It is 16 years ago this month since The Landlord and Tenant (Covenants) Act 1995 (the "Act") came into force. The Act applies to all "new" leases (broadly, those entered into on or after 1st January 1996) and provides, amongst other things, that tenants under "new" leases are automatically released from the tenant covenants in those leases on assignment.
The position in relation to landlords though is somewhat less well understood but no less important. On the sale of a property subject to "new" leases, the landlord is not automatically released from its covenants. Instead, the landlord must follow a prescribed notice procedure, set out in section 8, in order to be released from future liability. The landlord is required to serve notice on each of the tenants before or within four weeks after completion of the sale of the reversionary interest. The tenants then have a further four weeks within which to respond, either consenting to the release or objecting to it on "reasonable" grounds. If no response is served within this period, the landlord is automatically released.
The issue for landlords, and equally for tenants, is that the Act does not give any guidance as to what might be considered "reasonable" grounds for objecting. From a landlord's perspective, if a tenant does object, the landlord's only recourse is to apply to court for an order that it is reasonable for it to be released. From a tenant's perspective, if the court decides that it is reasonable for the landlord to be released, it is likely that the tenant will have to pay costs.
So what issues are likely to be considered "reasonable" in relation to a tenant's objection to a landlord's application for release? Unfortunately there are currently no decided cases on what constitutes "reasonableness" in these circumstances. However, in considering this, an analogy can be drawn with a tenant's application for consent to assign a lease. Just as a landlord is likely to be concerned with the covenant strength of a proposed assignee, so the tenant faced with an application for release is likely to be concerned with the identity and ability of any purchaser of the landlord's interest to be able to comply with the landlord obligations under the lease. In raising this as a "reasonable" ground of objection though, the tenant should consider the extent to which it carried out due diligence on the original landlord. If it didn't seek any financial information regarding the landlord on the grant of the lease, it is unlikely to be reasonable to request this information on a subsequent sale of the reversionary interest.
The extent of the landlord's obligations under the lease or any agreement for lease (to the extent those obligations remain "live") is also likely to be a reasonable consideration. Has the landlord, for instance, taken on any unusual or onerous obligations in the lease? Is the landlord responsible for insuring the building or carrying out repairs to the structure perhaps? If so, the tenant may have legitimate concerns that the new owner will not be in a position to comply with these obligations and so it is reasonable for the tenant to object to the landlord's release.
As an alternative, the parties may wish to address the position expressly in the lease. The House of Lords case of Diocesan Fund and others v Avonridge Property Company Limited [2005] established that the parties could agree to express provisions in the lease releasing the Landlord automatically on a sale of its reversionary interest. Whilst a provision of this nature is unlikely to be acceptable to tenants, the parties may agree to include an obligation by the tenant not unreasonably to withhold or delay consent to the landlord's application for release. This seems a fair compromise and ensures that, should a tenant unreasonably withhold consent, the landlord would have a contractual claim for damages in addition to any costs a court may order.
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