Privity of Contract in Commercial Leases — Landlord and Tenant (Covenants) Act 1995

Old Leases — The Pre-1996 Position

Under the common law doctrine of privity of contract, the original tenant under a commercial lease remained personally liable under the tenant's covenants (including the covenant to pay rent) throughout the entire lease term — even after assigning the lease and having no further interest in the property. This meant that a company that had assigned a 25-year lease in 1985 could still be pursued by the landlord in 2005 or 2010 if the current occupier defaulted on the rent. The original tenant's liability was not diminished by the fact that there may have been multiple subsequent assignments — the landlord could pursue any original tenant, or any former tenant, whose personal covenant remained in force. A guarantor of an original tenant's obligations was similarly exposed.

• Original tenant personal liability: under pre-1996 leases, the original tenant remains personally liable under the tenant's covenants for the full lease term, regardless of how many times the lease has been assigned
• Former tenant liability: each former tenant who assigned with the landlord's consent also remained liable under their original covenant (unless specifically released)
• Guarantor exposure: a guarantor of the original tenant (or any former tenant) had corresponding exposure throughout the lease term
• Section 17 notice procedure (L&T(C)A 1995 s.17): even for old leases, the 1995 Act introduced a requirement that the landlord must serve notice on the original/former tenant within 6 months of any rent or other fixed charge becoming due — failure to serve within 6 months bars the landlord from recovering that sum
• Overriding lease (s.19): a former tenant who pays under s.17 notice can call for an overriding lease from the landlord — this grants the former tenant a lease between themselves and the landlord, enabling them to control the current occupier (e.g., by forfeiting the current tenancy) and mitigate their exposure

New Leases — The 1995 Act Regime

The Landlord and Tenant (Covenants) Act 1995 applies to all leases granted on or after 1 January 1996 ('new leases'). Under the 1995 Act, a tenant is automatically released from the burden of the tenant's covenants upon assignment — provided the assignment is a lawful assignment (not an assignment in breach of a covenant prohibiting assignment without consent). The outgoing tenant serves a notice on the landlord requesting release from the tenant's covenants (and the landlord can object to the release of the landlord's own covenants on transfer of the reversion). The 1995 Act also provides automatic release of the landlord from the landlord's covenants on transfer of the freehold reversion, subject to a similar notice procedure.

• Automatic release: on lawful assignment of a new lease (post-1995), the outgoing tenant is automatically released from the burden of the tenant's covenants
• Notice to landlord: the tenant must serve a notice on the landlord before or within 4 weeks after the assignment, applying for release from the landlord's covenants (s.8); if no counter-notice, release is automatic
• Landlord release: landlord also automatically released from landlord's covenants on lawful assignment of the freehold reversion — same notice procedure (s.8)
• Unlawful assignment: the release does not apply to an unlawful assignment (e.g., assignment without required landlord consent) — in that case, the assigning tenant remains liable
• Anti-avoidance: the 1995 Act contains anti-avoidance provisions — agreements purporting to exclude a tenant's right to release are void (s.25)

Authorised Guarantee Agreements (AGA)

Although the 1995 Act provides for automatic release of the outgoing tenant on assignment of a new lease, the Act also permits the landlord to require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) as a condition of consenting to the assignment. An AGA is a guarantee by the outgoing tenant of the performance of the tenant's covenants by the immediate assignee — and only the immediate assignee. The AGA cannot extend to cover the liability of any subsequent assignee. Once the immediate assignee itself assigns the lease (with the landlord's consent), the original AGA guarantor is released from the AGA in relation to that subsequent assignee's obligations. The AGA can be required as a pre-condition of consent only where the lease contains a covenant not to assign without consent (the standard commercial position), and the landlord's requirement for an AGA is reasonable in the circumstances.

• AGA: Authorised Guarantee Agreement — the outgoing tenant guarantees performance of the tenant's covenants by the immediate assignee; permitted under s.16 L&T(C)A 1995
• Immediate assignee only: the AGA covers only the liability of the immediate assignee — it cannot extend to cover subsequent assignees; once the immediate assignee reassigns, the AGA guarantor is released
• Lawful pre-condition: landlord can require AGA as a condition of consent to assign where the lease requires consent; the requirement must be reasonable
• Direct covenant by AGA guarantor: AGA may also require the outgoing tenant to enter into a direct covenant with the landlord to observe and perform the tenant's covenants — equivalent in effect to the original personal covenant for the period of the immediate assignee's occupation
• Guarantor of AGA: a guarantor of the outgoing tenant's AGA obligations can be required — but the same limitations apply (immediate assignee only; released when immediate assignee reassigns)

Section 17 Notices — Both Old and New Leases

Section 17 of the L&T(C)A 1995 applies to both old and new leases. It requires a landlord who wishes to recover a 'fixed charge' (typically rent, but also other liquidated sums due under the lease) from a former tenant or guarantor to serve a s.17 notice within 6 months of the charge becoming due. The s.17 notice must be in prescribed form, identify the charge, state the amount due, and warn the recipient that they may apply for an overriding lease. Failure to serve the s.17 notice within 6 months bars the landlord from recovering that charge from the former tenant or guarantor — the right is lost permanently for that payment period. This is an extremely important practical point: landlords must maintain records of former tenants and their contact details and ensure that s.17 notices are served promptly when current occupiers default.

• s.17 notice required: landlord must serve prescribed form notice on former tenant/guarantor within 6 months of a fixed charge (rent; service charge; etc.) becoming due
• 6-month bar: failure to serve within 6 months = right to recover that charge from the former tenant/guarantor is permanently lost; no extension
• Prescribed form: notice must be in the form prescribed by the 1995 Act and regulations — failure to use prescribed form may invalidate the notice
• Former tenant's response: former tenant who pays under s.17 can apply for an overriding lease (s.19) — inserting themselves between the landlord and the current occupier; enables the former tenant to forfeit the underlease and mitigate their position
• Practical importance: landlords must maintain records of former tenants for the full lease term; instruct solicitors/managing agents to serve s.17 notices promptly on default by the current occupier

Scotland and Practical Implications

The Landlord and Tenant (Covenants) Act 1995 does not apply in Scotland. Scottish commercial lease law is governed by Scots law, under which the position on assignment differs significantly. Under Scots law, an original tenant who assigns does not generally remain personally liable for rent accruing after the date of assignment — this is the default Scots law position (contrasting with the common law English position under old leases). However, specific commercial lease terms in Scotland may contain express personal liability covenants that run beyond the date of assignment; Scots lawyers advise on this in each case. Practically, any business that assigned an English commercial lease before 1 January 1996 should review their potential exposure — the original tenant may still be liable if the current occupier defaults and the landlord serves a timely s.17 notice. Professional indemnity or a form of insurance against this risk may be worth considering.

• Scotland: L&T(C)A 1995 does not apply; Scots law governs commercial lease assignment liability; original tenant generally not liable for post-assignment rent under Scots law default position
• Pre-1996 English lease holders: any business that assigned an English commercial lease before 1 January 1996 retains potential exposure for the full remaining lease term — check your position with specialist commercial property solicitors
• Due diligence on assignment: before accepting an assignment of an old lease, take advice on the remaining term and any outstanding liability of former tenants that the landlord may prefer to pursue rather than the current tenant
• Guarantors: guarantors of tenants under old leases retain their exposure in the same way as original tenants — review guarantee terms carefully
• Negotiating release: on assignment of an old lease, the incoming tenant or landlord may agree (as part of the transaction) to release former tenants from their continuing liability — this requires formal documentation

Frequently asked questions