England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM WILLESDEN COUNTY COURT
His Honour Judge Copley

		Royal Courts of Justice Strand, London, WC2A 2LL
		14th October 2004

Lord Justice Jonathan Parker :

INTRODUCTION

1. The issue on this appeal is whether a provision in a lease entered into since 1 January 1996 which purports to limit the liability of the original lessor under the lessor's covenants so that it comes to an end on his disposing of the reversion falls foul of the anti-avoidance provision in section 25 of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act").
2. The appellant is Avonridge Property Company Ltd. It appeals against a judgment for damages to be assessed entered against it by HHJ Copley in the Willesden County Court on 11 December 2003 in Part 20 proceedings brought by sublessees of premises at Headstone Drive, Wealdstone. The sublessees, who are the respondents to the appeal, hold the premises under three subleases granted by the appellant in March 2002, in consideration of substantial premiums. The appellant granted the subleases in its capacity as lessee (by assignment) of a headlease of those and other premises. The headlease is for a term of 99 years from 24 June 1968, at a rent of £16,700 per annum. The subleases, which are in standard form, are for the term of the headlease less three days, at a peppercorn rent.
3. In the subleases the appellant is referred to as 'the Landlord'. Clause 2.1 of the subleases provides that:

"'Landlord' includes the person for the time being entitled to the reversion immediately expectant on the termination of the Term".

4. Clause 6 of the subleases is headed 'Landlord's Covenants'. Its opening words are as follows:

"The Landlord COVENANTS with the Tenant as follows (but not [-] in the case of Avonridge Property Company Limited only [-] so as to be liable after the Landlord has disposed of its interest in the Property) …"

5. Two covenants then follow. The first is a covenant for quiet enjoyment; the second (which is the relevant covenant for present purposes) is a covenant "to pay the rent reserved by any lease by virtue of which the Landlord holds the Demised Premises"; that is to say, a covenant to pay the rent reserved by the headlease.
6. The crucial words for the purposes of this appeal are the words in parenthesis quoted above (I have inserted the two dashes in the quotation in order to render the sense of those words somewhat clearer).
7. In 2002 the appellant assigned the headlease to a Mr Dhirajlal Phithwa. Mr Phithwa subsequently granted a sublease of other premises comprised in the headlease, taking a substantial premium. It appears that, having done so, Mr Phithwa (as the judge put it) "had no further dealings in the matter".
8. In due course the landlords under the headlease commenced proceedings against Mr Phithwa for forfeiture of the headlease for non-payment of rent. As forfeiture of the headlease would automatically bring the subleases to an end, the respondents applied in the proceedings for relief against forfeiture.
9. In the Part 20 proceedings the respondents claim damages against both Mr Phithwa and the appellant for breach of the covenant in clause 6 of the subleases to pay the rent reserved by the headlease. Damages are claimed on the alternative bases either that the respondents obtain, or that they fail to obtain, relief against forfeiture. The respondents contend that the appellant remains liable on the covenants in the subleases notwithstanding the words in parenthesis in clause 6, quoted above, and notwithstanding that it had parted with its reversion by the time the breaches of covenant occurred. By their Particulars of Claim, the respondents allege that the covenant in clause 6 of the subleases "amounted to a covenant to pay the rent under the head lease, at the times and in the manner required thereby"; and that the appellant "did not take the necessary steps to obtain release from its covenants …" (a reference to the procedure for release prescribed by the 1995 Act, to the relevant provisions of which I shall shortly turn).
10. Those allegations are denied by the appellant in its Defence. It pleads that the covenants "only applied after [the appellant] disposed of its interest in the property"; and that "there were no 'necessary steps' for [the appellant] to take, since it did not give the covenants in clause 6 of the [subleases]".
11. In the event, agreement was reached between the headlessors and the respondents as to the terms on which relief against forfeiture should be granted, and those agreed terms are incorporated in the judge's order dated 11 December 2003. They provide, among other things, for payment by the respondents of the arrears of rent and of the headlessors' costs of the proceedings. On the respondents' Part 20 claim against the appellant, the judge, by paragraph 11 of his order, entered judgment for damages to be assessed. The appellant now appeals against that part of the judge's order.
12. The judge refused the appellant permission to appeal, but permission was granted by Neuberger LJ on the papers on 9 March 2004.

