Leases Lecture

LEASES

INTRODUCTION

Many of the questions you will be dealing with in land law questions will relate to leaseholds rather than freeholds. By and large, the characterisation of an estate as a leasehold will not be the focus of a question. Typically, it is the other aspects of a problem question which are of more importance, whether it be easements, or a mortgage relationship, or covenants. However, on occasion the question will be about one of two questions:

  1. Is the relationship of the parties actually a lease?
  2. If it is (or if it is not), what does that mean for the obligations of the parties?

If the issue is whether or not the relationship is a lease, it is usually in the context of whether it is a lease or a licence. This shall be discussed in the section below entitled ‘Key Characteristics of Leases.’ Further on, we shall address some of the obligations owed by leaseholders. As with all other chapters, there will be example problem questions at the end.

But first, some background:

BACKGROUND

A leasehold is defined in the Law of Property Act 1925 as an estate in the land for a term of ‘years absolute’ (Law of Property Act 1925, s.1(1)(b)). A lease (or as it is otherwise called, a leasehold) is conferred by a landlord (also called the lessor) on the tenant (lessee). The lease grants to the lessee a right of exclusive possession for a finite period of time. The period of time can be fixed or may be periodically extended. The period can be for any period of years: from one year to one million years (Law of Property Act 1925, s.205(1)(xxvii). Any area can be designated as a leasehold so long as it grants, for a definite period, a right of ‘exclusive domain of a particular individual’ (AG Securities v Vaughan [1988] UKHL 8 per Lord Oliver of Aylmerton).

Aside from the restriction on the period of time for which a leaseholder may own land, there is no substantial distinction in the rights between leaseholders and freeholders. As the court has observed, the tenant leaseholder is equally able to exercise rights over land as would a freeholder (Street v Mountford [1985] 2 All ER 289 per Lord Templeman). 

Case in focus: Bruton v London & Quadrant Housing Trust [1999] UKHL 26

In the case of Bruton the House of Lords sought to draw a distinction between leases and the ‘term of years’ aspect. Lord Hoffmann said the creation of a lease does not in itself give rise to a right of an estate in the form of a term of years. It was sufficient to define a lease as any agreement for exclusive possession at a rent. Essentially, this key characteristic of leases is of a contractual, rather than proprietary, nature. Whether or not a term of years is created will ‘depend upon whether the landlord had an interest out of which he could grant it’ (per Lord Hoffmann). This ratio was repeated by the House of Lords when it stated that such tenancies, absent a term of years absolute, are contractual rather than proprietary and are not binding on third parties (Kay v Lambeth LBC [2006] 2 AC 465 per Lord Scott of Foscote).

Key Points:

  • Leases can, but do not require, a term of years absolute.
  • Leaseholds at root only require exclusive possession at a rent.
  • As such, leaseholds are perhaps more contractual than proprietary.

KEY CHARACTERISTICS OF LEASES

In the landmark case of Street v Mountford [1985]the court identified three key components of the ‘term of years’ aspect of leaseholds. They were identified as follows:

  • Exclusive possession;
  • For a fixed or periodic term certain; and
  • In consideration of a premium - meaning a lump sum -  and/or periodical payments.

We shall now deal with some of these requirements in detail, as well as several other aspects of the leasehold relationship.

Any given lease or tenancy must grant a right of exclusive possession

The right of exclusive possession over land is said to be the ‘proper touchstone’ of a lease or tenancy (Radaich v Smith [1959] HCA 45 per Windeyer J). A tenancy by definition must involve a granting by the landlord of exclusive possession, and so a tenancy without the right of exclusive possession is a contradiction in terms. Lord Templeman observed in Street v Mountford [1985] that the tenant is entitled to ‘keep out strangers and keep out the landlord unless the landlord is exercising limited rights reserved to him by the tenancy agreement to enter and view and repair.’ By contrast, a person holding a bare licence to occupy has no such right to ‘exclude other persons’ (AG Securities v Vaughan [1988] per Lord Oliver of Aylmerton).

