HL Deb 25 May 1995 vol 564 cc1087-97

2.12 p.m.

The Earl of Courtown

My Lords, I beg to move that this Bill be now read a second time. This Bill will put an end to the operation of the doctrine of privity of contract, described during the Bill's passage in another place as "the privity trap", which has resulted in considerable hardship and financial distress for large numbers of former tenants of all types of property over the years. I should like to thank my honourable friend the Member of Parliament for Bolton, North-East, Mr. Peter Thurnham, for and congratulate him on having persevered in bringing this Bill through another place in order that I may bring it before your Lordships' House.

While there have been some significant changes along the way, the starting point of the reforms which your Lordships are to consider is the Law Commission's 1988 report. It considered the extent and duration of liability undertaken by the parties to leases of land and their successors in title, under the doctrines of privity of contract and privity of estate, which apply to all types of lease, whether commercial, residential or agricultural.

The report explains the law with the thoroughness and erudition we have almost come to take for granted from the Law Commission, and I shall attempt only a brief overview. A lease of land has a twofold effect, acting both to create a new legal estate vesting the property in the tenant for a defined period and as a contract between the parties, who normally undertake liabilities under the contract for the whole of that period.

Under privity of estate, the landlord and tenant for the time being are bound by the covenants under the lease which "touch and concern" the land, as opposed to those which impose merely personal or collateral obligations. The original landlord and tenant, however, are also bound by privity of contract, and this binds them to their respective obligations for the whole period of that lease, notwithstanding that they may have parted with their whole interest in the property.

As many former tenants have found to their often crippling cost, this can mean having to pay rent or to pay for repairs years after parting with the property. Worse still for the former tenant, the liability is not limited to what he was paying when he parted with the property, so that, if there have been rent reviews or changes to the property in consideration of a higher rent, he may find himself liable for vastly increased sums.

The Law Commission criticised the existing law on two grounds in particular. The first is that the distinction between covenants which "touch and concern" the land and those that do not is unclear and a potential source of difficulties. The second, and the one which has drawn support from every quarter, is that it is intrinsically unfair for anyone to continue to bear burdens under a contract when he no longer derives any benefit and has no control, and that privity of contract bears particularly harshly on tenants.

When a demand is made of a former tenant under this doctrine, it will often be not only out of the blue but also beyond his means, particularly where a small businessman assigned his lease so that he might retire. There is also no logical way in which a former tenant who does understand that he has this contingent liability can estimate its amount.

The Law Commission recommended reform for all types of leases based on two principles. First, a landlord or tenant should, as a general rule, have no rights or liabilities arising from a lease once he has lawfully parted with his interest in the property; and, secondly, all the terms of a lease should be regarded as a single bargain for letting the property, so that, when the landlord's or tenant's interest changes hands, the successor should take on the whole package of his predecessor's rights and obligations, with no distinction between covenants which "touch and concern" the property and those which do not.

These two principles would ensure that rights and obligations would go hand in hand and would produce a clean break on assignment of a party's interest. The commission accepted, however, that there would be circumstances where it would be reasonable for both landlords and tenants to have a degree of continuing liability. For tenants it was accepted that it would in some circumstances be reasonable for a landlord to expect an outgoing tenant to guarantee performance of the tenant's obligations by his assignee, and it should be possible for a landlord to require such a guarantee, but only where that is a reasonable condition of his giving consent to the assignment and covering only the period until the assignee himself assigns, at which point the landlord could seek a similar guarantee from the outgoing assignee.

In the case of landlords, the commission noted that tenants would rarely, if ever, be in a position to exercise any control over assignment by the landlord, and so would be unable to require guarantees of performance by the landlord's successor. It recommended instead that a landlord's rights and liabilities under the lease should continue after assignment unless the landlord is released in accordance with a procedure allowing for the tenant to argue that it would not be reasonable for the landlord to be released.

The commission's recommendations also included detailed provision for apportionment of liability where only part of the landlord's or tenant's interest is assigned, and such matters as anti-avoidance provision to invalidate contractual or other devices to the extent that they have the effect of subverting the reforms.

In 1993 the Government accepted these recommendations, but with one very significant change; namely that they should apply only to new leases, and not, as the Law Commission recommended, also to leases already in existence when the Act comes into force. It is accepted by all sides that retrospective legislation of that order could not be justified, and the Bill accordingly gives effect to these recommendations for new leases only.

