COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION - Mr Justice Lightman
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE JONATHAN PARKER
MR JUSTICE BODEY
| Chesterfield Properties Ltd
|- and -
|BHP Great Britain Petroleum Ltd
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Michael Barnes QC (instructed by Messrs Herbert Smith for the Respondent/Cross-Appellant)
Crown Copyright ©
Lord Justice Jonathan Parker :
This is the judgment of the court
THE FACTUAL BACKGROUND
"1.1.8 "Building Works Defect" any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period and in either case:-
126.96.36.199. which is caused by defective design materials or workmanship in the construction of the Building Works and
188.8.131.52. which one or more of the Warrantors is responsible to the Landlord to remedy pursuant to the provisions contained in any contract appointment or warranty between the Landlord and the Warrantors and
184.108.40.206. the cost of remedying which will in each such case exceed £50,000 (excluding VAT);
220.127.116.11. any such damage which occurs or arises directly or indirectly as a result of any works undertaken by or on behalf of the Tenant to the Demised Premises or the Tenants use of the Demised Premises otherwise than in accordance with the provisions of the Lease and
18.104.22.168. (subject and without prejudice to the provisions of clause 12.2.7) any such damage to the extent that the cost of remedying such damage would result in the Landlord incurring costs and expenses pursuant to clause 12.2 of this agreement in excess of the Maximum Aggregate Sum."
" 1.1.15 "the Defects Period" the period of six years commencing on and including the date of the actual completion of the Lease or if completion of the Lease is delayed otherwise than by reason of the default of the Landlord the period commencing on and including the date upon which the Lease should have been completed pursuant to the provisions of this agreement."
"References in this agreement to the Landlord are references to Chesterfield Properties PLC and shall not include the Landlord's successors in title. All obligations on the part of the Landlord in this agreement .... are personal obligations of the Landlord".
"If on one or more occasions during the Defects Period a Building Works Defect manifests itself the following provisions shall apply: ....".
"the Landlord shall with the minimum practical inconvenience to the Tenant and as economically as reasonably practicable remedy or procure the remedying of each Building Works Defect as quickly as reasonably practicable after obtaining the necessary building consents and after (if reasonably required by the Landlord) the Tenant and all other occupiers shall have vacated the Demised Premises or the part or parts of the Demised Premises affected by such Building Works Defects."
" 12.5.1. For the avoidance of doubt:-
22.214.171.124. the Tenant acknowledges that the obligations on the part of the Landlord contained in this clause 12 are personal obligations of Chesterfield Properties Plc and the Tenant acknowledges and confirms that the Tenant shall have no claim of any nature whatsoever against the Landlords successors in title to the Demised Premises arising out of or otherwise in connection with the obligations on the part of the Landlord contained in this clause 12;
126.96.36.199. the benefit of the provisions contained in this clause 12 shall enure for the Tenants successors in title and the Tenant and the Tenants successors in title shall be entitled to assign the benefit of the provisions contained in this clause 12 to each subsequent assignee of the Lease but not otherwise."
THE 1995 ACT
The previous law
"In the law of landlord and tenant privity of contract means that the original landlord and the original tenant normally remain liable to perform their respective obligations for the whole of the period for which the lease was granted, even if they have parted with all interest in the property. Privity of estate means that the landlord and the tenant for the time being automatically assume responsibility for the lease obligations which relate directly to the property for the period during which they own an interest in it, but they are not necessarily bound to comply with all the terms of the lease."
"2.1 A lease creates a new legal estate, vesting the property in the tenant for a defined period; it also constitutes a contract between the original parties, who normally undertake liabilities under the covenants for the whole term created by the lease. The direct contractual relationship – privity of contract – between the original landlord and the original tenant means that they remain liable to perform their respective covenants for the whole period of the lease, notwithstanding that they have parted with all interest in the property. Thus, e.g., the original tenant remains liable to pay rent if the person to whom he has assigned the term defaults; "of course the expectation, commercially speaking, is that the assignee will pay, but the assignor does not by assignment get rid of one jot or tittle of his original liability". Although the privity of contract principle applies equally to landlords and tenants, examples of tenants being made liable are more common. The main reason for this is probably that in the majority of leases the tenant undertakes many more obligations than does the landlord.