Therefore, if a freeholder seeks to retain an unlimited right of access to the property over the leaseholder - as opposed to the right of access in limited and prescribed circumstances - then such an assertion by the freeholder would be unlawful. For example, requiring the tenant occupier to vacate the property for a prescribed period each day is inimical to the right of exclusive possession accorded to all lawful tenants (Aslan v Murphy (No. 1) [1989] EWCA Civ 2).

What should be borne in mind is that a right of occupation does not mean a right of possession. Certain parties, described as licensees, will have a right of occupation, such as students in university accommodation or residents in a care home, but will not have a right to exclude other persons (Mehta v Royal Bank of Scotland (2000) 32 HLR 45).

Case in focus: Westminster City Council v Clarke [1992] 2 AC 288

Clarke (C) was the occupant of a room at a hostel, run by Westminster City Council, intended for homeless persons. As per the regulations of the hostel, no occupant was entitled to any particular room. Further, the hostel was entitled to require occupants to share rooms with other occupants, forbade visits from non-occupants unless permission was granted, and its staff were entitled to access any room ‘at any time.’ The House of Lords determined that C’s claim for a tenancy was irreconcilable with the ‘totality, immediacy, and objectives of the powers exercisable by the council and the restrictions imposed on’ any given occupant such as C. He had no right of possession; this right was fully reserved and retained by the Council, and the House of Lords took the view that the Council was entitled to do so in order ‘to supervise and control the activities of occupiers.’

Key Points:

  • The person claiming the tenancy was agreed to be an occupant.
  • Taken together, the nature of the agreement of the occupation meant no tenancy could subsist given the ‘totality, immediacy and objectives of the powers exercised by the council’.
  • The place occupied by him imposed several requirements, the totality of which were irreconcilable with a notion of exclusive possession on the part of the occupier.
  • Examples of such requirements include the ability of staff to enter the rooms at any time, and no occupant could claim the right to occupy any specific room.
  • The powers were said to be immediate because these powers could be exercised at any time by the council.
  • The objectives were seen by the court as legitimate, namely controlling and supervising the occupants.

Distinction between lease and licence

As you will have seen, there is much discussion around whether a given arrangement is a lease or a licence, typically in the context of whether the occupant is claiming a right of exclusive possession and the person granting the right of occupation claims they had only granted a licence. Yet the importance of the distinction goes beyond the right of exclusive possession: a lease grants the leaseholder a transferable and enforceable right in the property, whereas a licence confers no rights of transfer or enforcement at all over the property (Ashburn Anstalt v Arnold [1988]).  Certain legislative protections apply only to tenants and not to licensees (Rent Act 1977, s.1 for protected tenancies, Housing Act 1988, s.1 for assured tenancies, and the Landlord and Tenant Act 1954, s.23 for business tenancies). In the residential context, however, leases and licences can look very similar. Hence, in looking at ways to distinguish between the two categories, the courts have arrived at various principles:

  1. Exclusive possession is necessary but not sufficient for tenancies: Although it is a given that leases will require exclusive possession, there are certain arrangements by which exclusive possession applies despite there being no relationship of landlord and tenant. In the case of licences, there may appear to be a degree of exclusive possession on the part of the licensee over a portion of a property, but the person who owns the property at large will retain exclusive possession over the remaining part of the property. The important factor is that exclusive possession, although apparently held by the licensee, is overall held by another party, such as the case of a lodger in a bed-sit or the occupant of serviced housing (Gray v Taylor [1998] 1 WLR 1093). Where the accommodation is underpinned by some element of friendship or familial relations the court is likely to find that the occupant was not intended to have conferred on themselves the vital element of exclusive possession (Heslop v Burns [1974] 1 WLR 1241). Yet if the agreement confers on the occupant a right of exclusive possession, unencumbered by control from the party owning the property, the court will find that the arrangement is a tenancy, even if the occupant is subject to certain onerous conditions under the occupation, such as in the case of a charitable housing trust (Bruton v London & Quadrant Housing Trust [1999]).
  1. The status of the lodger: Typically, an occupant will be designated as a lodger and therefore a licensee, rather than a tenant, if the owner of the premises is contractually obliged to provide attendance or services ‘which require the landlord or his servants to exercise unrestricted access to and use of the premises’ (Street v Mountford [1985] per Lord Templeman). The lodger by definition is someone who cannot claim the right to ‘call the place [meaning the property] his own’ (Street v Mountford [1985] per Lord Templeman). This is because the lodger will never be able to lawfully resist intrusion by the owner of the premises, as the owner ‘retains possession’ in order to supply the contractually mandated services or attendance (Antonaides v Villiers [1990] 1 AC 417 per Lord Templeman).
  1. The ‘tolerated trespasser’: In certain contexts, the parties are never taken to have intended a mutually binding legal relationship vis-à-vis the property. For example, where a local authority landlord obtains a possession order under the Housing Act 1985 against a council tenant after the tenant defaults on their rent payments, and yet the local authority allows the individual to remain in the property on condition of payment of rent arrears and future rent, the situation is described as being one of ‘limbo’, in which the individual ranks not as a leaseholder or licensee but as merely a ‘tolerated trespasser’ (Burrows v Brent LBC [1996] 4 All ER 577 per Lord Browne-Wilkinson).
  1. Labelling by the parties is irrelevant: When ascertaining the nexus of legal rights and obligations, the courts will not take the labels given by the parties to themselves as conclusive. Instead, the courts will look at the substantive rights granted to each of the parties as they ascertain the ‘true bargain between the parties’ (Aslan v Murphy [1989] per Lord Donaldson of Lymington MR). The courts take the view that the parties may mistakenly, or intentionally, mis-label themselves in order to shape the legal relationship, whereas it is the terms of the agreement which are of greater significance. Examples include:

In short, the definition given by the parties to the agreement is only relevant insofar as it correctly and accurately reflects the nature of the terms of the agreement. It is the terms which define the relationship, not the label. As Bingham LJ observed in Antonaides v Villiers [1990]: ‘A cat does not become a dog because the parties have agreed to call it a dog.’

A lease or tenancy must be for a fixed term of years absolute

We have seen that the leasehold can be stated to last for any duration - whether one year or one million years - but it is crucial that an ascertainable period is given. The leasehold has to be given in strictly numerical terms; it is presumed by the common law that this gives certainty. Therefore, particular phrases which fail to give a period of years as defined by a numerical value will fail for uncertainty. Examples of failed periods include:

  1. A purported lease that was said to last for ‘the duration of the war’ ([1944] 1 All ER 305); and
  2. A lease that would run ‘until Britain wins the Davis Cup’ (Prudential Assurance Co Ltd v London Residuary Body [1991] UKHL 10).

The courts have occasionally questioned the rationale of needing a certainty in the stated period. It has been said to have no ‘satisfactory rationale’ (Prudential Assurance Co Ltd v London Residuary Body [1991] per Lord Browne-Wilkinson), and the court has considered relaxing the requirement of the term of years absolute requirement (Ashburn Anstalt v Arnold [1988] EWCA Civ 14).

Case in focus: Prudential Assurance Co Ltd v London Residuary Body [1991]

The title to the property held by London Residuary Body (LRB) was formerly held by another party. That other party had granted ‘tenancy’ in 1930, with the tenancy said to exist until such time as the land required improvements to the road. The rent was initially £30 per year, yet by the 1980s the annual rental value had increased almost a thousand fold. Thus, once LRB held the title, they sought to contest the validity of the term of years as defined in the tenancy; that is, they sought to argue that the lease was for a term of years to be given in a defined numerical value rather than by the wording given in the tenancy. LRB sought to be able to argue that the giving of half a year’s notice would be sufficient in the former case. The court agreed with that assessment, ruling that a tenancy defined by a period of such an indeterminate nature could never be a valid lease.

Key Points:

  • The tenancy was initially created on the basis of a certain event coming to pass.
  • That event never materialised, nor was a term of years quoted in the tenancy.
  • Such a form of wording for the duration of a tenancy, according to the court, can never be valid.

Statute does provide for a number of exceptional leases that will automatically be converted into time-bound leases. A lease for life, or a lease until marriage, will be converted into a 90 year lease, dependent on the death or marriage of the original lessee (Law of Property Act 1925, s.149(6)). Likewise, a perpetually renewable lease shall be converted automatically into a 2,000 year term to be determinable exclusively by the lessee (Law of Property Act 1922, s.145, Schedule 15).