There was still concern, however, for those former tenants who would still be subject to continuing liability and who might still be presented without warning with demands for payment covering extremely long periods of arrears. To alleviate this, the Government agreed a further provision, to apply to both new and existing leases, and presently embodied in Clause 13 of the Bill. This requires landlords to notify former tenants of arrears within nine months of their falling due, or lose the right to enforce them. It will ensure that former tenants are promptly informed about their obligations when default occurs and will help to protect individuals and companies against the sudden and unexpected costs which cause such problems under the existing law.

Noble Lords who have followed the Bill's progress in another place will know that that is by no means the whole story, and there is particular reason for my congratulations to my honourable friend, Mr. Peter Thurnham, on his determination in bringing the issue to the House. The Bill represents a second attempt to introduce these much needed reforms, an attempt which perhaps carries more of a spirit of compromise than the first. Following the failure last year of the first Bill, for reasons which all parties accept were entirely proper, the British Retail Consortium and the British Property Federation worked together to see whether a measure of agreement could be reached on privity reform, and eventually put forward a balanced and considered package of measures which is now supported across the property industry by, among others, the Association of British Chambers of Commerce, the Forum for Private Business, the Royal Institute of Chartered Surveyors, the Property Managers' Association and the British Council of Shopping Centres. The force of that agreement has carried the Bill as far as this House and will, I hope, carry it all the way to the statute book.

There are two parts to that agreement. The first is to apply only to new commercial leases; the second to both new and existing leases of all types. The first part comprises the amendment of Section 19 of the Landlord and Tenant Act 1927, thereby enabling landlords and tenants to agree between themselves at the commencement of the lease, or by agreement later, the terms under which future assignments can be made.

Without such a change, the abolition of the privity of contract doctrine would undermine the ability of landlords to preserve the covenants underpinning investment in commercial property, with consequent serious harm to investment and confidence in the property market, to the detriment of both landlords and tenants. In its absence, it is likely that the majority of landlords would be driven to exercise their right to ban assignment altogether since under the current law the principles on which the courts operate do not give landlords and investors the certainty they require in respect of assignments and covenant strength. By enabling the parties to agree the terms for assignment in advance, this harm will be avoided. Both the British Retail Consortium and the British Property Federation are convinced that this sensible and measured approach will provide the property industry with the necessary control over covenant strength which will maintain confidence in the property market as well as ensuring a real future for the high street. They are certainly not alone in that, as the support of the bodies I mentioned earlier indicates.

The second part of the agreement aims to provide additional protection for tenants by means of three extra measures, all of which are to apply to both new and existing leases. One is a reduction to six months of the nine-month period in Clause 13 of the Bill to which I have already referred. This will mean that those former tenants who remain subject to continuing liability will now have early notice of their financial liabilities for any subsequent default and will be able to budget accordingly, rather than be faced with unexpected demands for debts accumulated over a number of years.

The next measure is to provide that no former tenant or their guarantor will be liable to pay any sum resulting from a change to the lease after assignment by a deed of variation. This provision applies to new and existing leases, but will only apply to deeds of variation after the commencement of the Act. Any increase in the rent solely attributable to a variation of the original terms of the lease would not fall within the original tenant's privity of contract liability. This provision is not intended to cover increases in rent following rent reviews which are provided for by the lease, but rather is intended to prevent cases where assignee tenants have accepted changes in the terms of the lease in the knowledge that they will not have to meet the additional costs which result, and former tenants are then faced with excessive costs resulting from negotiations to which they have not been party. I am sure that your Lordships will agree that it is wholly unreasonable that former tenants should be placed under any obligation resulting from changes in the lease which could not have been contemplated by the original parties.

The final component would allow former tenants to call for an overriding lease when faced with a privity of contract claim. This will address the concern that many businessmen and women have expressed about their lack of control and feeling of helplessness over the property when they are called upon to make good the default of a subsequent tenant. This measure will allow former tenants to take back control of the property and take action to control their liabilities as quickly as possible.

The Bill was introduced in another place without provision for these additional changes, but on the clear basis that they should be incorporated by subsequent amendment. Following wider consultation undertaken by the Lord Chancellor's Department, which revealed support across a wide range of interests in the property industry, the Government accepted these additional changes and have confirmed that they would be willing to extend all necessary assistance to enable the amendments necessary to give effect to them to be brought forward.

