Landlord and Tenant (Covenants) (Hansard, 5 May 1993)

§ Mr. John Fraser (Norwood)

I beg to move, That leave be given to bring in a Bill to amend the law relating to privity of contract and estate in respect of covenants in tenancies; to give effect to the recommendations of the Law Commission in that regard; and for connected purposes. The Bill was drafted by the Law Commission—which exists to advise the Government and the House on changes in the law—in report 174, and was published in 1988 under the title "Landlord and Tenant Privity of Contract and Estate". It has the support of a large number of property lawyers and of hon. Members on both sides of the House. It will remove a dangerous catch in the law. I know that the Lord Chancellor has promised to legislate along the lines of the Law Commission's report, but only for leases granted after the date of the enactment of any measure that he introduces. That is a wholly inadequate response to a problem that afflicts many business tenants here and now.

The problem that the Bill addresses was considered carefully by the Law Commission. The easiest way to describe the Bill is by illustrating the problem. At the moment, in law, original tenants and landlords are contractually liable, under the terms of the lease, no matter how long after they have ceased to have any interest in the property to which the lease relates. In the words of Michael Caine, "Not a lot of people know that." However, it is a fact, and it has caused some suffering to some business tenants.

Let me give an illustration. Let us suppose that a landlord grants a 21-year lease on a shop or a factory to a tenant. After three years of the lease, perhaps because that original tenant is making a success of the business, he transfers the lease to a second tenant. The second tenant then transfers the lease to a third tenant, the third to a fourth and so on down a chain of transfers.

Let us assume that, after the lease has run for 19 of the 21 years, in the 19th year the tenant then in possession of the premises defaults on payment of rent or fails to carry out essential repairs to the premises. The law is that the original tenant, who took the property on 19 years ago but gave it up 16 years ago, is liable for the default and has to deal with the repairs. The problem may be even worse with the rent, because if the 21-year lease has rent revision clauses, the original tenant may be liable to pay a rent perhaps five or even 10 times the original rent that he signed up for. Recently, Iandlords—mostly institutional landlords—have begun to spring that trap on unsuspecting original tenants.

The liability of the original tenant is not a fanciful notion. It is a disabling. even a bankrupting, event for the original tenant, and it has been particularly marked during the recession. After all, in London alone last year, over 40,000 businesses became insolvent or at least went out of business, based on the figures for VAT terminations. Therefore, many thousands of original lessees could find themselves liable as a result of subsequent tenants defaulting. For many original tenants, the original lessee liability leases represent a timebomb ticking away underneath them, although they have no control or 194 influence over what happens with the later tenants. As I have explained, it could be even worse as there may have been later rent reviews.

I shall give two recent dramatic examples. When the IRA bomb exploded in Bishopsgate, causing millions of pounds of damage to premises—some of which may not have been insured because of the changes in the insurance market—the original tenant of one of those premises could be liable for millions of pounds' worth of damage, long after he had parted with the lease.

The second example is Canary Wharf. If its developers had done a lease swop—had taken over the lease of premises in the City of London in order to persuade that leaseholder to take a lease at Canary Wharf—when those developers then failed, the business tenant could find himself holding a lease at Canary Wharf and having to pay rent there, and also liable as the original lessee for the rent on the premises in the City of London.

The central feature of my Bill would be to release the original tenant once he or she had transferred the lease, but subject to some safeguards for the landlord in the first transfer by the original lessee—if it were reasonable to provide safeguards in the particular circumstances. That is one of the recommendations of the Law Commission. The Bill would also provide for the original landlord to be released from his obligations under certain circumstances.

A few people—I suspect, very few—might say that the Bill is unfair to landlords. However, the truth is that the institutional landlord, as it usually is, that enforces the original lessee liability is able to spread his risk. The unfortunate original tenant cannot, except in a very few circumstances, spread the risk.

That is why the law should be changed, and that is why the Law Commission has taken the same view. It is essential that we legislate for that now and that it should apply to current leases. The Lord Chancellor's proposals to direct legislation only at future leases are inadequate.

The Bill will prevent a massive injustice—the falling upon original tenants of wholly unexpected but unavoidable losses. Business people may have moved out of their premises long ago because of their success, or perhaps because of retirement. Indeed, there are many instances of retired people being caught under the present law.

The Bill has the support not only of both sides of the House, but of chambers of commerce and many retail associations. Indeed, the recession underlines the need for the Bill. It will correct an ancient but commercially dangerous feature of the law and I ask the House to give me leave to present it.