London Diocesan Fund & Ors v. Avonridge Property Company Ltd

This appeal concerns the effect of the Landlord and Tenant (Covenants) Act 1995 on an express contractual limitation of an original landlord's liability under a landlord's covenant in a sublease. The House of Lords held that the 1995 Act does not invalidate an express agreement by which an original landlord limits its contractual liability to the period while it retains the reversion, and that section 25 does not strike down such an agreement as an impermissible 'contracting-out' of the Act. The court treated sections 3, 5, 6 and 8 as providing a statutory release mechanism but not as intended to shut down pre-existing or freely agreed contractual arrangements that curtail liability.

Key statutory provisions considered were: section 5 (release of tenant covenants on assignment), sections 6 to 8 (procedure for landlord release), section 3 (annexation of benefit and burden), section 25 (anti-avoidance/contracting-out), and section 28(1) (definition of tenancy/landlord covenant). The House emphasised that the Act was designed to provide an exit route, not to create additional liabilities or to abolish parties' pre-existing freedom to limit obligations by contract.

Background and facts:

• Avonridge acquired a 99-year head lease and granted six subleases for nominal rents in exchange for substantial premiums. Each sublease contained a clause limiting Avonridge's liability under the landlord's covenant to the period during which Avonridge retained the reversion.
• Avonridge promptly assigned the head lease to a third party who defaulted on rent; the head lessor commenced forfeiture. The subtenants obtained relief from forfeiture on terms, which required payment of arrears and grant of new leases at substantial ongoing rents.

Procedural posture and relief sought:

• The subtenants sued Avonridge for damages for breach of the landlord's covenant in the subleases. At first instance Judge Copley found the parenthetical limitation void under section 25 of the 1995 Act. The Court of Appeal dismissed Avonridge's appeal. Avonridge appealed to the House of Lords.

Issues framed by the court:

• Whether an express provision in a sublease restricting the original landlord's contractual liability to the period while it retained the reversion is void under section 25 as an agreement which excludes, modifies or frustrates the operation of the 1995 Act.
• How sections 3, 5, 6 and 8 operate in relation to such contractual limitations and whether the decision in BHP Petroleum v Chesterfield (the Chesterfield authorities) or section 3 affects the result.

Court's reasoning and outcome:

• The majority concluded that the 1995 Act provides statutory means of release (sections 5 to 8) but was not intended to extinguish the parties' pre-existing freedom to agree contractual limits on liability. Section 25 should be interpreted so as to protect the statute's operation but not to invalidate every agreed limitation of liability; an agreed curtailment does not frustrate the Act's purpose because the Act supplies a remedial route which does not add liabilities the parties did not assume.
• The House distinguished obligations that are personal (as in Chesterfield) from landlord covenants expressly limited in duration: Chesterfield was not determinative. Section 3 did not prevent parties from limiting the duration of the original covenantor's liability or render such a limitation void by section 25.
• By majority the appeal was allowed; the limitation in clause 6 was held effective and not void under section 25. There was a single dissent (Lord Walker) who would have dismissed the appeal, taking a broader view of section 25's contracting-out prohibition.

Context and implication:

• The Lords noted the transactions appeared contrived and that the statutory scheme could be used in ways Parliament may not have contemplated, but held that the risks were apparent on the face of the leases and that the Act was not written to eliminate parties' freedom to limit liabilities by contract.

Appeal allowed. The House of Lords (majority) held that an express contractual provision limiting the original landlord's liability under a landlord's covenant to the period during which the landlord retained the reversion was not void under section 25 of the Landlord and Tenant (Covenants) Act 1995. The 1995 Act provides statutory mechanisms for release but was not intended to abolish the parties' pre-existing freedom to agree limitations of liability; section 3 does not preclude such a limitation and Chesterfield did not assist the respondents.

County Court (Willesden, Judge Copley) — judgment for subtenants, order dated 17 December 2003; Court of Appeal — Avonridge's appeal dismissed [2004] EWCA Civ 1306; House of Lords — appeal allowed [2005] UKHL 70.