THE 1995 ACT

The background to the 1995 Act

13. For an account of the historical background to the 1995 Act, reference may be made to paragraphs 18 to 27 of the judgment of this court in BHP Petroleum Great Britain Ltd v. Chesterfield Properties Ltd & Anor. [2002] Ch 194 ("BHP"). For present purposes, the following somewhat briefer summary will, I hope, suffice.
14. The 1995 Act implements, in a modified form, the recommendations of the Law Commission in its Report no 174 entitled 'Landlord and Tenant Law: Privity of Contract and Estate' (1988) for the reform of the doctrines of privity of contract and privity of estate.
15. In paragraph 1.1 of their Report the Law Commission summarised the effects of these two doctrines in the context of the law of landlord and tenant, as follows:

"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."

16. In Part IV of the Report, under the heading 'Reform Proposals', the Law Commission outlined their reform proposals in relation to the obligations of landlords, as follows:

"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 responsibiliby for the lease obligations if, but only if, they comply with 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. …."

17. In paragraphs 4.16 and 4.17 of the Report the Law Commission explained why they had found it necessary to recommend the imposition of conditions on a release of the landlord's covenants when they had not found it necessary to make a similar recommendation in relation to tenants' covenants, saying this:

"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 than 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."

18. In paragraphs 4.57 and 4.58 of the Report, under the heading 'Contracting out', the Law Commission said this:

"4.57 We could have put forward our proposals for reform as a voluntary code, for parties to adopt if they wished, or as a set of rules to apply as a fall-back in cases where the parties did not expressly agree an alternative. We do not see either of these possibilities as satisfactory. The continuing liability effect of the privity of contract principle can be excluded voluntarily at the moment, but this is rarely done. We think it unlikely, given that there will be no change in the relative bargaining power of landlords and tenants, that new rules which the parties could exclude by agreement would have much effect in implementing the principles underlying our proposed reform. We therefore recommend that the new rules should apply notwithstanding any contract between the parties. In making this recommendation, we bear in mind that our proposals themselves have inherent flexibility when variation of the basic rule is reasonable.

4.58 Clearly, there are many ways in which the parties could seek to circumvent the rules we are proposing. Agreements for this purpose might be made outside the lease or agreement to assign, and might be made with third parties. We cannot foresee all the ways in which it could be done, and we do not consider that it would be satisfactory for statute to try to identify and nullify each individually. We recommend a general provision aimed at invalidating all contracts to the extent that they have the effect of subverting the rules we propose."

19. As part of the statutory background to the 1995 Act, it is relevant to note section 142(1) of the Law of Property Act 1925, which re-enacts provisions to similar effect in earlier legislation. It provides as follows (so far as material):

"The obligation …. of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by the lease, be annexed and incident to and shall go with that reversionary estate …. and may be taken advantage of and enforced by the person in whom the term is from time to time vested ….; and, if and as far as the lessor has power to bind the person from time to time entitled to that reversionary estate, the obligation aforesaid may be taken advantage of and entered against any person so entitled."

The 1995 Act itself

20. I can now turn to the 1995 Act itself. Its long title is:

"An act to make provision for persons bound by covenants of a tenancy to be released from such covenants on the assignment of the tenancy, and to make other provision with respect to rights and liabilities arising under such covenants; to restrict in certain circumstances the operation of rights of re-entry, forfeiture and disclaimer; and for connected purposes".

21. Turning to the relevant provisions of the 1995 Act, I start with section 28 (the interpretation section). Section 28(1) provides as follows (so far as material):

"In this Act (unless the context otherwise requires) – …."