2.2 Privity of estate means that the parties stand for the time being in the relationship of landlord and tenant, which of itself involves certain enforceable obligations. As between the original parties to a lease, there is at first privity both of contract and of estate. However, if either the original landlord or the original tenant parts with his interest in the property, the privity of estate between them comes to an end. There is then privity of estate between the person who is landlord for the time being and the person who is tenant for the time being. The parties currently in the position of landlord and tenant become bound by, and can enforce, certain types of covenant in a lease. The covenants so enforceable are, in general, those which have a direct bearing on their relationship as landlord and tenant - said technically to be, covenants which "touch and concern" the land or have "reference to the subject-matter of the lease", terms which are treated as synonymous. In practice, almost all the most important covenants in a lease fall within this category. Those covenants which impose merely personal obligations bind only the original parties, and not their successors.
2.3 Once the lease is assigned, there will be privity of estate between the landlord and the assignee. When a lease requires the landlord's consent to an assignment by the tenant, it is not uncommon for the landlord to require the proposed assignee to covenant directly with him to observe and perform the tenant's covenants in the lease. In that case, as soon as the assignee covenants directly with the landlord, there will additionally be privity of contract between them. As a result, the new tenant's liability will go beyond the normal privity of estate liability of an assignee in two respects. First, his liability will extend to all the tenant's covenants in the lease and not merely those which touch and concern the land. Secondly, if his covenant is expressed to bind him for the remainder of the lease, he remains liable even if he subsequently assigns his interest."
"2.21 Thus, when the original tenant assigns his lease, the assignee (and any subsequent assignee) automatically becomes directly liable to the landlord, with whom he has privity of estate, in respect of those covenants which "touch and concern" the land. Examples of such covenants are covenants to pay the rent; to repair buildings; to insure them against fire; to use the property for domestic purposes only; and a covenant not to assign the lease without the landlord's consent. Similarly, when the original landlord parts with the reversion, his successor becomes responsible for complying with those obligations which have "reference to the subject matter of the lease". Examples of such obligations undertaken by the landlord are covenants to repair or insure the premises, to supply water to the property, and to give the tenant quiet possession of the premises. Personal covenants bind only the original parties, and not their successors. Examples of such covenants are a landlord's covenant not to compete with the tenant's business; a covenant requiring payment of an annual sum to a third party; and one promising to pay the tenant a sum of money at the end of the lease or until a new lease is granted.
2.22 The test for distinguishing between those covenants which touch and concern the land and those which are merely personal has been variously formulated in the decided cases over the years. The covenant will touch and concern the land if it per se affects the nature, quality or value of the land; if it affects the landlord in his normal capacity as landlord or the tenant in his normal capacity as tenant; if the covenant is beneficial to the owner for the time being of the covenantee's land and to no one else.
2.23 The rules concerning covenants which run with the land were criticised some fifty years ago as "purely arbitrary, and the distinctions, for the most part, quite illogical". As we indicated in the Working Paper, there are a number of difficult borderline cases from which it is hard to discern a clear guiding principle. To take a few examples. A landlord's covenant to renew a lease runs with the land, but a covenant that a landlord will make a payment to the tenant at the end of the lease, or in default will grant a new lease does not. A covenant not to employ a named person on business premises binds the tenant's successors; a covenant not to employ a particular class of people on the property does not."
The Law Commission's proposals for reform
4.1 Our proposals for reform recognise the importance of two principles:
First, a landlord or a tenant of property should not continue to enjoy rights nor be under any obligation arising from a lease once he has parted with all interest in the property.
Secondly, all the terms of the lease should be regarded as a single bargain for letting the property. When the interest of one of the parties changes hands the successor should fully take his predecessor's place as landlord or tenant, without distinguishing between different categories of covenant.
4.2 The majority of those who responded to the Working Paper believed that the effect of transferring property which has been leased should be the "clean break" which results from applying the two principles. Nevertheless, the consultation convinced us that there are cases in which, for good reason, landlords can only agree to a proposed assignment if they are assured that their existing tenant will continue to be responsible for complying with the lease terms. We are therefore proposing a scheme based on the general abrogation of the privity of contract principle, but which stops short of abolishing it in all cases.
