Reeves & Downing v Sandhu (2015) Ch D 13/01/2015

This case is a reminder that on the sale of the reversion of a let property, the outgoing landlord (i.e. the seller) remains jointly liable with the incoming landlord (i.e. the buyer) for any future breaches of the landlord covenants in the lease.

In this case, the original landlord transferred its reversionary interest to a connected company.

The new landlord failed to insure the property and went bust. The property then burned down.

The tenant (by mistake!) sued the outgoing landlord for damages, obtained a judgement in default and petitioned for its bankruptcy.

The Court of Appeal confirmed that, since the original landlord had not obtained a release from liability under the notice procedure in section 8 of the Landlord and Tenant (Covenants) Act 1995, it was still liable under the landlord covenants in the lease for the consequences of the lack of insurance.

Lessons

On a new letting, a landlord should consider whether to include in the draft lease a clause that automatically releases the landlord from liability on a sale of the landlord's reversionary interest. It is not completely certain whether such an automatic landlord release would be upheld by the Courts.

Agents should perhaps be encouraged to deal with this issue at the heads of terms stage to avoid lengthy debate if it is raised later in the transaction.

On a sale of its reversionary interest, the outgoing landlord should consider invoking the section 8 release procedure. But it should bear in mind that, in the case of a multi-let property, the prospect of being released by some, but not all, of the tenants could  be troublesome.

For instance, suppose the incoming landlord defaults in the provision of services and one of the non-released tenants insists that the outgoing landlord pays for structural repairs. The outgoing landlord will not be entitled to recoup the cost through the service charge from those tenants who have released it, thus leaving the outgoing landlord with a shortfall.

A well advised tenant, on receipt of a section 8 notice, will serve a counter-notice objecting to the release, thus leading to a stalemate (unless the outgoing landlord is prepared to go to court for a declaration that the release is reasonable).