London Diocesan Fund and others and others (Respondents) v. Avonridge Property Company Limited (Appellants)

The Landlord and Tenant (Covenants) Act 1995 provides statutory routes by which tenants and landlords may obtain release from liabilities that would otherwise continue after assignment. It does not impose or enlarge liability.

Parties therefore remain free to limit a landlord’s covenant from the outset so that the original landlord’s liability ends upon disposal of the reversion. Such a limitation does not frustrate the Act and is not void under section 25. It leaves intact the statutory transmission of the covenant’s benefit and burden to assignees under section 3.

Avonridge acquired a head lease of shop units and granted long subleases at peppercorn rents in return for substantial premiums. Each sublease required the landlord to pay the head rent, but expressly limited Avonridge’s liability to the period during which it retained its interest. Avonridge assigned the head lease to a person without financial substance, who defaulted. The head landlord began forfeiture proceedings, and the subtenants incurred substantial liabilities to preserve occupation.

The subtenants claimed damages from Avonridge. The county court held the limitation void under section 25 of the Landlord and Tenant (Covenants) Act 1995. The Court of Appeal dismissed Avonridge’s appeal: [2004] EWCA Civ 1306, reported at [2005] 1 WLR 236. The central issue was whether the Act prevents parties from limiting an original landlord’s covenant liability from the outset.

1. Appeal allowed by a majority of four to one. Lord Nicholls delivered the leading speech. Lord Hoffmann, Lord Scott and Baroness Hale agreed. The limitation in clause 6 was effective, and the relevant part of the county court’s order was set aside.

2. Per Lord Nicholls, sections 5 to 8 of the Landlord and Tenant (Covenants) Act 1995 are relieving provisions. They provide routes, which the parties cannot exclude, by which tenants or landlords may escape liabilities that would otherwise continue after assignment. Their purpose is not to impose liability, enlarge covenant liability or eliminate other consensual means by which liability may be curtailed.

3. Section 25 should be construed generously to prevent direct or indirect frustration of the Act. Nevertheless, an agreement limiting the duration of a covenant from the outset does not frustrate the statutory scheme. The Act operates upon liabilities which otherwise exist. It does not require a landlord to covenant to pay head rent or prevent a tenant from agreeing that the original landlord’s liability will end upon disposal of the reversion.

4. Per Lord Nicholls, section 3 establishes a statutory code for transmitting landlord and tenant covenants. Clause 6 was not merely personal to Avonridge. It was intended to continue throughout the sublease and bind assignees. Its benefit and burden therefore passed under section 3(1), while Avonridge’s own contractual liability ended in accordance with the express limitation. That limitation did not impede transmission of the covenant.

5. The decisions in BHP Petroleum Great Britain Ltd v Chesterfield Properties Ltd, [2002] Ch 12 and [2002] Ch 194, were distinguishable. The obligation there was personal and was consequently not a landlord covenant capable of release under section 8. Avonridge’s covenant was instead a continuing landlord covenant whose burden passed to assignees, although Avonridge’s personal liability was expressly time-limited.

6. Baroness Hale added that the Law Commission’s scheme contemplated no alteration to the existing freedom to limit continuing liability expressly. Parliament had not effected such a fundamental change of principle.

7. Lord Walker dissented. He considered section 25 sufficiently wide to invalidate the limitation and would have held that a landlord could escape liability upon assignment only through the section 8 procedure.

1. House of Lords: Allowed Avonridge’s appeal by a majority of four to one: [2005] UKHL 70. Paragraph 11(d) of the county court order was set aside.

2. Court of Appeal: Dismissed Avonridge’s appeal: [2004] EWCA Civ 1306, reported at [2005] 1 WLR 236.

3. Willesden County Court: Judge Copley gave judgment for the subtenants, with damages to be assessed. He held that section 25 of the Landlord and Tenant (Covenants) Act 1995 rendered the limitation of Avonridge’s liability void.