Landlord’s Continuing Liabilities on Assigned Leases

HISTORIC VICTORY FOR LANDLORDS IN HOUSE OF LORDS

Introduction On 1 December 2005 the House of Lords reversed the decision of the Court of Appeal in London Diocesan Fund v Avonridge Property Company Limited. (Full report at [2005] 1 WLR 3956.) As a result of the House of Lords ruling it is now clear that landlords, when granting new leases of premises, may exclude all liability to their tenants once they have parted with their interest in those premises. This ruling applies to all leases, whether the premises are commercial, residential or of any other nature.

Summary of the case: Until 1st January 1996 whenever a lease was granted the original landlord and the original tenant remained liable pursuant to their covenants in the lease for the duration of that lease unless they excluded or limited that liability. This continuing liability arose because of the “privity of contract� principle. This principle could result in the original parties to a lease being sued for liabilities affecting premises with which they had ceased to have any connection many years earlier. The privity of contract principle was widely acknowledged as imposing unfair burdens on the original parties to leases, particularly tenants.

The Law Commission investigated the matter and reported in 1988. The Commission proposed the total abolition of the privity of contract principle in the case of tenants. However, in the case of landlords, it proposed that they could only be released from their liability if they went through a “notice� procedure. It took some years for Parliament to find time to pass legislation embodying the Commissions’ recommendations.

The legislation took the form of the Landlord & Tenant (Covenants) Act 1995. In the aftermath of the passing of the Act, a question debated by property practitioners was whether the notice procedure contained within the Act was a comprehensive code applying to all leases, or whether the use of that procedure could be avoided by words inserted in the lease, limiting the landlord’s liability.

This is the issue that fell to be debated in the case of London Diocesan Fund v Avonridge Property Company Limited. The facts of the Avonridge case were marked by a lack of factual merit on the part of Avonridge. This had the practical result that Avonridge’s legal submissions initially encountered substantial judicial resistance. In February 2002 Avonridge purchased a lease (“the Headlease�) of seven small shop units in Headstone Drive, Wealdstone, Middlesex. The Headlease was for a term of 99 years, with a rent of £16,700 per annum, subject to rent review. In the space of six weeks Avonridge granted new subleases to six of the shopkeepers. In return for a substantial payment, on average £75,000, each shopkeeper obtained a 99 year sublease at a peppercorn rent. After granting its six new subleases, and having made a substantial profit, Avonridge then assigned its Headlease to a Mr Phithwa.

Mr Phithwa was described by The House of Lords as a “man of straw�. Mr Phithwa paid no rent pursuant to the Headlease and the freeholders of the shops, the London Diocesan Fund, forfeit the Headlease. This meant that all the new subleases were automatically forfeit. To avoid losing their shops the subtenants had to agree new leases. This obliged them to agree to pay rent and also to incur substantial costs. The shopkeepers sought to pass on their financial burden to Avonridge. They alleged that Avonridge was liable for damages due to non-payment of rent under the Headlease. It was common ground that Avonridge had not adopted the notice procedure in the Act. Avonridge’s answer was that it did not need to use this procedure because it had limited its liability under the subleases to the time when it owned the Headlease.

Avonridge argued that due to its limitation of liability it was not responsible for the non-payment of rent. The sympathies of the trial judge and the Court of Appeal rested with the small shopkeepers and Avonridge’s arguments in those courts were rejected. The House of Lords agreed that Avonridge’s position lacked factual merit. Indeed Lord Nicholls, delivering the leading judgment, said that: “On their face the transactions have the appearance of a scam�.

Despite this, however, Lord Nicholls, together with three of the other four law lords, (viz. Lords Hoffmann and Scott and Baroness Hale) accepted that Avonridge’s argument was legally sound. Lord Nicholls pointed out that the statutory provisions: “are intended to operate to relieve tenants and landlords from a liability which would otherwise exist. They are not intended to impose a liability which otherwise would be absent. They are not intended to enlarge the liability either of a tenant or a landlord�.

Conclusion The House of Lords’ decision has given landlords a very valuable drafting tool. Any well-advised landlord when granting a lease should now limit its liability to the period when it is the landlord. This should ensure that it has no liability after parting with its interest in the premises. Suitable words will avoid the need for using the notice procedure in the Act. Moreover those landlords who since 1996 have granted leases that limited their liability to the period when they owned premises can breath easily. They now know that the limitation of liability in their leases will be effective.

MARK WARWICK Selborne Chambers