4.3 We propose a general rule that the liability of the original tenant, and his entitlement to benefits under the lease. should not survive an assignment of the lease. For this purpose, we propose that all the covenants in a lease should be treated in the same way, whether or not at present they touch and concern the land. Nevertheless, it would be possible for the landlord, when granting consent to the assignment, to impose a condition that the tenant will be liable to guarantee the performance of some or all of the lease covenants by his immediate successor.
4.4 The Landlord and Tenant Act 1988 implements our recommendations generally to impose a duty on landlords not unreasonably to withhold consent. The effect would be that in cases where the landlord is not entitled to withhold his consent to assign, he would only be able to impose a condition that the tenant have continuing liability where it was reasonable to do so.
4.5 For landlords, we propose a rule that when they part with their interest in the property let by a lease they will escape further responsibility for the lease obligations if, but only if, they comply with the prescribed conditions. These will involve their giving notice to the tenant and his being able to withhold consent if it is reasonable for him to do so. Again, the benefits of being landlord, so far as they can enure to an owner who has parted with the property, would only continue for a former landlord who had continuing liability.
4.6 Landlords and tenants will generally have different forms of continuing liability, where they have any at all. Former landlords will be jointly and severally liable with the current landlord, and any other former landlord who is still liable. A former tenant, on the other hand, will normally be guarantor of the current tenant; the only exceptional case is where a tenant only assigns part of the property and remains jointly and severally liable with the assignee for some covenants which affect the whole property. Making former tenants liable as guarantors avoids the major injustice to tenants which can arise where the terms of the lease are, in effect, later varied to increase the tenant's liability. That will now release the tenant, except where the court varies an unsatisfactory lease of a flat."
"4.16 In relation to the liability of landlords, we should have preferred our proposals to have mirrored precisely our recommendations for tenants' covenants. However, that is not possible because tenants rarely, if ever, have a right to give or withhold consent to dispositions by their landlord. They would therefore not be in a position to require continuing liability after an assignment of the reversion and to block an assignment if the condition is not agreed. Moreover, there is less need here for radical change. In most leases, the landlord undertakes far fewer obligations that the tenant and landlords may not be troubled by the prospect of continuing responsibility.
4.17 For these reasons, we do not propose that an assignment of the landlord's reversionary interest should automatically affect his continuing liability. Rather, we recommend that an assigning landlord should have an option to operate a procedure which could end his liability, and his entitlement to benefits, under the lease. A landlord who wished to escape further responsibility would have to give the tenant notice of his proposal to assign. In the notice the landlord would propose that after the assignment he should no longer have any liability under the lease. It would give the tenant four weeks in which to reply."
" (1) A tenant who assigns all the property let by a lease should generally cease to be liable to comply with the lease covenants, and similarly should cease to have the benefit of the lease. The assignee should become liable to perform the covenants and should have the benefit.
(2) A landlord consenting to an assignment should be able to impose a condition that the tenant guarantees the performance of the lease covenants by his successor, but only until the following assignment.
(3) A landlord who assigns the whole of his reversion should have the option to escape further liability, and to forego benefits, under the lease by serving a prescribed notice on the tenant.
(4) The incoming landlord should be liable to perform all the lease covenants, and be entitled to the benefits of the lease. Any previous landlord remaining bound by the covenants should be jointly and severally liable with the new landlord.
(5) On a later assignment of the reversion, a previous landlord should be able to serve notice to escape further liability, but should have no statutory right to be notified in advance of a proposed assignment.
(10) The distinction between lease covenants which touch and concern the land and those which do not should be abolished."
The 1995 Act itself
"An Act to make provisions for persons bound by covenants of a tenancy to be released from such covenants on the assignment of the tenancy ...."
" There were significant intermediate stages between the  Report and the enactment of the 1995 Act which are conveniently referred to in Mr Charles Harpum's sixth edition of Megarry & Wade on the Law of Real Property at 15-064. It is accordingly not possible to assume that the 1995 Act gave unqualified effect to the recommendations in the  Report. There were modifications and additions. But I can find no indication in Hansard or elsewhere of any intention to qualify the adoption of the principle that the release of a landlord or tenant from a covenant was intended to be sequential upon, and only sequential upon, a parting by the landlord or tenant with his interest in the property let and the successor taking his predecessor's place as the party responsible for complying with that covenant".
