Landlords still on the hook

Following the Landlord and Tenant (Covenants) Act 1995, tenants who assign their leases are released from the tenant’s covenants. An authorised guarantee agreement is often required by the landlord to extend the tenant’s liability.

However, landlords do not have the luxury of an automatic release as highlighted in the case of Kyle Reeves and Natalie Downing v Sukhbir Singh Sandhu.

Analysis of the case

In this case, Mr Sandhu had assigned the freehold reversion to his company. The lease imposed an obligation on the landlord to insure but this had not been complied with. Following a fire the tenants issued proceedings against Mr Sandhu for breach of the insurance covenant. Judgment was in favour of the tenants who ultimately served a statutory demand on Mr Sandhu. Mr Sandhu asserted that as he had assigned the reversion to his company before the breach he was not liable.

On appeal against the district judge’s dismissal of the bankruptcy petition, the court held that Mr Sandhu remained liable for breach of the landlord’s covenant to insure. The court based the decision on Section 6 of the 1995 Act. This section requires a landlord to apply to the tenant for release of liability after assigning the reversion to the lease. In this case, Mr Sandhu had not applied for the release so remained liable and a bankruptcy order was made against Mr Sandhu. There was no indication that the tenants were aware of the provisions of Section 6 of the 1995 Act. Their success was a happy accident for them.

What we can learn from the case

This case serves as a reminder that landlords on assignment of the reversion should either invoke the procedure for a release under Section 6 of the 1995 Act, or negotiate an express release in the lease itself under Section 26(1)(a) of the 1995 Act by the use of an Avonridge clause.

Another consequence of ignoring the need for a release is the question of liability under a rent deposit deed. A rent deposit deed would qualify as a collateral agreement under Section 28 of the 1995 Act. Again, pending release, the assignor landlord remains liable on the covenants in the rent deposit deed. Until release the assignor and the assignee landlords are jointly and severally liable. This causes various problems for example, the new landlord would expect to hold the deposit but the assignor landlord remains liable under the rent deposit deeds.

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