=I January 2014 BrookStreet des Roches 1 Real Estate briefing Release of landlord’s covenants ‘When the landiord sells his interest ina property, the new property owner becomes the landlord in his place and immediately becomes liable to the tenant in respect of the landlord's obligations. However, the original landlord is not automatically released from his ‘obligations, meaning that the tenant can bring an action against either the current or former landlord in respect of any breach. For a former landlord, who had thought that by selling the property he'd also got rd of his tenant, this may come as a nasty surprise. To avoid this, when an owner sells @ property which is subject to one or more leases he should always consider whetherand how he can ‘obtain a release from his obligations under that lease. From a tenant's perspective careful thought should always be given to whether or not to agree to a release: if the incoming landlord is @ newly-formed property holding company the tenant may not trust that they can ‘actually comply with the landlord obligations and may wish to keep the former landlord on the hook. Are all landlords affected and how long do they remain bound? ‘The rules apply differently depending on whether the lease is a “new” or an “old” lease. Broadly speaking, a new lease is one granted ‘on of after 1 January 1996 (when the Landlord and Tenant (Covenants) Act 1995 ("1995 Act’) came into force) though there are ‘exceptions to this, o legal advice should always be taken. Under 2 “new” lease, and in the absence ofa release, the landlord willbe bound by the landlord covenants from the point at which he became landlord (whether as original landlord or ona later transfer) ght through until the lease comes to an end, Under an old lease, only the original landlord (who granted the lease) will emain bound throughout the term: any landlord who acquires the property on 2 subsequent transfer will automatically be released from future obligations at the point at which he transfers on to someone else Which obligations does this apply to? ‘The landlord remains bound by all covenants which he gives. However, for new leases there is an important distinction to be drawn between “landlord covenants” and “personal covenants". While the landlord who gave them continues to be bound by personal ‘covenants, an incoming landlord only becomes liable for landlord covenants: tis is also significant when looking atthe statutory release provisions as these only coverlandlord covenants Landlord covenants are any obligations which the landlord has under a lease and which relate to the landlord and tenant relationship. Depending on the nature of the lease these may include covenants to repair, insure and provide services, as well as the covenant for ‘quiet enjoyment. Landlord covenents also include obligations contained in collateral agreements, for example an obligation in a rent deposit deed to hold money in a specified account ‘A personal covenant, which does not fll within this definition, may be “personal” either because it is explicitly stated in the lease that it ill nat be binding on successors intitle or because it does nat relate tothe subject matter ofthe lease What should an outgoing landlord do? Indemnity from buyer ‘On any sale of a property that is subject to leases, the seller should require the buyer to indemnity him in respect of any future breach of the landlord covenants contained in those leases. This means that even ifthe tenant does successfully pursue the former landlord he will have a claim against his successor. However, an indemnity is only as good as the person giving it. Ifthe tenant has decided to pursue a former landlord it's probably because he is getting nowhere with his current landlord; if the tenant has been unable to claim for the current landlord there's a good chance that the former landlord won't have much success either. In addition the indemnity will only be fram the next landlord along the chain: if this was 2 company which has subsequently sold the property and been wound up, the indemnity will be worthless. Brooksweet des Roches LL 25A Western Avenue, ston Pt, abingdon xfs, 0445 a firm with unique properties DX T44160 Abingdon 401235 836600 W wbsdcomRelease from tenant To avoid having to rely on an indemnity, a landlord should always try to obtain a release if possible. There are several ways in which this, can be don > By including provisions in the lease atthe outset which limit or release liability (applies to allleases) > By obtaining an express release from the tenant (applies toll eases) > Under the statutory procedure for release contained in the 1995 Act (applies to new leases only) Provisions to limit or release the landlord's lia ty (all leases) ‘While it isunusual to see a provision of this kind, the partes can agree when the lease is granted - or by way of a variation at some later stage that the landlord will be released from all or some of his covenants when the landlord's interest is transferred Iti clear that this will be effective in respect ofthe original landlord’ liability (for both old and new leases) and there is no reason to thirk that it wouldit ‘also work to release a subsequent landlord under a new lease. However, there is no advantage to the tenant in agreeing to this, so heis likely to want something in return. Express release (all leases) ‘The tenant is always free to expressly release the landlord from its covenants under the lease (including any personal covenants). This is the case whether the lease is an old lease or a new lease and is a matter for negotiation between the parties, usually atthe time the landlord transfers its reversion. From a tenant’ perspective it will generally be preferable not to give a release as it’s always better to have an additonal party on the hook who can be pursued ifthe current landlord fails to perform; the outgoing landlord should therefore expect to give some kind of consideration forthe release. Release under the 1995 Act (new leases only) ‘Where the landlords unable to obtain the tenant's agreement to a release, the 1995 Act provides a statutory mechanism under which a landlord is able to apply for a release from its covenants. However, there are strict requirements which must be complied with (failure to do so means that the landlord loses the right to be released until the next time the reversion is assigned): > The notice must be served on the tenant at any time before or up to four weeks after the date of the “assignment”. While there is some debate about exactly when the “assignment” takes place it is safest to assume itis the day on which the actual transferor assignment of the property is dated (and not the earlier date of any equitable transferor later date of registration). > The notice must be inthe correct prescribed form (which varies depending on the exact circumstances). On receipt of the notice the tenant may agree to the release, do