Leasehold Liability

Author: Tom Lawrence

The Landlord and Tenant (Covenants) Act 1995 was introduced following the recession of the early 90s. The Act provides former tenants who have lawfully assigned their interest in a lease (the assignor) with a degree of protection against contingent liabilities for rent and other sums in the event that the person to whom they have assigned the lease (the assignee) defaults. The Act applies to both pre 1 January 1996 leases (Old Leases) and post 1 January 1996 leases (New Leases).

Former tenants who assigned a lease created prior to 1 January 1996 remained liable for the breaches of their assignee, which left them no way of managing that liability. Tenants who assigned leases created after this date will usually have entered into an Authorised Guarantee Agreement (AGA) with their landlord, which guarantees the performance of the tenant’s covenants by the assignee.

The Act provides a mechanism whereby the assignor can demand an overriding lease from the landlord provided they make good any breach by the assignee. This means that the assignor can either find another tenant who will be able to comply with the covenants in the lease or re-enter the premises themselves for their own purposes.

In addition, the Act provides that a landlord must serve a notice on a former tenant if he wants to recover ‘fixed charges’ from them. Fixed charges are defined by the Act and include rent, service charges and any specified amount payable under the lease. This is known as a section 17 notice and must be in the prescribed form and served within 6 months of the ‘fixed charge’ becoming due.

Once the former tenant has paid the sums demanded in the section 17 notice he can demand an overriding lease so long as he makes that demand within 12 months of the payment to the landlord. An overriding lease gives ‘the former tenant’ control of their contingent liability. The ‘former tenant’ (assignor) can then sue the assignee for the sums they have paid the landlord and re-enter the premises (subject to the overriding lease containing a forfeiture clause and subject to the re-entry being made legally). This procedure enables the former tenant (assignor) to proactive action to manage his contingent liability.

Leasing properties as a tenant or a landlord can be complex. For information, problem solving and advice, contact Tom Lawrence, Solicitor at Birkett Long LLP on 01245 453821 or email [email protected]