The recent case of Reeves & Downing v Sandhu (2015) Ch D 13/01/2015 demonstrates why it really is a good idea for a landlord to seek a release from further liability to its tenant where the reversion is transferred.
In this case, the tenants sued the defendant, their original landlord, for losses arising out of a fire and a failure by the landlord to insure the demised premises in accordance with the obligation to do so in the lease. The tenants obtained judgment by default against their original landlord and petitioned for his bankruptcy. At first, the landlord successfully applied to set aside the default judgment and to dismiss the petition. However, on appeal, the judgment and the petition were reinstated, and the landlord was declared bankrupt. The original landlord’s main argument in defending the action was that he was no longer the landlord of the demised premises and should not therefore have been the person to be sued for the breach of covenant.
The original landlord had granted a long lease to the tenants in 2002 and had soon thereafter assigned his interest in the premises to his limited company. However, the defendant overlooked an elementary point. As original landlord, he had assumed contractual liability on the landlord covenants of the lease for the entire duration of the term and, at the time of the assignment of the reversion, the landlord had not obtained a release from liability under section 8(2) of the Landlord and Tenant (Covenants) Act 1995. The defendant was therefore still liable under the landlord covenants of the lease, jointly and severally with the assignee of the reversion. Although the tenants may have intended to commence proceedings against their current landlord, the “happy accident” of instituting proceedings against the original landlord did not count against them. The original landlord was still liable under the landlord covenants of the lease and was therefore an appropriate defendant in the litigation.
The case is a cursory tale for landlords. The Landlord and Tenant (Covenants) Act 1995 did not remove the rule of privity of contract in relation to an original landlord’s obligations under a lease. While a tenant is able to enjoy an automatic release from liability on assignment of the lease (under section 5(2) LTCA 1995), a landlord’s original contractual liability will continue after an assignment of the reversion and throughout the term unless (a) the lease includes an express provision limiting the original landlord’s liability to its period of ownership; or (b) the tenant provides the landlord with an express release from liability on assignment of the reversion; or (c) the landlord makes successful use of the notice procedure found in sections 6 to 8 LTCA 1995. Many commercial leases include very few covenants on the part of the landlord. However, most commercial leases include an obligation on the part of the landlord to insure.
As this case shows, a failure by an original landlord to be released from liability under an insurance covenant on an assignment of the reversion will expose it to risk if the assignee breaches the covenant.