6 Covenant Against Alienation
3.59 Unless restricted by the terms of the lease, it is a basic incident of the tenant’s leasehold interest that he has the right to assign or sub-let without reference to the landlord.111 Where the lease is in writing, this right will commonly be restrained by the inclusion of either an absolute, a fully qualified, or a qualified covenant against assignment and sub-letting.
In practice, most farm tenancies will include an absolute covenant against assignment or subletting. Under the 1986 Act, the landlord was able to serve a notice requiring the tenancy to be reduced into writing, and request the insertion of a statutory covenant against alienation.112 The terms of the tenancy were then referable to arbitration under the 1986 Act. Where the landlord served a request for a written agreement, section 6(5) of the 1986 Act provided that the tenant could not,113 without the landlord’s consent in writing, assign, sub-let or part with possession of the holding or any part of it during the period while the determination of the terms of the tenancy is pending. The statutory bar on assignment was intended to prevent avoidance of the 1986 Act provisions by a tenant assigning his interest after service of a request and before the arbitration. Where a 1986 Act tenancy was granted orally, or the written agreement failed to include a covenant against assignment etc., the tenant’s common law right to assign furnished a strong incentive to use the statutory machinery and have the lease reduced into writing.3.60 There is no comparable machinery available to the landlord who grants a farm business tenancy under the 1995 Act, and he will be unable to compel the insertion of a non-assignment covenant after the tenancy has been granted. It is therefore important to take an appropriate covenant against alienation in the tenancy agreement itself.114 The covenant may be absolute, or it may be qualified in that it requires the landlord’s written consent to assignment or subletting.
Where a qualified covenant is taken, the Landlord and Tenant Act 1927115 normally implies a proviso that the landlord’s consent cannot be unreasonably withheld. This provision, which is of considerable importance in relation to business tenancies, does not apply to farm business tenancies under the 1995 Act, or to agricultural holdings under the Agricultural Holdings Act 1986.116 The reasonableness or otherwise of the landlord’s reasons for refusing consent cannot, therefore, be challenged under the 1927 Act or the Landlord and Tenant Act 1988.3.61 If the parties choose to include a fully qualified covenant – viz. one which expressly stipulates that the landlord’s consent is not to be unreasonably withheld – then the reasonableness or otherwise of the landlord’s reasons for refusing consent will be referable to arbitration under s 28 of the Agricultural Tenancies Act 1995. Semble, if the parties agree the inclusion of a fully qualified covenant in this form, the guidelines approved in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd,117 decided under the 1927 Act, will be relevant in an arbitration under the 1995 Act to assess the reasonableness of any refusal of licence to assign. These make it clear that the landlord cannot refuse consent on grounds that have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease.118 He can, however, refuse consent if he reasonably believes that the proposed assignment will lead to breaches of the tenancy.119
3.62 The Landlord and Tenant (Covenants) Act 1995 introduced new provisions giving landlords greater potential control over assignments of non-residential leases.120 The 1995 Act enables the parties to enter into an agreement specifying the circumstances in which the landlord will grant consent for the assignment of the lease, and/or the conditions on which consent will be granted.121 This reduces the courts’ power to scrutinise the landlord’s reason for withholding consent, as they do not have to be ‘reasonable’ provided they fall with the terms of the parties’ agreement.122 More generally, the 1995 Act benefits the tenant by abolishing privity of contract; so that where an assignment lawfully takes place the tenant is freed from his future obligations under the lease, including the obligation to pay rent.123 These are assumed by, and are solely enforceable against, the new tenant.
The landlord can, however, require the tenant to enter into an ‘authorised guarantee agreement’ (AGA) guaranteeing the performance of the tenant’s covenants by his assignee.124 Where the landlord insists upon the tenant entering into such an agreement as a condition of his granting consent (and most well advised landlords will do so) this cannot be attacked on grounds of unreasonableness, and will have the effect of prolonging the tenant’s contractual liability to cover the performance of the terms of the lease by his immediate successor (but no further). But it has been held that if the terms of the guarantee go further than the provisions laid down in the 1995 Act, then the court can delete the offending parts of the guarantee.125 The 1995 Act places restrictions on the terms that can be taken in an AGA,126 for example by restricting the ability of the landlord to take a term making the tenant liable for obligations created by variation of the lease post-assignment.1273.63 The covenant will commonly be drafted to prevent the tenant assigning, sub-letting or parting with possession of the whole or any part of the holding. It may also prohibit the tenant from sharing possession of the whole or part of the holding. Assignment or subletting the holding (or part of it, as relevant) in contravention of an alienation covenant will be construed by the court as an irremediable breach of tenancy entitling the landlord to forfeit the lease.128 A covenant against parting with possession, or sharing possession, will however be capable of remedy by the tenant – and if remedied within a reasonable time of the service of statutory notice of forfeiture129 cannot subsequently support forfeiture proceedings by the landlord.130 Note that if the parties include a covenant not to assign or sublet the whole of the demised property, this will not be breached by an assignment or subletting of only part of it.131 If, however, by express covenant the tenant agrees ‘not to assign or underlet any part of the premises’, the covenant on its true construction will prohibit the tenant assigning etc.
the whole or any part of the property. A covenant against assigning or sub letting ‘any part’ of the premises embraces the assignment or sub letting of every part.1323.64 A covenant against assigning or sub letting the whole or part of the holding will not in itself prevent the tenant from sharing possession with another – for instance under a share farming contract – and the landlord may wish to take an extended alienation covenant to expressly prevent the tenant parting with or sharing possession with a third party. Allowing a licensee or contractor to share occupation will not breach the covenant, however, as long as the tenant retains exclusive possession.133 Occupation and possession are not synonymous. The distinction between the two is elusive, but a tenant will only be held to have parted with legal possession if he is excluded from the premises, or cedes effective control of them, having granted the right to exclusive possession to a third party (typically a sub lessee or assignee).134 So, in Clarence House Ltd. v National Westminster Bank plc.135 it was held that a ‘virtual assignment’ by which the economic benefits of the tenancy (including the right to receive rent) were transferred was not a sharing of possession in breach of the alienation covenant. The sub tenant here remained in possession and/or occupation of the business premises in question.
3.65 The landlord can, in some circumstances be, estopped by convention from relying on an alienation covenant. So, in Troop v Gibson,136 the landlord failed where the lease containing the alienation clause had been lost. The parties had subsequently acted on the common assumption that no restraint on assignment existed, and engaged in rent arbitration proceedings on this basis. The landlord could not enforce the covenant because both parties at all material times did not believe it existed, and this common assumption was to the detriment of the tenant – for absence of a restriction on alienation would increase the holding’s rental value.137 Where the tenancy does contain an enforceable alienation covenant, on the other hand, principles of estoppel can be relevant to prevent the tenant denying that a breach of covenant has taken place. So, for example, the tenant will be estopped from denying the existence of a contract to assign the tenancy if he allows the assignee to act to his detriment in reliance thereon (for instance by selling his own farm), even if an agent acting without authority entered into the contract.138
3.66 Where the tenant assigns or sublets in breach of the covenant against alienation in the lease, the rule at common law is that, although a breach of tenancy, assignment or subletting in breach of covenant does vest a leasehold interest in the assignee (or sub lessee as appropriate):139