(back to preceding text)

    26.  The distinction has long been criticised as illogical and not easily drawn in practice. Section 3 of the 1995 Act, read with section 30(4), abolished this distinction for post-1995 tenancies. In place the Act established a new, self-contained statutory code regulating the transmission of the benefit and burden of landlord and tenant covenants. Under section 3(1) the benefit and burden of all landlord and tenant covenants of a tenancy is annexed to the premises demised by the tenancy and the reversion in them and passes on an assignment of those premises or the reversion. The parties to a lease, however, still remain free to agree that the benefit or burden of a covenant shall not pass on assignment of the tenancy or reversion. Where a covenant is expressed to be 'personal to any person' section 3 does not make the covenant enforceable by or, as the case may be, against any other person: section 3(6).

    27.  The covenant in clause 6 does not fall within this 'personal' category. It was intended to endure throughout the term of the sublease and be binding on Avonridge's assigns. So section 3(1) applied to this covenant. But that leads nowhere in the present case, because in clause 6 Avonridge's liability under this covenant is expressly limited to the period while it holds the reversion. Nothing in section 3 precludes the parties from limiting the liability of the original covenantor in this way. Nor is such a limitation rendered void by section 25. This limitation on the duration of the original covenantor's liability does not affect the transmission of the benefit and burden of the covenant in accordance with section 3.

    28.  For these reasons I would allow this appeal and set aside paragraph 11(d) of Judge Copley's order of 17 December 2003.

LORD HOFFMANN

My Lords,

    29.  I have had the advantage of reading in draft the speech of my noble and learned friend Lord Nicholls of Birkenhead. For the reasons he gives, with which I agree, I would allow this appeal.

LORD SCOTT OF FOSCOTE

My Lords,

    30.  I have had the advantage of reading in draft the opinion prepared by my noble and learned friend Lord Nicholls of Birkenhead and for the reasons he has given, with which I am in full agreement, I too would allow this appeal and make the order he has proposed.

LORD WALKER OF GESTINGTHORPE

My Lords,

    31.  I have the misfortune to differ from my noble and learned friends as to the disposal of this appeal. I shall express my dissent as briefly as possible.

    32.  Mr Mark Warwick (for the appellant ex-landlord) did not seek to argue that its conduct had been meritorious. In a period of less than two months it acquired the head lease of seven shop units, granted six under-leases at premiums which gave it a profit of the order of £200,000, and then sold the head lease (for £50,000) to Mr Phithwa. Mr Phithwa himself made a profit of over £20,000 (by granting a seventh under-lease at a premium) and then disappeared without ever paying any rent under the head lease. The unfortunate subtenants have had to pay a heavy price to avoid forfeiture (unless and except so far as they may have been able to pass on that burden to their solicitors).

    33.  My noble and learned friends rightly attach great importance to the general legislative purpose of the Landlord & Tenant (Covenants) Act 1995 ("the Act"). It was to provide for the release from liability of ex-landlords and ex-tenants, not for the imposition of such liability on them. But section 25 of the Act contains a provision against "contracting-out" expressed in wide terms. It applies (by section 25(4)) to an agreement relating to a tenancy whether or not the agreement is contained in the instrument creating the tenancy, or ante-dates it. It seems to me clear that if each of the six subleases had contained a covenant by the tenant to release the landlord from liability after it (the landlord) had disposed of its interest in the demised premises, even though the landlord had not complied with the procedure set out in section 8 of the Act, that covenant would have been struck down by section 25. The landlord would have been using his bargaining power "to exclude, modify or otherwise frustrate" the operation of the Act.

    34.  I cannot see why a different result should follow just because the contracting-out provision is contained, not in a separate covenant, but in a rather clumsy parenthesis at the beginning of clause 6, which (as is common ground) contains "landlord covenants" within the meaning of the Act. I cannot reconcile this with Mr Warwick's repeated submission that his case depended on principle, and not on some narrow semantic point.