….

'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;

'new tenancy' means a tenancy which is a new tenancy for the purposes of section 1;

'reversion' means the interest expectant on the termination of a tenancy;

'tenancy' means any lease or other tenancy and includes –

(a) a sub-tenancy, …."

22. Section 1(1) provides that the 1995 Act applies only to 'new tenancies'. Section 1(3) provides that for the purposes of the section a tenancy is a 'new tenancy' if it is granted after the commencement date (1 January 1996).
23. Section 3 provides (so far as material):

"(1) The benefit and burden of all landlord …. 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.

….

(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; …."

24. Section 6 provides as follows (so far as material):

"(1) This section applies where a landlord assigns the reversion in premises of which he is the landlord under a tenancy.

(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.

…."

25. Section 7 deals with the release of a former landlord on an assignment of the reversion, and is not directly material for present purposes.
26. Section 8 is headed 'Procedure for seeking release from a covenant under section 6 or 7'. It provides as follows:

"(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 four 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) ….

(4) In this section –

(a) 'the tenant' means the tenant of the premises comprised in the assignment in question ….;

(b) ….; and

(c) 'the court' means a county court."

27. Section 25(1) contains the anti-avoidance provision which is at the heart of this appeal. It provides (so far as material):

"Any agreement relating to a tenancy is void to the extent that –

(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act …."

THE JUDGMENT

28. The judge encountered no difficulty in concluding that the words in parenthesis in clause 6 of the subleases fall foul of section 25(1). In paragraph 16 of his judgment he said this:

"16. It seems to me that the words in parenthesis in clause 6 of the lease are tantamount to an agreement to release in advance, and I respectfully agree with the learned editors of Megarry and Wade that such a provision, by virtue of the 1995 Act, and particularly section 25, is void. There is no doubt that the 1995 Act …. had far-reaching effects, and one of the effects was that as from 1^st January 1996 …., when the Act came into force, it is not possible, as it were, to contract out, and that for a landlord to escape continuing liability under his covenants in a lease the procedure under the Act has to be gone through, and the words in parenthesis in clause 6 which, on the face of them, seek to avoid that procedure, cannot be other than avoided under section 25."

29. Refusing permission to appeal, the judge expressed himself in similarly robust terms, saying this:

"The wording of section 25 of [the 1995 Act] is in clear and unequivocal terms, and the provision in the lease to limit the landlord's liability is clearly an attempt to 'exclude, modify or otherwise frustrate' the operation of sections 6 and 8 thereof and is void, thus precluding the landlord from relying thereon in the claim against them for breach of covenant."

THE ARGUMENTS ON THE APPEAL

30. For the appellant, Mr Mark Warwick submits that a covenant in the terms of clause 6, which provides that the landlord is not to be liable on the covenant after it has disposed of its interest, is not a covenant 'falling to be complied with by the landlord of premises demised by the tenancy' (see section 28(1)), and is accordingly not a 'landlord covenant' for the purposes of section 6. If and so far as necessary, he seeks to rely on the qualification 'unless the context otherwise requires' in the opening words of section 28(1) as modifying the definition of 'landlord covenant' in a case such as the present.
31. He submits that, properly understood, the words in parenthesis in clause 6 render the landlord's covenant a personal covenant, such as this court was concerned with in BHP.
32. In BHP an agreement for a lease contained an obligation on the defendant landlord to carry out remedial works to the premises to be leased. The lease was duly executed, and in due course the defendant transferred its reversion to an associated company and served notice on the claimant tenant under section 8(1) of the 1995 Act seeking a release from its obligations. No counter-notice was served by the claimant. The claimant subsequently alleged that the defendant had breached its obligation to carry out remedial works and sought a declaration that the defendant remained liable to perform that obligation. Lightman J, at first instance, held that the obligation was personal to the defendant and accordingly was not a 'landlord covenant' within the meaning of the 1995 Act; and that the defendant's liability to perform the obligation survived the transfer of the reversion. The Court of Appeal upheld that decision. Mr Warwick referred us in particular to paragraph 62 of the judgment of the court, where the court said:

"Nor can we see anything in the 1995 Act to fetter the freedom of contracting parties to place a contractual limit on the transmissibility of the benefit or burden of obligations under a tenancy. On the contrary, that no such fetter was intended by Parliament is clearly demonstrated, in our judgment, by section 3(6)(a) …."