Periodic tenancies

There is also the exceptional scenario of the periodic tenancy. In this instance, after a fixed-term period has come to an end, the tenant continues to retain rights of exclusive possession over the property indefinitely. The tenancy can proceed indefinitely until such time as either the landlord or tenant serves a notice to quit on the other party. This may seem to conflict with the requirement of certainty of years, nevertheless periodic tenancies are recognised as valid (Law of Property Act 1925, s.205(1)(xxvii)).

The courts have provided various means of explaining (or explaining away) the discrepancy. For example, the court has suggested that:

  1. Periodic tenancies are an isolated exception and that the ‘certainty of years’ requirement simply does not pertain to them (Re Midland Railway Co’s Agreement [1971] Ch 725 per Russell LJ).
  1. In an alternative explanation, the court has recognised periodic tenancies as a continuing and subsisting active agreement between the parties that they wish to remain in a leasehold relationship (Hammersmith and Fulham LBC v Monk [1992] 1 AC 478).
  1. The life of the periodic tenancy is contingent entirely on the parties’ mutual agreement, and thus the tenancy has ‘no greater life than the period up to the time when the next notice can be given and would terminate’ (Crawley BC v Ure [1996] 1 QB 13 per Hobhouse LJ).
  1. Upon either party serving a notice to quit, the periodic tenancy is said to have reached ‘the end of its natural life’ and thereby reaches its ‘predetermined end in accordance with the terms of the tenancy agreement’ (Barrett v Morgan [2000] 2 AC 264 per Lord Millett).

The parties cannot contract away their legal status

We mentioned above how the parties are not free to define their relationship solely by the label they accord to the relationship. On a similar, connected point, the parties cannot reduce or erode the status of their relationship where the status on a construction of the terms is already defined and set by the common law or statute. In other words, the parties cannot agree to render the rights of a tenant, say, to be anything less than those ordinarily enjoyed by a tenant.

Case in focus: Street v Mountford [1985]

Mountford, upon paying a weekly so-called ‘licence fee’, was granted an exclusive right of occupancy over a portion of a flat as per a written so-called ‘licence agreement.’ Under the terms of that agreement, Mountford explicitly disavowed any intention to take the property under a tenancy. Despite the inclusion of this exemption of tenancy rights, the House of Lords said that she was a tenant because the agreement exhibited all of the relevant characteristics of a lease, despite this disavowing of such rights. Therefore, Mountford qualified for the protections accorded to tenants under the Rent Act 1977. Lord Templeman said that ‘if the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting they created only a licence. The manufacture of a five-pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.’ Therefore, the parties could not contract out of the Rent Act protections.

  • The agreement to grant exclusive occupation used such language as ‘licence fee’ and ‘licence agreement.’
  • The agreement included a term amounting to a waiver by the occupant of all status and rights of a tenancy.
  • However, given the terms of the agreement as a whole, the court saw the agreement was in fact a tenancy.
  • The court underlined that labels for terms does not decide the legal effect of terms, and the supposed waiver was null and void.
  • Given the above, the occupant retained the rights of a tenant.
  • A similar line of reasoning was adopted in Bruton v London & Quadrant Housing Trust [1999] where the court held that the party, designated by the court as the landlord, could not contract out of obligations to conduct repairs on the property.

Identifying sham or pretence terms

Given the above, certain landlords will want to avoid the effects of a tenancy. After all, the rights accorded to an occupant under a tenancy are far more onerous for a landlord than are those accorded to an occupant under a licence. Notice requirements are more stringent, a tenant will have the right to exclude the landlord in most circumstances, and the landlord is thus far less able to oust the occupant under a tenancy. Therefore, some landlords have sought to include certain terms that erode the legal status of the tenant.

In response, the courts are vigilant for such ‘sham’ or ‘pretence’ terms. Where the court finds such a term, it can render the term unenforceable, null and void. The act of discarding such terms - ‘pro non scripto’ (Antonaides v Villiers [1990] per Lord Templeman) - enables the court to properly direct the parties as to the legal effect of the agreement, and prevents vulnerable persons seeking accommodation from being exploited.

