Aspects of leases of commercial property: The Rules of Privity of Contract

A lease is like any other commercial contract. It is made between two parties and it is therefore possible to enforce lease obligations under the rules of privity of contract even after a lease has been disposed of by a tenant. It is a common misconception that where a tenant disposes of a lease to a third party, that tenant is no longer liable under the terms of the lease. This is not necessarily the case and a tenant can continue to be liable after disposal.

This Rule was deemed to be inequitable so that the rules were changed by the Landlord and Tenant (Covenants) Act 1995 which came into force on the 1st January 1996. The act is not retrospective and different rules apply to leases granted before and after this date.

For leases granted before this date, the general rule is that the original tenant remains liable for the covenants in the lease throughout the term.

For leases granted after 1st January 1996, the tenant is liable only until he is released by virtue of the Act.

The lesson of this article is that a tenant of commercial property may not necessarily be released from its obligations on disposal. If there is default by the current tenant, the landlord will look to see who is best able to meet the liability and if you are a strong "covenant" there is a risk that the landlord could look to enforce those liabilities against you.

Andrew Woods, Partner
May 2003