This week the House of Lords confirmed that a release of a landlord’s covenants contained in the lease itself is not in breach of the Landlord and Tenant (Covenants) Act 1995. In the landmark decision of London Diocesan Fund and others –v- Avonridge Property Company [2005] UKHL 70 the court maintained that the Act was not intended to close any exit strategy that a landlord may have put in place in the lease.

The case involved the head lease of seven small shop units in Wealdstone, Middlesex. The lease was for a term of 99 years expiring in 2067. Avonridge granted subleases of six shops for almost the same term as the head lease for substantial premiums.

Each lease contained a covenant by the landlord to pay the rent reserved by the head lease. The lease, however, gave an automatic release for Avonridge by adding; "but not, in the case of Avonridge Property Company Limited only, so as to be liable after the Landlord has disposed of its interest in the Property".

Avonridge subsequently assigned the head lease to a third party who granted a further lease for a premium and then disappeared, failing to pay the rent due under the head lease. The superior landlord forfeited the head lease and underleases. The undertenants brought a claim for damages against Avonridge claiming that the clause limiting Avonridge’s liability was prohibited by section 25 of the 1995 Act. This contains anti- avoidance wording making void any agreement relating to a tenancy which would frustrate the operation of any other provision of the Act. Other parts of the Act do allow for a landlord to be released from the covenants given by him in a lease but only by following a specific procedure involving serving notices.

The House of Lords held by a majority decision that the main object of the Act was to give both the landlord and tenant an exit strategy from the lease on a proper lawful assignment or transfer of the reversion (as appropriate). It was not intended to close exit routes that the parties may have agreed between themselves. The decision means that even if the exit strategy contained in the lease does not follow the procedure laid down in the 1995 Act, it does not mean that it was invalid.

Whilst this decision gives no compensation to the tenants who have suffered loss at the hands of their landlord, it will give comfort to landlords who draft in automatic releases in their leases as they will not be required to go through the notice procedure in order to be released from their covenants. All landlords would be well advised to limit their liability to the period when they are the landlords of the premises.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 05/12/2005.