AWA: Academic Writing at Auckland

I        Whether the Covenants in the Original Lease are Binding on Eruera

Under the common law test set out in Spencer’s Case a covenant was said to “go with the land” if it “touched or concerned” the land.[1]  This meant that a covenant that related directly to the property that had been leased became a part of the lease and bound whomever was the current lessee.  Where the lease was assigned a covenant would therefore bind the assignee just as it bound the original lessee.[2]  The reason for this was that, while privity of contract only existed between the original lessor and the original lessee, privity of estate existed between the current lessor and the current lessee.[3]  So where the lease was assigned, privity of estate moved with the assignment.[4]

The common law test resulted in uncertainty[5] and so the Property Law Act 2007 was passed to “restate, reform and codify” the law in this area.[6]  In relation to the question of whether covenants are binding on assignees s 240 of the Act says:

(1)           A person who accepts a transfer or assignment of a lease becomes the lessee of the land...

(3)           A person who becomes the lessee under this section-

(a)           Must pay to the lessor the rent payable under the lease; and

(b)           Must observe and perform all covenants of the lessee...

Registered leases are captured in the Land Transfer Act 1952 at s 97:

(2)           ...all rights, powers, and privileges...shall pass to the transferee.

(3)           The transferee shall...become subject to and liable for all and every the same requirements and liabilities to which he would have been subject and liable if named in the instrument originally as ...lessee of the land....

A          The Covenant to Pay Rent

The covenant to pay rent was one of the fundamental requirements of a lessee under the common law.[7]  As mentioned, this covenant is now captured in the Property Law Act 2007 at s 240(3)(a).  In the event that the lease is silent as to the payment of rent this covenant is also statutorily implied into leases at Schedule 3, cl 4 of the Act.

In Eruera’s case the lease with Sure Fire Insurance (SFI) expressly states that there is a covenant to pay rent.  It may be assumed that because Helen has been paying the rent for the past four years that there is sufficient certainty as to the amount of rent and the time and method of payment.

If Eruera is unhappy with the amount of rent he could discuss this with SFI and try to contract directly with them to pay a lower rent.  SFI is unlikely to go for this because under s 241 of the Act the assignor of the lease remains liable for the payment of the rent.[8]  This means that if Eruera is unwilling to take assignment of the lease then Helen will remain liable for the payment of the rent.  However given that Helen only has one year to run on the lease it might arguably be in SFI’s interest to secure a long term tenant – especially if SFI has had difficulty leasing this property in the past.

B          The Covenant to Insure with the Lessor

Under the old common law test it would have been uncertain whether a court would have found that this covenant touched or concerned the land.  Because it only relates to insuring the business conducted on the premises it would appear to be concerning the land.  It would also appear that the covenant has no effect on Helen once she assigns the lease because she will no longer be conducting business on the premises.  This adds weight to the argument that the covenant concerns the land.  But this is by no means certain and the court may have found that this was a personal covenant between SFI and Helen.

However as previously mentioned this has now been captured in the Property Law Act s 240(3)(b).  Based on this it seems that, should Eruera take assignment of the lease, he would be required to place all insurances relating to business conducted on the premises with SFI.  Whether this would require him to cancel his existing negligence insurance would depend on the nature of that insurance.  To the extent that it concerned business that was not conducted on the premises, or activities that were not ‘business’ he could retain it.  However in all other regards he would be required to cancel it.

It is important to note that under s 246 of the Act a lessor may cancel the lease if the lessee breaches a covenant.[9]  If Eruera was unable to cancel his negligence insurance or maintaining it was of great importance then I would advise Eruera not to take the assignment.

As an aside, there are two potential issues with this covenant.  First, it appears to require the lessee to only insure the business that is conducted on the premises, rather than the premises themselves.  In long term leases there is usually an express covenant requiring the lessee to insure the premises.[10]  Secondly, it seems odd that an insurance company who was a lessor would require tenants to place their insurance with it.  This would make the lessor liable to its tenants in the event of damage to their business.  Without further facts it is unclear what effect this might have but it is possible that if there was a fire that destroyed the building the lessor would be required to pay out its tenants for the loss of their businesses.

