Real estate things you once knew but may have forgotten - Building leases and alienation

It is easy to overlook the fact that a landlord's ability to control alienation (here meaning assignment, underletting, charging or parting with possession) as provided for under the tenant's covenants in a "building lease", can be substantially undermined by section 19(1){b) of Landlord and Tenant Act 1927.

In this context, a building lease means any lease (other than where the landlord is a Government Department, local or public authority or a statutory or public utility company) granted in consideration wholly or partly of the erection, or the substantial improvement, addition or alteration of buildings and which is for a term of more than 40 years.

As originally enacted, section 19(1)(b) provided that covenants in such leases prohibiting any form of alienation without consent are automatically subject to a proviso excluding the requirement for consent (other than during the last 7 years of the term), as long as written notice of the relevant transaction is given to the landlord within 6 months of completion.

To confuse matters, however, this basic position has since been modified by the Landlord and Tenant (Covenants) Act 1995, so that now, section 19(1)(b) only applies in full to a building lease if it is either:

• an old tenancy under the Covenants Act (being any lease granted before 1 January 1996 or (if later) pursuant to an agreement or court order made before that date); or
• a new tenancy under the Covenants Act (granted on or after 1 January 1996, unless pursuant to an earlier agreement or order) which is also a residential lease (being a lease by which the whole or part of a building is let wholly or mainly as a single private residence).

For any other building lease, being a new tenancy, but of commercial premises (the kind of building lease most commonly encountered in commercial practice), the Covenants Act provides that section 19(1)(b) no longer applies to assignment, but continues to apply to any other form of alienation.

The Covenants Act has accordingly restored the landlord's ability to require consent to assignment for any such building lease. This also enables a landlord of such a lease to require an Authorised Guarantee Agreement from the outgoing tenant, which would not have been the case if the Covenants Act had not amended section 19(1)(b) in this way.

It nevertheless remains the case that for such leases, the landlord still has no control over underletting, charging or parting with possession until the last seven years of the term, regardless of what the tenant's covenants might appear to provide.

If a landlord wants to control these forms of alienation in any new building lease (including assignment, if the construction of a single private residence is involved), the only options are, therefore:

• an absolute prohibition aganst alienation (since section 19(1)(b) only operates to exclude the requirement for consent where alienation is prohibited without it), which is unlikely to be commercially acceptable to the tenant; or
• keeping the term under 40 years, which may affect the tenant's funding and which, for residential premises in particular, is also unlikely to be commercially acceptable.

For further information, please contact Clive Newnham at [email protected] or on +44 (0)20 7367 3981.