"collateral agreement", in relation to a tenancy, means any agreement collateral to the tenancy, whether made before or after its creation;
"covenant" includes term, condition and obligation, and references to a covenant .... of a tenancy include a covenant .... contained in a collateral agreement;
"landlord" and "tenant", in relation to a tenancy, mean the person for the time being entitled to the reversion expectant on the term of the tenancy and the person so entitled to that term respectively;
"landlord covenant", in relation to a tenancy, means a covenant falling to be complied with by the landlord of premises demised by the tenancy;
"tenant covenant", in relation to a tenancy, means a covenant falling to be complied with by the tenant of premises demised by the tenancy."
"(1) This Act applies to a landlord covenant or a tenant covenant of a tenancy –
(a) whether or not the covenant has reference to the subject matter of the tenancy, ...."
" (1) The benefit and burden of all landlord and tenant covenants of a tenancy –
(a) shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and
(b) shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them.
(2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee –
(a) becomes bound by the tenant covenants of the tenancy except to the extent that –
(i) immediately before the assignment they did not bind the assignor, or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefit of the landlord covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises.
(3) Where the assignment is by the landlord under the tenancy, then as from the assignment the assignee –
(a) becomes bound by the landlord covenants of the tenancy except to the extent that –
(i) immediately before the assignment they did not bind the assignor, or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefit of the tenant covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises.
(4) In determining for the purposes of subsection (2) or (3) whether any covenant bound the assignor immediately before the assignment, any waiver or release of the covenant which (in whatever terms) is expressed to be personal to the assignor shall be disregarded.
(5) Any landlord or tenant covenant of a tenancy which is restrictive of the user of land shall, as well as being capable of enforcement against an assignee, be capable of being enforced against any other person who is the owner or occupier of any demised premises to which the covenant relates, even though there is no express provision in the tenancy to that effect.
(6) Nothing in this section shall operate –
(a) in the case of a covenant which (in whatever terms) is expressed to be personal to any person, to make the covenant enforceable by or (as the case may be) against any other person; or
"(2) If the tenant assigns the whole of the premises demised to him, he –
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment."
"(2) If the landlord assigns the reversion in the whole of the premises of which he is the landlord –
(a) he may apply to be released from the landlord covenants of the tenancy in accordance with section 8; and
(b) if he is so released from all of those covenants, he ceases to be entitled to the benefit of the tenant covenants of the tenancy as from the assignment."
"(1) For the purposes of section 6 or 7 an application for the release of a covenant to any extent is made by serving on the tenant, either before or within the period of four weeks beginning with the date of the assignment in question, a notice informing him of –
(a) the proposed assignment or (as the case may be) the fact that the assignment has taken place, and
(b) the request for the covenant to be released to that extent.
(2) Where an application for the release of a covenant is made in accordance with subsection (1), the covenant is released to the extent mentioned in the notice if –
(a) the tenant does not, within the period of 4 weeks beginning with the day on which the notice is served, serve on the landlord or former landlord a notice in writing objecting to the release, or
(b) the tenant does so serve such a notice but the court, on the application of the landlord or former landlord, makes a declaration that it is reasonable for the covenant to be so released, or
(c) the tenant serves on the landlord or former landlord a notice in writing consenting to the release and, if he has previously served a notice objecting to it, stating that that notice is withdrawn.
(3) Any release from a covenant in accordance with this section shall be regarded as occurring at the time when the assignment in question takes place.
(4) In this section –
(a) "the tenant" means the tenant of the premises comprised in the assignment in question (or, if different part of those premises are held under the tenancy by different tenants, each of those tenants);
(b) any reference to the landlord or former landlord is a reference to the landlord referred to in section 6 or the former landlord referred to in section 7, as the case may be; and
(c) "the court" means a county court."