33. Mr Warwick submits that clause 6 contains, in effect, two covenants in relation to the payment of the rent under the headlease. One is a personal covenant by the appellant; the other is a covenant which is binding on its successors in title. The appellant's covenant is, he submits, excepted from the application of the 1995 Act by section 3(6)(a).
34. Mr Warwick goes on to submit that, as this court recognised in BHP, the 1995 Act imposes no restriction on the placing of a contractual limit on obligations arising under a personal covenant. He points out that one of the main aims of the 1995 Act was to make it easier, not more difficult, for a lessor to limit his liability.
35. In short, his submission is that no question of any release from liability arises, so far as the appellant is concerned, since, on a proper interpretation of clause 6, there was no continuing liability of the appellant on which a release could operate.
36. Mr Warwick referred us to passages from two text books (both of which he also cited to the judge). The first is a passage from 'Enforceability of Landlord and Tenant Covenants' (1st edition, 1997), by Mr Timothy Fancourt. In paragraph 23.05 of that work, the learned author says this, with reference to section 25(1)(a):

"Any agreement relating to a tenancy is void to the extent that it would, but for the anti-avoidance provision, have effect to exclude, modify or otherwise frustrate the operation of any provision of the [1995 Act]. Thus, a term of a lease that a guarantor for the lessee should remain liable on all the tenant covenants in the lease, however varied during the term granted, and for the duration of the term notwithstanding any assignment, would be void on account of the provisions of the [1995 Act] relating to release of guarantors and non-liability for the consequences of post-assignment variations. Similarly, an agreement expressly limiting the applicability of one or more of the sections of the [1995 Act] would be void because it would have effect to modify the operation of the Act. Limb (a) [a reference to section 25(1)(a)] goes yet further, seemingly for the avoidance of any doubt, and makes void any agreement which would 'otherwise frustrate' the operation of any provision of the Act. It is not obvious how an agreement which does not have effect to exclude or modify the operation of any provision of the Act can frustrate the operation of any such provision; but it is possible that it was intended to catch an agreement delaying the operation of provisions of the Act. The [1995 Act] does not provide for landlords to remain liable on their covenants after assignment of the reversion; it provides that, in certain circumstances, a landlord can be released from any such continuing liability. It is therefore considered that a term of a lease, which provided for a landlord's liability under his covenants to terminate upon an assignment of the reversion, would not be void under the anti-avoidance provision; yet, in one sense, it would 'frustrate' the operation of sections 6, 7 and 8 of the Act," (Emphasis supplied)

37. Mr Warwick relies in particular on the last sentence of the above quotation.
38. The other passage to which Mr Warwick referred us is paragraph 15-071 of Megarry and Wade's 'The Law of Real Property' (6th edition, 2000), where the learned editors say this:

"Agreements to release in advance void. Although either party to a tenancy may release the other from a covenant, any provision in the lease by which a tenant binds himself to release the landlord on an assignment of the reversion will be void as contravening the anti-avoidance provisions of the Act. The expressed intention of the provisions is that a tenant should be able to object to the release of landlord covenants in cases where it is unreasonable for the landlord to seek it. For a tenant to undertake in advance to give such a release on an assignment by the landlord, regardless of the circumstances that might then prevail, would plainly frustrate that purpose."