    35.  I am driven to the conclusion that although the general legislative purpose of the Act was to effect the release from liability of landlords and tenants on their assignment of their interests, subject to and in accordance with the provisions of the Act, section 25 is expressed in terms wide enough to interfere with the freedom of contract which was available to the parties in negotiating a tenancy before the coming into force of the Act. By restricting the parties' freedom of contract, the Act (in a case such as the present) does operate to make it more difficult for a landlord to escape liability on landlord covenants (within the meaning of the Act). I would accept the submission of Mr Wells, for the respondents, that that can be done only by the procedure laid down in section 8 of the Act. To that limited extent the Act does operate, as it seems to me, to shut off what my noble and learned friend Lord Nicholls of Birkenhead has described as "any other exit route" previously open to the parties.

    36.  The Law Commission considered this topic very carefully, but there is no indication either in the 1986 working paper (no. 99) or in the 1986 Report on Privity of Contract and Estate (Law Com No 174) that the Law Commission addressed this particular point. In my opinion it has to be answered by construing the language of the Act itself. For my part I would have dismissed this appeal.

My Lords,

    37.  I entirely agree with the reasons given by my noble and learned friend, Lord Nicholls of Birkenhead, for allowing this appeal. I add only a few words because much was made, in the arguments before us and in the courts below, of the recommendations of the Law Commission in their Report on Privity of Contract and Estate (Law Com No 174, 1988). As the parties both know, I was a member of the Law Commission, not only at the time of that Report but also when the preceding Working Paper, Privity of Contract and Estate, Duration of Liability of Parties to Leases (PWP No 95, 1986) was published, and thus was party to the Commission's deliberations and recommendations.

    38.  Both parties to this case sought to draw support from the Law Commission's work. However, it should be borne in mind when reading the Commission's publications that the Commission contemplated that their recommendations would apply to existing as well as to new leases. Thus the Report recommended (Law Com No 174, at para 4.59):

"The introduction of our proposed scheme would not have any immediate effect on the rights and liabilities of those who were then landlords and tenants, nor those of people who were previously in that position but no longer had any interest in the property in question. Only when the interest of the current landlord or the current tenant changes hands should the proposed rules change the position."

    Hence there was no equivalent in the draft Bill annexed to the Law Commission's Report to section 1(1) of the Landlord and Tenant (Covenants) Act 1995, which limits sections 3 to 16 of the Act to new tenancies. The limitation of the Commission's scheme to new tenancies was the result of negotiations with the property industry after the Commission's report.

    39.  Given that the Commission contemplated that both existing and new tenancies should be covered by their recommendations, they clearly could not have contemplated any change in the existing freedom of the original parties to contract out of any continuing liability once they had parted with their interest in the property. This is confirmed by the reference to that freedom in both the Working Paper (PWP No 95, at para 3.3) and in the Report (Law Com No 174, also at para 3.3). The mischief at which the Commission's recommendations were aimed was the continuation of a liability long after the parties had parted with their interests in the property to which it related. If there was already no continuing liability, because of the express terms of the lease which were apparent to all, there was no mischief.

    40.  It would, of course, have been open to Parliament, when passing the 1995 Act, to limit the initial landlord's freedom to contract out of any continuing liability. But there is nothing in the 1995 Act which effects such a fundamental change of principle. Given the concerns of the property industry which led to the modifications of the Law Commission's recommendations, it would have been surprising if there were. The provisions with which we are concerned, principally sections 6 and 8 of the 1995 Act, are closely modelled on those in clauses 4 and 6 of the Bill annexed to the Law Commission's Report (allowing for the stylistic changes which often seem to take place when a new draftsman takes over another's draft). I cannot find in them, or in section 3, which is concerned to identify those covenants which fall within the doctrine of privity of estate and are thus capable of running with the tenancy and the reversion, anything to suggest such a radical change in policy.