THE JUDGMENT OF LIGHTMAN J
"22. I turn to the first question. The rival contentions by the parties put the issue into perspective. Mr Berry for [Chesterfield] submits any form of obligation on the part of a landlord in a tenancy or collateral agreement, whatever its character or topic, constitutes a landlord covenant and likewise any form of obligation on the part of a tenant constitutes a tenant covenant. On the other hand Mr Barnes for [BHP] submits that the obligation in either case must be capable of being annexed to the premises demised by the tenancy and the reversion and accordingly transmissible under section 3 of the Act, and that this excludes personal covenants. It is common ground that the Agreement is a "collateral agreement" in relation to the Lease. It is sufficient to say the Agreement is an agreement "running side by side" and "parallel to" the Lease: see the definition of "collateral" in the Oxford English Dictionary 2nd edition. (It is unnecessary for this purpose, though it may be sufficient, that the agreement constitutes the species of contract known as a collateral contract). It is clear that the personal covenant, since it is "a covenant in a collateral agreement", is for the purposes of the 1995 Act (in accordance with the definition of the term "covenant") a covenant of the Lease. The critical question is whether that covenant falls within the definition in section 28 of a landlord covenant. For this purpose it must be a covenant "falling to be complied with by the landlord of premises demised by the tenancy", and the landlord for this purpose means "the person for the time being entitled to the reversion expectant on the term of the tenancy". Focus, as it seems to me, must be placed on the words "for the time being". These words to my mind connote, not merely that the covenant falls to be complied with by the landlord at any particular point in time (as submitted by Mr Berry for [Chesterfield]), but that it falls to be complied with by the person who may from time to time be entitled to the reversion. It may be noted that a tenant covenant is likewise defined as a covenant falling to be complied by the person "so" (i.e. like the landlord in the case of the landlord covenant) for the time being entitled to the tenancy. In short the only covenant that can constitute a landlord or tenant covenant is a covenant which is capable of subsisting (in the language of section 3 of the Act) as a transmissible covenant and accordingly a personal covenant cannot qualify.
23. Mr Berry submitted that this construction could not stand with the two specific references in the 1995 Act to personal covenants. Section 3(6) provides that nothing in section 3 (which is concerned with the transmission of the benefit and burden of covenants) shall operate to make a covenant expressed to be personal to any person enforceable by or (as the case may be) against any other person; and section 15(5) again provides that nothing in that section (which is concerned with enforcement of covenants) shall operate to make a covenant expressed to be personal to any person enforceable by or (as the case may be) against any other person. I do not find any contra-indication to the construction which I have adopted in either of those provisions. They are cautionary provisions designed to prevent any question arising whether the sections might have the unexpected and unintended result there referred to. They do not elevate, or reflect any intention to elevate, personal into landlord or tenant covenants."
"28. The tenant maintains that under clause 188.8.131.52 of the Agreement he is entitled to require [Chesterfield] to remedy, not merely the physical damage that has occurred by reason of the building work defect (i.e. replace the windows if the total cost exceeds £50,000) but also the underlying defect, namely the use of the wrong and untested glass. This claim turns on the definition of Building Works Defect in clause 1.1.8 namely:
"any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period."
"[BHP] cannot say that further physical damage will result from this defect, nor could he say that further physical damage would result when [BHP] gave notice of the defect between the date of the resultant damage to the second and third window. All he can say now is, and all he could say then was, that the defect gives rise now and gave rise then to a significant risk of further damage. But Mr Barnes for [BHP] submits that the issue whether there is a defect which will cause damage (and accordingly requires remedying) must be looked at as at the date of the Agreement: looked at from that viewpoint it can now be seen and said that the defect would result in physical damage. It is however clear (most particularly from clause 12.2 of the Agreement) that the situation must be looked at as at the date of [BHP's] notification of the defect. Accordingly [BHP] cannot require [Chesterfield] to remedy the alleged defect: he can only require remedy of the accrued physical damage and then only if the cost of the remedy exceeds £50,000. Any complaint about this on the part of [BHP] must be in respect of the negotiation or drafting of this term of the Agreement."
THE 1995 ACT ISSUE
"I do not see why the transmission of the burden should depend on transmissibility of the benefit if all the other conditions are satisfied when, as the decision in P & A Swift Investments v. Combined English Stores Group plc [ AC 632] shows, the transmission of the benefit does not depend on the transmissibility of the burden."
THE AGREEMENT ISSUE
".... any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period ...."