Landlord liability - getting landlords 'off the hook'
When a landlord sells a tenanted property, he may retain liabilities under the lease depending on whether this is an ‘old’ or ‘new’ tenancy as defined by the Landlord and Tenant (Covenants) Act 1995 (‘the Act’).
In the case of old tenancies (generally one granted prior to 1 January 1996) a landlord remains ‘on the hook’ for its covenants in the lease to the original tenant throughout the whole term of the lease irrespective of sale and notwithstanding that the tenant or its assignees have an alternative remedy against the new landlord. The former landlord and the new landlord will be jointly and severally liable.
The new regime, introduced by the Act, applies to new tenancies (generally, those granted after 31 December 1995) giving the landlord who sells its property a statutory right to apply to its tenant to be released from its lease covenants. The Act prescribes a notice procedure for agreeing the release and the landlord’s notice can be served any time before or up to four weeks after the sale. A tenant may agree to the release, object to it or do nothing. If the tenant does not object within four weeks of receiving the notice, the landlord is automatically released from the covenants. If the tenant objects, the landlord may apply to the court for a declaration that such a release is reasonable. If this declaration is given the tenant risks being liable for both parties costs and so this should result in tenants carefully considering the grounds for their objections.
The significance of a landlord’s release will depend on issues such as the extent and nature of the landlord’s covenants (including those contained in any agreement for lease or licence that remain to be performed) and the profile, financial strength and experience of the new landlord. These issues will generally be of less concern where the obligations to insure and repair are placed on the tenant.
A landlord does need to carefully consider whether to apply for a release where it could remain liable to some but not all tenants. If it is not possible to obtain a release from all the tenants (e.g. on the sale of a multi-let building) and the landlord still has responsibility for, say, repair of the common parts, the landlord could be liable for breach of covenant if its successor fails to comply with that repairing covenant. Furthermore, if the former landlord carried out the repairs, it would not be able to recover the costs from the tenants who had given the release because the benefit of the tenant covenant to pay the service charge would have been lost to the landlord on the release.
The parties may agree to release each other from the lease covenants outside of the statutory provisions at the time of the sale. Notwithstanding the anti-avoidance provisions in the Act, it has been held by the House of Lords in Diocesan Fund and others v Avonridge Property Company Limited [2005] UKHL 70 that a lease may provide for the automatic release of the landlord’s covenants when it sells its interest in the property.
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