Case in focus: Antonaides v Villiers [1990]

Villiers and his partner had both entered into identical ‘licence’ agreements with Antonaides simultaneously for the occupation of an attic flat. In the agreement, Antonaides purported to retain rights to use the flat in common with them ‘at any time’ (meaning that Antonaides could occupy the flat with them) and would also have the right to introduce any number of other licensees to also share the (very small) premises with Villiers and his partner. Antonaides never exercised the contractual term entitling him to use the flat in common with them. The House of Lords held that this ‘non-exclusive occupation licence’ was an example of a sham agreement. Once the ‘sham’ aspects of the agreement had been stripped away, the court held that the terms of the agreement in their totality pointed towards a tenancy on the part of Villiers and his partner. The court took the physical circumstances of the living space to be a relevant factor: given its very small size, the court said this revealed the ‘air of total unreality’ surrounding Antonaides’s attempt to effectively deny the couple their legal right to a tenancy. Such clauses as the one entitling Antonaides to reside with them in the space could not have been ‘seriously intended’ to have any practical effect. The only reason for their inclusion was to ‘avert the ordinary legal consequences attendant upon letting the appellants into possession at a monthly rent.’

Key Points:

  • The residents were being granted rights of occupancy under a so-called ‘licence agreement.’
  • The agreement included terms to the effect that the owner could also share occupation with the occupants, and could introduce further occupants at any time.
  • Such terms were not exercised by the owner of the property.
  • The portion of the property occupied by the occupants was very limited: an attic flat.
  • The court held that the limited physical space gave the lie to the terms, as did the fact that they were not exercised.
  • The court held that such terms were pretence terms, intended merely by the landlord to ‘avert the ordinary legal consequences’ which flowed from a landlord and tenant relationship.
  • As such, given the nature of the remaining terms that were held to be valid, the court determined that the agreement was in fact a tenancy.
  • In a similar case - Aslan v Murphy (No. 1) [1989] - the court held that when construing the ‘true bargain of the parties’, the bargain could not sensibly be said to require the tenant to vacate the property every day between 10:30am and midday, as the agreement had purported to include in its terms.

That all being said, a label will not necessarily be irrelevant. Although the courts are certainly concerned with preventing the exploitation by dishonest landlords of vulnerable tenants by the use of such language as ‘licence agreement’ (see for example Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369), sometimes the label can actually be a useful ‘pointer.’ Arden LJ observed in the Court of Appeal that it would be ‘a strong thing for the law to disregard totally the parties’ choice of wording and to do so would be inconsistent with the general principle of freedom of contract’ (National Car Parks Ltd v Trinity Development Co (Banbury) Ltd [2001] EWCA Civ 1686).

Examination Consideration: You will have noticed that certain cases have been referred to again and again in this section. They include Street v Mountford, Antonaides v Villiers, Bruton v London & Quadrant Housing Trust, and AG Securities v Vaughan. These are the classic cases on questions of leases versus licences, and it is important that you remember what each case contributes to this area of the case law. It is recommended that as a minimum you can recall what legal principles these cases represent, as well as some of the pithy phrases used by the court, such as the “spade” speech from Lord Templeman.

OBLIGATIONS

Aside from the requirement that a lease entitles the leaseholder to exclusive possession of the property in a term of years, a lease also entails other obligations which ‘remain outstanding on both sides throughout its currency’ (National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675 per Neuberger J). There are various express obligations that a landlord will owe to their tenant. Here we shall discuss some of the implied obligations owed by a landlord to a tenant.