nothing, or object. While there is no requirement for the outgoing landlord to provide information about the new landlord, a tenant is likely to want to see this in order to establish the new landlord's financial standing and assess its ability to perform the landlord covenants. Where the new landlord is of good covenant strength the jutgoing landlord should consider supplying ths information when he serves his notice. If the tenant agrees to the release, the landlord will automatically be released. Similarly, i the tenant does nothing then, after a period of four weeks from service of the landlord's notice, the landlord will be automatically released from the covenants, This release takes effect from the date of the assignment, If the tenant wishes to object he must serve his written objection no later than four weeks after service of the landlord's notice. On receipt of an objection the landlord can either accept that he has not been released, supply further information in the hope that the tenant changes his mind (the tenant is able withdraw his objection at any time) or apply to the court for a declaration that it is reasonable for the covenants to be released If the landlord is not released when he assigns (ether becouse he forgets to make the application or because the tenant reasonably refuses to release hi), the landlord is able to make a further application on any future transfer of the reversion. The obvious problem ‘with this is knowing when a future transfer is made so that an application can be made within the time limit. One possible solution is to include a clause in the sale contract requiring the buyer to notify the seller of any future contract and transfer. It is imporant to note that a release by this mechanism does not extend to personal covenants, only to landlord covenants: any personal covenants will need to be dealt with expressly. In addition the release does not affect any lability thatthe landlord may have for any breaches that occurred prior tothe release svookSueet des Roches iL 254 Westen Avene, ston Patt abingdon, forse, ox 4S a firm with unique properties 1x 44160 bingion 4.61235 836600. W wwwbsdicomPotential risks of statutory release ‘Where a landlord is seling freehold property which is subject to just one lease, there are no disadvantages to following the statutory release procedure. However, where the landlord is selling property subject to multiple leases or he is assigning a headlease, careful consideration should be aiven before making an application for release. Under the provisions of the 1995 Act, once a landlord has been released from all of the landlord covenants, he also ceases to be entitled to the benefit ofthe tenant covenants under the lease. Depending on the nature of the landlord's obligations this may not be an issue but its worth being aware of a couple of situations when it may be: > ‘Ais the original tenant under a 60-year lease granted by Lin 1990 and which contains a tenant's repairing covenant. In 2000, A underlets the whole of the property to B fora term of 20 years the underlease contains equivalent repair obligations. In 2014 sells, his reversionary interest in the head lease to On the sale to G A is not eleased from his obligations as he isthe original tenant under the 1990 headlease: L can still sue A in respect of a breach by C. IFA obtains a release of the landlord covenants in the underlease at this point and 8 subsequently fails to comply with repair obligations, L would be able to pursue A, but A would not be able to enforce against 8. However, if A does not obtain a release from B then his right to enforce against 8 will continue. > A owns a new office block which has been let in three parts to different tenants (B, ¢ and D). A has an obligation to repair the common parts of the building and can recover the cost of doing so through the service charge. A sells the freehold to E and obtains a statutory release from just one tenant, B. E subsequently becomes insolvent and fails to carry out necessary repairs. C and O require A to cary out the works, which he does; however, he is only able to enforce the obligation to pay for the costs of dang so against C and D, meaning that he faces a shortfall If he had not been released by 8 he would have been able to recover from all three of them. ‘As a landlord it is therefore important to consider whether the benefits of obtaining a release outweigh the risks of being unable to ‘enforce the tenant's covenants. For example, in a multrlet situation it may be thatthe landlord is confident that the tenants would be unreasonable ina refusal to give the release (so that he can apply for a court declaration in respect of any who do object) in which case he may still be advised to make the application. However, ifthe incoming landlord is of very poor covenant strength it may be advisable ‘to wait until a future transfer of the reversion orto try and negotiate express releases ~ these issues don't arise f an express release is “obtained, as there is no automatic release ofthe tenant's covenants. Conclusion When a landlord sells his interest in 2 property he should always consider whether he will continue to be bound by the landlord covenants, and any personal covenants, and whether he may be able to obtain a release from these. However careful thought should be sven to the best way of applying for a release as the statutory release procedure can potentially leave the outgoing landlord with liabilities which he cannot pursue the tenant for. ‘tenant who receives 2 landlord's release request should carefully consider whether or not to agree to this. Where the landlord has not used the statutory procedure the tenant will want something in return. However, if the statutory procedure has been used and the incoming landlord & of good covenant strength, there may be no point in objecting as the landlord will be able to apply to the court for @ declaration thatthe release is reasonable. If you have any questions about the issues raised in this note, or would like any advice about serving or responding to statutory release notices, please speak to your usual contact at BrookStreet des Roches or contact any of the solicitors in our realestate team. Disclaimer ‘The ifomation set ut inthis briefing noes provided fee of charge or foration purposes onl toes and prospective dents of this fm We make every reasonable cfr to check that the infomation i accurate and yp to date but we cannot accept any responsibilty forts accuracy or extensor or any consequences of ring on it Pease note thatthe information des not ad is ot ntended to amount to legal advice and you are advised oobi speci persal advice For us or another lyr about any case or matter and nt to ely on the information o comments inthis ing note, ©-esoR 204 svookSueet des Roches iL 254 Westen Avene, ston Patt abingdon, forse, ox 4S a firm with unique properties X44160abingion 40135 836600 _W mabsdcom