39. Mr Warwick submits that the above paragraph has no application in the instant case, since the words in parenthesis in clause 6 of the subleases do not amount to a release in advance, but merely to a limitation on the appellant's personal contractual liability.
40. Mr Nathan Wells, for the respondents, submits that the covenant in clause 6 of the subleases is, by its express terms, not a personal covenant by the appellant, but rather one which is intended to bind, and which is effective to bind, successors in title to the reversion. Hence it is a 'landlord covenant' within the meaning of section 6 of the 1995 Act, and accordingly one to which the procedure prescribed by section 8 applies.
41. As to the Law Commission Report, Mr Wells submits that the section 8 procedure was an integral part of the protection afforded by the statutory scheme which the Law Commission recommended. In support of this submission he relies in particular on paragraph 4.5 of the Report (quoted in paragraph 16 above).
42. Mr Wells submits that the words in parenthesis in clause 6 of the subleases represent the clearest attempt to contract out of the section 8 procedure, and that the judge was right so to hold.

CONCLUSIONS

43. In my judgment the appellant's argument is fallacious. The fallacy lies in the proposition that the effect of the words in parenthesis in clause 6 of the subleases is to convert the appellant's covenant into a personal covenant, notwithstanding that the covenant continues to be binding on the appellant's successors in title. As this court made clear in BHP, the distinction between a personal covenant and a 'landlord's covenant' within the meaning of section 6 of the 1995 Act is that a 'landlord's covenant' is one which is binding on the landlord's successors in title, whereas, by definition, a covenant which is personal to the landlord does not bind his successors (see paragraph 59 of the judgment in BHP).
44. In paragraph 62 of its judgment in BHP this court observed that there is nothing in the 1995 Act which fetters the contractual freedom of a party to enter into a personal covenant only (that is to say one which is not binding on successors in title); so much, indeed, is clear from the provisions of section 3(6)(a). However, that observation is of no assistance to the appellant in the instant case since the covenant in clause 6 of the subleases is not a personal covenant.
45. Nor can the appellant derive any comfort from the words 'unless the context otherwise requires' in section 28(1). The context there referred to is the context of the 1995 Act; not the context of the subleases. The definition of 'landlord's covenant' requires no modification in the context of section 6.
46. As to the extracts from the two text books to which we were referred, I agree with the judge when he says (in paragraph 14 of his judgment) that in the light of the background to the 1995 Act, and the very clear wording of it, there is no basis for the proposition in Mr Fancourt's book that a provision in a lease which provides that a landlord's liability under his covenants is to terminate on an assignment of the reversion is not caught by section 25(1). I further agree with the judge that the extract from Megarry and Wade to which we were referred is a correct statement of the law, and in particular that for a tenant to undertake in advance to release his landlord from further liability on an assignment of the reversion would plainly frustrate the operation of the 1995 Act, the intention of which is that a tenant should have the opportunity to object to such a release where the circumstances are such that it is unreasonable for the landlord to seek it.
47. Returning to the instant case, I am in full agreement with the judge that this is a clear case of an attempt to contract out of the 1995 Act. As the judge succinctly put it in paragraph 16 of his judgment, the provision in clause 6 of the subleases is "tantamount to an agreement to release in advance". As such, it is caught fairly and squarely by section 25(1).
48. I reach this conclusion without regret, since it seems to me to be wholly consistent with the recommendations of the Law Commission in their Report, referred to earlier. As the Law Commission say in paragraph 4.5 of the Report (quoted in full in paragraph 16 above), a landlord should have the opportunity to seek a release of its landlord's obligations "if, but only if", it complies with prescribed conditions. The words in parenthesis in clause 6 of the subleases represent a clear attempt by the appellant to avoid the need to do so.
49. I would dismiss this appeal.

Lord Justice Hooper:

50. I agree.

Lord Justice Pill:

51. I also agree.
Order: Appeal dismissed. The Appellant to pay the Respondent's costs of the appeal, (agreed subject to client's instructions) in the sum of £3,500, such costs to be paid by 4pm on 28 October 2004. Application for permission to appeal to House of Lords refused. (Order does not form part of approved judgment)