When the landlord sells his interest in a property, the new property owner becomes the landlord in his place and immediately becomes liable to the tenant in respect of the landlord’s obligations. However, the original landlord is not automatically released from his obligations, meaning that the tenant can bring an action against either the current or former landlord in respect of any breach. For a former landlord, who had thought that by selling the property he’d also got rid of his tenant, this may come as a nasty surprise.
To avoid this, when an owner sells a property which is subject to one or more leases he should always consider whether and how he can obtain a release from his obligations under that lease. From a tenant’s perspective, careful thought should always be given to whether to agree to a release: if the incoming landlord is a newly-formed property holding company the tenant may not trust that they can actually comply with the landlord obligations and may wish to keep the former landlord on the hook.
Are all landlords affected and how long do they remain bound?
The rules apply differently depending on whether the lease is a “new” or an “old” lease. Broadly speaking, a new lease is one granted on or after 1 January 1996 (when the Landlord and Tenant (Covenants) Act 1995 (“1995 Act”) came into force) though there are exceptions to this, so legal advice should always be taken.
Under a “new” lease, and in the absence of a release, the landlord will be bound by the landlord covenants from the point at which he became landlord (whether as original landlord or on a later transfer) right through until the lease comes to an end.
Under an old lease, only the original landlord (who granted the lease) will remain bound throughout the term: any landlord who acquires the property on a subsequent transfer will automatically be released from future obligations at the point at which he transfers on to someone else.
Which obligations does this apply to?
The landlord remains bound by all covenants which he gives. However, for new leases there is an important distinction to be drawn between “landlord covenants” and “personal covenants”. While the landlord who gave them continues to be bound by personal covenants, an incoming landlord only becomes liable for landlord covenants: this is also significant when looking at the statutory release provisions as these only cover landlord covenants.
Landlord covenants are any obligations which the landlord has under a lease and which relate to the landlord and tenant relationship. Depending on the nature of the lease, these may include covenants to repair, insure and provide services, as well as the covenant for quiet enjoyment. Landlord covenants also include obligations contained in collateral agreements, for example an obligation in a rent deposit deed to hold money in a specified account.
A personal covenant, which does not fall within this definition, may be “personal” either because it is explicitly stated in the lease that it will not be binding on successors in title or because it does not relate to the subject matter of the lease.
What should an outgoing landlord do?
Indemnity from buyer
On any sale of a property that is subject to leases, the seller should require the buyer to indemnify him in respect of any future breach of the landlord covenants contained in those leases. This means that even if the tenant does successfully pursue the former landlord he will have a claim against his successor.
However, an indemnity is only as good as the person giving it. If the tenant has decided to pursue a former landlord, it’s probably because he is getting nowhere with his current landlord; if the tenant has been unable to claim from the current landlord there’s a good chance that the former landlord won’t have much success either. In addition, the indemnity will only be from the next landlord along the chain: if this was a company which has subsequently sold the property and been wound up, the indemnity will be worthless.
To avoid having to rely on an indemnity, a landlord should always try to obtain a release if possible. There are several ways in which this can be done:
- By including provisions in the lease at the outset which limit or release liability (applies to all leases)
- By obtaining an express release from the tenant (applies to all leases)
- Under the statutory procedure for release contained in the 1995 Act (applies to new leases only
Provisions to limit or release the landlord’s liability (all leases)
While it is unusual to see a provision of this kind, the parties can agree when the lease is granted – or by way of a variation at some later stage – that the landlord will be released from all or some of his covenants when the landlord’s interest is transferred. It is clear that this will be effective in respect of the original landlord’s liability (for both old and new leases) and there is no reason to think that it wouldn’t also work to release a subsequent landlord under a new lease. However, there is no advantage to the tenant in agreeing to this, so he is likely to want something in return.
Express release (all leases)
The tenant is always free to expressly release the landlord from its covenants under the lease (including any personal covenants). This is the case whether the lease is an old lease or a new lease and is a matter for negotiation between the parties, usually at the time the landlord transfers its reversion. From a tenant’s perspective it will generally be preferable not to give a release as it’s always better to have an additional party on the hook who can be pursued if the current landlord fails to perform; the outgoing landlord should therefore expect to give some kind of consideration for the release.
Release under the 1995 Act (new leases only)
Where the landlord is unable to obtain the tenant’s agreement to a release, the 1995 Act provides a statutory mechanism under which a landlord is able to apply for a release from its covenants. However, there are strict requirements which must be complied with and failure to do so means that the landlord loses the right to be released until the next time the reversion is assigned:
- The notice must be served on the tenant at any time before or up to four weeks after the date of the “assignment”. While there is some debate about exactly when the “assignment” takes place, it is safest to assume it is the day on which the actual legal transfer or assignment of the property is dated (and not the earlier date of any equitable transfer or later date of registration).