The Bill as I have outlined it, together with the additional measures, has wide cross-party support, amply illustrated by the fact that its sponsors in the other place are drawn from all the English and Welsh parties and include the honourable Member for Brent South, Mr. Paul Boateng, who is the Opposition spokesman on the Lord Chancellor's Department, the honourable Member for Berwick-upon-Tweed, Mr. Alan Beith, the deputy leader of the Liberal Democrats, and, for Plaid Cymru, the honourable Member for Ynys Mon, Mr. Ieuan Wyn Jones.

Your Lordships will appreciate that these reforms do represent a compromise which has moved in some respects from the Law Commission's original vision, and I think it proper to mention that the commission itself did express some reservations about the first part of the agreement which I have outlined. Notwithstanding those reservations however, the commission has continued to extend the benefit of its advice and expertise to the drive to enact these reforms, and I should like to thank the commission for its assistance.

In conclusion, I consider that these reforms will introduce fairness in this area of the law, striking a balance between the rights of tenants and those of landlords. To the extent that they represent a compromise, it may be that they omit features which some would have wished for, and include elements which some might have preferred to omit; but it is my firm view that the balance is right, and the will to carry through these reforms and make them work is there, shown by the firm support which the Bill has received from all sides. There is a golden opportunity to secure much-needed reform for the benefit of all in the property world, and I hope your Lordships will agree that we should seize that opportunity and make the most of it. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(The Earl of Courtown.)

2.26 p.m.

Lord Meston

My Lords, I am sure the whole House will want to thank the noble Earl for his explanation of this important Bill, which should have the support of us all, particularly those who appreciate the problems it seeks to address. The existing state of the law is bad and has created many hard cases. It is also a confusing area of the law, particularly in England. I never properly got to grips with the subject of covenants that touch and concern the land, and I congratulate the noble Earl on his mastery of it.

It must be an enormous worry and a surprise to the original tenant to be met with a demand to meet the terms of a lease of which he has no longer any benefit, possibly several years after he had anything to do with the property concerned. The original tenant may have left those premises years before, having complied with all the covenants and all the obligations as at the date of his departure. He will have assigned the lease to an apparently suitable replacement with the knowledge and full approval of the landlord. There will probably have been good references for the assignee and sureties of apparent means.

The original tenant may also have obtained written indemnities from the assignee. Yet, with all those safeguards, the original tenant might find himself meeting demands, and being embroiled in litigation, arising out of breaches of the lease caused by any of his successors. Those successors may be not be just the assignee he knew about, but subsequent assignees of whom he knows nothing. The claim against him may also follow rent reviews and other actions or transactions with which he had nothing to do.

Moreover, if the landlord has taken time first to pursue the successor tenants and their sureties, the original tenant may also be faced with a large demand for arrears of rent which have mounted in the intervening period and with a large claim for interest.

Alternatively, the landlord may be more selective and go almost immediately for the original tenant, leaving him to pursue his indemnities against whoever else may be liable. All too often those indemnities prove to be worth little or nothing, and it turns out that the landlord has rightly perceived that the blameless original tenant is the person with the deepest pocket.

Perhaps it is also worth remembering that the original tenant of small commercial premises may have assigned the lease on retirement. Indeed, one of the cases that was shown on a television programme which dealt with this subject illustrated the difficulties of the widow of the original tenant who was left to cope with the landlord's claim after her husband's death.

That is the nature of the problem; and it is a problem peculiar to English law. The need for reform was urgent by the time the Law Commission reported in 1988. Unhappily, the Bill comes too late to help those who have suffered during the recession, which has aggravated the problem. The noble Earl mentioned retrospection. I believe that retrospection would be unfair on those who had to pay up under the existing law as against those who as yet have managed to escape liability.

It is ironic that more recently tenants have had greater bargaining power and today are able to require in leases the inclusion of a variety of contractual restrictions on their liabilities. Having noted that, if in years to come the bargaining power returns to landlords, I should not want to see the provisions of this Bill unduly fetter the future assignability of tenancies. I listened with care to what the noble Earl said about that matter, which we must consider in more detail in Committee.

I hope that further thought will be given to Clauses 12 and 13. There is much to be said for an upper limit of 10 years and for some of the other limits on liability of the original tenant, which were suggested by the CBI. It is also not unreasonable that the notices, which under Clause 13 must be served, should also supply information to the original tenant about the identities of other candidates for liability under the lease and that there should be some obligation on the lessor to heed the reasonable wishes and views of the original tenant about possible enforcement against such other people.

