However the doctrine of privity of contract didn’t only affect the tenant the landlord was also affected; when the Landlord entered in to the lease he was agreeing covenants with the tenant. The Landlord remains liable for these covenants when the tenant assigns the lease and even if the Landlord sells his interest in the property. However, unlike the tenant, the Landlord can protect himself from being sued for a breech of covenant committed by his successor by obtaining an express indemnity covenant in the transfer of the interest.
It was considered desirable to abolish the doctrine of privity of contract as it was geared towards the Landlord, who could contract out of his liability when he sold his interest, while the tenant was liable for all the covenants for the entire duration of the term even if they assigned the lease, however unlike the Landlord the Tenant could not contract out of his liability to the covenants in the lease on assignment. The Tenant also was liable for all the assignees of the lease. If it was a long lease the tenant was granted the lease could have been assigned dozens of times, so the tenant would be liable for the 12th assignee in the 50th year of the lease which was very unfair particularly when the 12th assignee was nothing to do with the original tenant. It was decided that a new act should abolish the doctrine of privity of contract, but that it should be replaced with something that made the tenant liable for the assignee directly below him in the lease, but no more than that.
Stage 2
If a Landlord is willing to let his tenant assign the lease, but wishes to ensure that if the tenant does assign the lease then the tenant will remain liable to him for the rent, in case the assignee defaults, then this can be achieved by making the tenant enter in to an Authorised guarantee agreement (AGA).
Although the doctrine of privity of contract was abolished in the LTCA 1995 a tenant who assigns his lease can be required to enter in to an AGA with the landlord meaning the tenant will guarantee his assignees performance of the covenants contained in the lease.
Basically what the AGA does is it makes the tenant liable for his assignees performance relating to the covenants in the lease, however if the assignee assigns the lease again then the original tenant is no longer liable for the 2nd assignees performance. Therefore if the 1st assignee defaults on his rent payment then the landlord can, by law, rightfully sue or reclaim the rent off the original tenant, as the original tenant entered in to an AGA with the Landlord when he assigned the lease.
If the landlord wants to be sure that the tenant has to enter an AGA with the Landlord on assignment, then a new covenant must be entered in to the lease stating that on assignment of the lease the tenant must enter an AGA with the Landlord to guarantee the assignees performance of the covenants.
The terms of the AGA itself are left to the parties involved; as long as they do not undermine the LTCA 1995 itself, the act permits that the tenant could be required to enter in to a new lease if the assignee goes in to insolvency.
If the tenant is served with a notice to pay, on behalf of his defaulting assignee, from the Landlord for a fixed charge then the LTCA 1995 allows the tenant to ask for an overriding lease within 12 months of the payment. This means that if a tenant enters into a lease with a landlord then assigns the lease later on in the term so the assignee owns the lease. The assignee defaults with his rent payment and falls in to arrears and the Landlord serves the tenant with a notice to pay. The tenant pays the amount in full and now has the right to claim an overriding lease from the Landlord, which the tenant does. This new overriding lease will be the new head lease and the assignee now has a sub lease and is now liable to the tenant for the rent. If the assignee continues to default the tenant can decide what action is to be taken. The tenant now has limited control over the premises and he is now liable for his stake in the premises. This applies to both new and old leases whether the Tenants liability is from privity of contract or from an AGA.
Stage 3
Section 19 of the 1927 LTCA is about assigning the lease. The section states that if there is a covenant against assigning without the landlords permission, in a new or old lease that the Landlords permission are now subject to the following terms:
- The Landlords permission must not be unreasonably withheld; however the Landlord has the right to require payment of a reasonable sum for any expenses that are incurred with the assignment, such as legal costs.
- The Landlords permission is not required for assignment, if the lease is over 40 years long and that the assignment has occurred within seven years of the end of the lease, if the notice in writing of the assignment is given to the lessor within 6 months of the assignment.
What this means is the Landlord cannot unreasonably withhold his consent. For example if the tenant tries to assign the lease to a German company, but the Landlord refuses to give his permission to the tenant as he does not want a German company in his building, then the Landlord is withholding his permission unreasonably and the tenant can take the Landlord to court over this matter if the Landlord will no back down.
The modifications brought about by the new section 19(1A) are to do with agreements, entered in to by the Landlord and Tenant under a qualifying lease, about provisions as to covenants not to assign, without permission.
Where the Landlord and tenant have entered in to an agreement specifying
- any circumstances in which the landlord may withhold his permission to an assignment of the building or any part of them
- any conditions subject to which any such permission may be granted
Then the Landlord-
- shall not be regarded as unreasonably withholding his permission to any such assignment if he withholds it on the ground (and it is the case) that any such circumstances exist
- If he gives any such permission subject to any such conditions, shall not be regarded as giving it subject to unreasonable conditions.
What this modification to section 19 of the LTCA 1927 means is that if the Landlord enters a covenant into the lease, with regards to assignment, stating that various conditions have to be fulfilled, then the Landlord will not be withholding his permission unreasonably if he refuses assignment on these grounds. For example if the Landlord enters a covenant into the lease that the premises cannot be assigned to a German company, then if in the future the tenant tries to assign the premises to a German company and the Landlord wont give his permission then this the Landlord is not being unreasonable in withholding his permission.
The original section 19 applies to all leases new and old where as the modification, section 19(1A), applies only to qualified leases, for example one that has an alienation covenant stating; not to assign the whole or any part of the premises without the permission of the Landlord.