II       Whether Helen can Assign the Lease to Eruera

There are two types of covenants against alienation – absolute and qualified.[11]  An absolute covenant prevents alienation of the lease absolutely[12], whereas a qualified covenant requires the lessor’s consent before a lease is alienated[13].  In this case Helen’s lease includes a qualified covenant against alienation.  This means that while she is not prohibited from assigning the lease to Eruera, she must gain the consent of the lessor before she does so.

Covenants of this nature are relatively standard.[14]  While a lessor has the opportunity to contract directly with the original lessee and to assess their ability to perform the covenants of the lease they often do not have any visibility over any assignees.  Covenants against alienation allow lessors to control who tenants their premises.[15]  In the case of commercial leases it may be important to ensure that the individual to whom the lease is being assigned is not going to conduct business on the premises of a sort that would be undesirable to the lessor.[16]  In this particular instance it may also be important for the lessor to ensure that any assignee is prepared to comply with the covenant to place all insurances relating to business conducted on the premises in SFI.

In this case Eruera is buying Helen’s business.  It is therefore logical to assume that Eruera will be carrying on the same business as Helen was.  Provided there are no other reasons that might make Eruera an undesirable tenant there is no reason why SFI would not consent to the assignment of the lease.  Consent may not be withheld unreasonably.[17]

If Helen fails to gain SFI’s consent before assigning the lease the assignment to Eruera will not be void.[18]  However SFI will be able to cancel the lease for breach of covenant.[19]  If this occurs, Eruera may apply to the court for relief under the provisions of Part 4, Subpart 6 of the Property Law Act 2007.

In order to avoid this problem Eruera should ensure that Helen has gained the consent of SFI prior to the assignment.  One method of doing this would be for Eruera to request that the assignment be recorded on a standard deed of assignment of lease such as that provided by the Auckland District Law Society.[20]  In addition to the privity of estate between the lessor and assignee, this form creates privity of contract between these parties as well.  Importantly for Eruera it also confirms that the lessor consents to the assignment and that the lessee has fulfilled all obligations under the lease to date.

III      Conclusion

Now that the common law test of ‘touching and concerning’ has been replaced by the Property Law Act 2007 it seems that all covenants are binding on an assignee of a lease.  While this may create its own uncertainty around what are essentially personal covenants, this is not an issue in this case.  The covenant to pay rent is fundamental to any lease and this is clearly required by the Act.[21]  The covenant to place all insurances concerning business conducted on the property with the lessor would arguably concern the land in that it specifically relates to business conducted on the premises but regardless of this it would also seem to be a requirement under the Act.[22]  Both of these covenants would be enforceable on Eruera should he choose to take assignment of the lease.

The covenant not to assign the lease without consent would be unlikely to cause any issues.  Provided Eruera is not an undesirable tenant for some reason there is no reason why SFI would not consent to the assignment.  This is especially so given that he will be continuing Helen’s existing business.

In addition, I would advise Eruera that the assignment be recorded on a standard deed of assignment form to protect all parties involved.  I would also advise him that while he could try negotiating with SFI the likelihood of success would be low.

[1] Spencer’s Case (1583) 5 Co Rep 16.

[2] Tom Bennion and others New Zealand Land Law (2nd ed, Brookers, Wellington, 2009) at 8.15.05(2).

[3] Emma Tait “Liability of Lessees and Assignees of Commercial Leases in New Zealand” (2008) 39 VUWLR 193 at 199.

[4] Above n2 at 8.15.05(1).

[5] Above n3 at 201.

[6] Property Law Act 2007, s 3.

[7] Bennion et al New Zealand Land Law at 8.8.03(1).

[8] Property Law Act 2007, s 241.

[9] Property Law Act 2007, s 246.

[10] GW Hinde, NR Campbell and Peter Twist Principles of Real Property Law (Student Ed, LexisNexis, Wellington, 2007) at 11.088.

[11] Hinde et al Principles of Real Property Law at 11.097.

[12] At 11.101.

[13] At 11.098.

[14] Bennion et al New Zealand Land Law at 8.11.10(3).

[15] Above n11 at 11.097.

[16] International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513 (CA) at [12].

[17] Property Law Act 2007, s 226.

[18] s 240(2).

[19] s 240(6)(b).

[20] Auckland District Law Society "Deed of Assignment of Lease" (5 ed, ADLS, Auckland, 2012(2)).

[21] Property Law Act 2007, s 240(3)(a).

[22] s 240(3)(b).