AGAs.

Box E1 The liability of a subsequent assignee of the lease to be sued (page 433)

The House of Lords has now decided that the Court of Appeal decision in Scottish & Newcastle Plc v Raguz (No 3) [2007] EWCA Civ 150; [2007] Bus LR 841 has produced

‘some remarkably silly consequences’.

In Scottish & Newcastle Plc v Raguz [2008] UKHL 65; [2008] 1 WLR 2494; it was decided that if the rent is not in arrears, the landlord does not have to serve section 17(2) notices when the rent review is outstanding. When the rent review is decided, the landlord must then within 6 months serve a section 17(2) notice on the former tenant telling him he is now liable for the increase. This is because when the increase is fixed, this is a new and separate fixed charge. The increase would only become ‘due’ when it had been decided. Until the increase in rent is decided, there is no increase to pay and so the tenant cannot be in default. Although this wasn’t the literal interpretation of section 17, it was decided that Parliament could not have intended that the outcome was the decision of the Court of Appeal. The minority in the House of Lords thought that if the tenant defaulted after the date of the rent review but before its determination, the section 17(2) notice would not be valid unless the landlord reserved the right to claim for the increase in rent. Either way, though, landlords do not have to serve a ‘nil but watch this space’ notice.

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