- The notice must be in the correct prescribed form (which varies depending on the exact circumstances).
On receipt of the notice the tenant may agree to the release, do nothing, or object. While there is no requirement for the outgoing landlord to provide information about the new landlord, a tenant is likely to want to see this in order to establish the new landlord’s financial standing and assess its ability to perform the landlord covenants. Where the new landlord is of good covenant strength the outgoing landlord should consider supplying this information when he serves his notice.
If the tenant agrees to the release, the landlord will automatically be released. Similarly, if the tenant does nothing then, after a period of four weeks from service of the landlord’s notice, the landlord will be automatically released from the covenants. This release takes effect from the date of the assignment.
If the tenant wishes to object he must serve his written objection no later than four weeks after service of the landlord’s notice. On receipt of an objection the landlord can either accept that he has not been released, supply further information in the hope that the tenant changes his mind (the tenant is able withdraw his objection at any time) or apply to the court for a declaration that it is reasonable for the covenants to be released.
If the landlord is not released when he assigns (either because he forgets to make the application or because the tenant reasonably refuses to release him), the landlord is able to make a further application on any future transfer of the reversion. The obvious problem with this is knowing when a future transfer is made so that an application can be made within the time limit. One possible solution is to include a clause in the sale contract requiring the buyer to notify the seller of any future contract and transfer.
It is important to note that a release by this mechanism does not extend to personal covenants, only to landlord covenants: any personal covenants will need to be dealt with expressly. In addition, the release does not affect any liability that the landlord may have for any breaches that occurred prior to the release.
Potential risks of statutory release
Where a landlord is selling freehold property which is subject to just one lease, there are no disadvantages to following the statutory release procedure.
However, where the landlord is selling property subject to multiple leases, or he is assigning a headlease, careful consideration should be given before making an application for release. Under the provisions of the 1995 Act, once a landlord has been released from all of the landlord covenants, he also ceases to be entitled to the benefit of the tenant covenants under the lease. Depending on the nature of the landlord’s obligations this may not be an issue but it’s worth being aware of a couple of situations when it may be:
- A is the original tenant under a 60-year lease granted by L in 1990 and which contains a tenant’s repairing covenant. In 2000, A underlets the whole of the property to B for a term of 20 years; the underlease contains equivalent repair obligations. In 2014 A sells his reversionary interest in the head lease to C. On the sale to C, A is not released from his obligations as he is the original tenant under the 1990 headlease: L can still sue A in respect of a breach by C. If A obtains a release of the landlord covenants in the underlease at this point and B subsequently fails to comply with repair obligations, L would be able to pursue A, but A would not be able to enforce against B. However, if A does not obtain a release from B then his right to enforce against B will continue.
- A owns a new office block which has been let in three parts to different tenants (B, C and D). A has an obligation to repair the common parts of the building and can recover the cost of doing so through the service charge. A sells the freehold to E and obtains a statutory release from just one tenant, B. E subsequently becomes insolvent and fails to carry out necessary repairs. C and D require A to carry out the works, which he does; however, he is only able to enforce the obligation to pay for the costs of doing so against C and D, meaning that he faces a shortfall. If he had not been released by B he would have been able to recover from all three of them.
As a landlord it is therefore important to consider whether the benefits of obtaining a release outweigh the risks of being unable to enforce the tenant’s covenants. For example, in a multi-let situation it may be that the landlord is confident that the tenants would be unreasonable in a refusal to give the release (so that he can apply for a court declaration in respect of any who do object) in which case he may still be advised to make the application. However, if the incoming landlord is of very poor covenant strength it may be advisable to wait until a future transfer of the reversion or to try and negotiate express releases – these issues don’t arise if an express release is obtained, as there is no automatic release of the tenant’s covenants.
When a landlord sells his interest in a property he should always consider whether he will continue to be bound by the landlord covenants, and any personal covenants, and whether he may be able to obtain a release from these. However, careful thought should be given to the best way of applying for a release as the statutory release procedure can potentially leave the outgoing landlord with liabilities which he cannot pursue the tenant for.
A tenant who receives a landlord’s release request should carefully consider whether to agree to this. Where the landlord has not used the statutory procedure, the tenant will want something in return. However, if the statutory procedure has been used and the incoming landlord is of good covenant strength, there may be no point in objecting as the landlord will be able to apply to the court for a declaration that the release is reasonable.