Setting the Landlord Free

English land law has a lot of idiosyncrasies; mainly as a result of how it has developed over many centuries. Two of these are the idea of privity of contract and privity of estate. In very simple terms these ideas mean that once you sign up to a lease (whether as landlord or tenant) you remain bound to comply with the terms of the lease even after you have disposed of your interest (either selling the reversion or assigning the lease) and that in order to ensure any new tenant would be directly liable to a landlord direct covenants with the landlord are advisable.
Now any slightly bright spark might notice that this could create a bit of a problem. For example, imagine you (A) take a new lease for 20 years of an office. After 10 years you have outgrown your offices and so you take some new offices and assign your lease to someone else (B). Seven years later that someone else goes bust. You remain liable for the rent in respect of your old premises and whilst you will have, if properly advised, received an indemnity from B since B is now bust this is of little value.
In recognition of this fact an act was passed in 1995 called the Landlord and Tenant (Covenants) Act. The first thing to note about this Act is that it only applies to leases created on or after 1 January 1996. The main effect of this Act was to make it so that Tenants were automatically released from their covenants on assignment of the lease. As a sop to the Landlord lobby a mechanism was inserted so that the landlord could keep the outgoing tenant on the hook as a guarantor of the incoming tenant but this could last for one assignment only.
In terms of Landlords being automatically released the Act did not provide for this - the logic being that leases rarely (if ever) give a tenant any control over a landlord disposing of its reversionary interest and so a tenant could find itself with a straw-man landlord failing to perform significant obligations. However the Act does provide for an ability for an outgoing Landlord to seek a release which must be given if reasonable.
Whilst at one point it was considered that as a result of the Act it was now impossible for Landlords to avoid continuing liability in advance a case in which went to the House of Lords in 2005 confirmed this was not so. In London Diocesan Fund v Avonridge Property Co. Ltd [2005] 1 WLR 3956 the House of Lords confirmed that with the correct drafting there was nothing to stop the Landlord and Tenant agreeing (as was the case before the Act) that once the Landlord has disposed of his reversion to the Lease he would not longer have liability for breaches of the landlord covenants.
Surprisingly, use of this mechanism is not automatic in the market. The most likely reason for this is that very few leases contain particularly onerous landlord covenants so the risk to the landlord of a lease coming back to haunt it is relatively remote. However where a landlord is granting a lease which does contain more onerous landlord covenants consideration should quite probably be had to including such a clause. Lawyers acting for tenants should pick up on the clause and advise their clients of its effect. I suspect most will not be bothered as many might be surprised to have learnt that without this clause they did have a claim.
Another example where this clause may be considered is where an Insolvency Practitioner is granting a lease and wants to ensure that the liability is limited to the period that the reversion remains vested in the insolvent entity.