  1. Covenant for quiet enjoyment: Upon granting a lease to a party, the landlord thereby also agrees, both on his part and on the part of others, to refrain from doing anything which ‘substantially interferes with the tenant’s title to or possession of the demised premises or with his ordinary and lawful enjoyment of the demised premises’ (Southwark LBC v Mills [1999] 3 WLR 939 per Lord Millett). This effectively means the tenant will be free from harassment either by the landlord or by others when done with permission from the landlord. It extends also preventing the removal of the tenant’s belongings, as well as the cutting off of utilities supplied to the property (Perera v Vandiyar [1953] 1 All ER 1109). It is not an absolute right: if the landlord takes all reasonable precautions to avoid disturbance in, for example, the carrying out of covenanted repairs on the premises, then the interference will be lawful (Jones v Cleanthi [2006] EWCA Civ 1712).

Case in focus: Southwark LBC v Mills [1999]

The Council had let a series of flats, of which the sound insulation was poor and thus there was daily unwanted transmission of noise. Despite this, the House of Lords held there was no breach of the covenant for quiet enjoyment. The inadequate sound-proofing was a product of the structure itself, ‘for which the landlord assumed no responsibility.’ The noise was generated by neighbours as they lawfully and reasonably exercised their own rights of enjoyment over their respective properties, and the building had been adapted for multiple occupation. Given these factors, the court held it ‘must have been within the contemplation of the prospective tenants that the adjoining flats would be let to residential tenants, and that the occupiers would live normally in them’ (per Lord Hoffmann).

Key Points:

  • The tenants each experienced a great degree of noise from adjacent flats. The noise was described as ‘horrendous’ and thus interfered with the right to quiet enjoyment.
  • However, the interference was the result of the structural design and was not the result of actions by the landlord.
  • Given the nature of the structure, and given that the flats were being let out for multiple occupation, the court held that it was within the contemplation of the parties that the adjacent properties would be let out for residential purposes.
  1. Covenant against derogation from grant: The landlord is prevented from leasing out the property to another on terms which effectively negative the usefulness of the grant. Expressed differently, the landlord cannot engage in conduct which is inconsistent with the purpose for which the lease was granted, or undermines the exercise of that purpose (Chartered Trust plc v Davies [1997] EWCA Civ 2256). For example, a landlord had granted a lease for the storage of explosives and then allowed his adjoining land to be used for mining operations (Harmer v Jumbil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200).
  1. Obligations in respect of repair, maintenance and general amenity: Classically, the common law has seen fit to impose only the bare minimum on landlords as to what they may let out. For example: ‘fraud apart, there is no law against letting a tumble-down house’ (Robbins v Jones(1863) 15 CBNS 221 per Erle CJ). This view has continued into the 21st century: if the tenant ‘wants more he should bargain for it and be prepared to pay the extra rent’ (Southwark LBC v Mills [1999] per Schiemann LJ). The courts take the view that they are not empowered to create obligations in addition to those agreed upon by the parties.

However, there are exceptions to this Victorian view. Under the common law, the landlord is required to provide for the following:

  1. Implied condition of fitness for human habitation: The premises must be reasonably fit for habitation at the commencement of the lease (Smith v Marrable(1843) 11 M&W 5) provided that the premises is residential and furnished.
  1. Implied duty of care: The landlord must take reasonable care to keep in repair certain facilities used by the tenant(s) e.g. the lifts in a block of flats. The duty is imposed where its breach renders ‘the whole transaction… inefficacious, futile and absurd’ (Liverpool CC v Irwin [1976] UKHL 1). This extends only to those facilities which are essential.
  1. Liability in negligence: Whereupon a defect in the premises arises after the commencement of the lease, the landlord may be liable for defects which arise after its commencement depending on their negligence in the causative effect of those defects (Sharpe v Manchester CC (1977) 5 HLR 71, CA).
  1. Liability in nuisance: In certain instances, certain acts or omissions of the landlord may be taken to unduly interfere with the tenant’s comfortable and convenient enjoyment of the premises (Sharpe v Manchester CC (1977)). However, a landlord is usually not liable for the nuisance caused by other tenants (Chartered Trust plc v Davies [1997]), though it may constitute an infringement by the landlord on the tenant’s right to privacy and family life under Article 8 of the European Convention on Human Rights (Lee v Leeds CC [2002] EWCA Civ 6).

Examination Consideration: There are essentially three obligations imposed on landlords towards their tenants. The obligations are not absolute and are case-sensitive. Can you recall the wording which underlies the test for each obligation?


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