Matrimonial law strives to deal with, among other things, the problem of the limping marriage. This Bill tackles tenancy agreements which limp on causing trouble, conflict and expense long after the lease or agreement concerned has any practical utility. I hope that the Bill will achieve what a matrimonial lawyer calls a "clean break" between the original landlord and the original tenant who are no longer wedded in any real sense to the property or to the agreement they signed years ago.

Finally, perhaps I may comment on the drafting of the Bill. It lacks the direct clarity of drafting of the original Law Commission Bill. I wonder whether Clauses 1 and 2 have to be where they are and in that form. I also wonder whether Clauses 3(4) and 4(4) add a great deal. It is not obvious to the reader what is meant by a "non-attributable covenant", which is used in Clause 6. Perhaps we must return to those issues in Committee; but, with those reservations, I hope that the House will support the Bill.

2.35 p.m.

Lord Graham of Edmonton

My Lords, my noble friend Lord Irvine of Lairg has had to leave the Chamber for an urgent appointment in Scotland. He apologises for having to do so.

He has asked me to say on his behalf that he believes that the Bill will be welcomed by the whole House. It reflects the agreements on reform of the law of privity of contract arrived at between the British Retail Consortium and the British Property Federation.

My noble friend tells me that it is right also to mark the industry and determination of the honourable Member for Bolton North-East which has led to this Bill coming to your Lordships' House in such an advanced state. As the noble Earl explained, amendments remain to be brought forward which will have to be scrutinised with care because of the difficulties of the subject matter. However, we give this measure a fair wind and will co-operate in its speedy translation to the statute book.

There is one specific point which I wish to raise at this stage so that the noble Earl may consider it. Has thought been given to the special position of charities and their trustees? Under Clause 12, the original tenant may be required to guarantee the performance of the covenants, subject to the qualifications in Clause 13. The guarantee will last during the remainder of the term of the tenancy. If the rent is increased due to a rent review, after assignment the guarantor will be liable for the increased rent. If trustees sign a guarantee without having received legal advice independent from that given to the charity itself, when the guarantee becomes enforceable, perhaps many years later after the charity has been wound up, the trustees would remain liable in their personal capacity. In Committee your Lordships may wish to consider whether greater protection should be afforded to the trustees in that position.

Meanwhile, we are grateful to the noble Earl for his full and clear exposition of this long-awaited Bill, which we support.

2.36 p.m.

The Lord Chancellor

My Lords, I am sure that your Lordships are grateful to the noble Lord, Lord Graham of Edmonton, for contributing on behalf of the noble Lord, Lord Irvine of Lairg. If one has to leave the Chamber, I cannot think of a better place to go than that to which he has gone.

I join with those who congratulated my honourable friend in another place for his perseverance in bringing forward the previous Bill, for considering the points made about it and the discussions of the property industry organisations, and for keeping up the momentum by bringing forward the present Bill in the conviction that the eventual agreement reached by those organisations represented a proper compromise and a way forward which all sides, including the Government, would find themselves able to support. It must be underlined that my noble friend brought forward this Bill in the wake of the agreement before we could know the extent to which it was generally acceptable elsewhere. His courage and judgment in doing so have been vindicated, as I shall indicate.

I think "perseverance" is the right word, for the level of agreement which has carried the Bill as far as your Lordships' House has been hard-won. As my noble friend Lord Courtown said, the backbone of the Bill was provided by work done by the Law Commission and reflects the decision of the Government which I announced in 1993 to accept the commission's recommendations, but only in relation to new leases.

That decision itself represented a compromise following consultation in which I played an extensive part. There were those on the one hand who regretted that more could not be done to alleviate the difficulties which would continue to be faced by former tenants under existing leases, and those on the other hand who applauded the decision to legislate with prospective effect only, but remained worried about how the market might greet the new regime and the potential effects for tenants as well as landlords.

Those worries, as your Lordships are aware, proved an insurmountable obstacle to the previous Bill, but there were indications that the debate was not between an irresistible force and an immovable object, and the Government for their part remained willing to hear suggestions as to how progress towards the principal objective of abolishing privity of contract liability might be made. Accordingly, when at the end of 1994, the agreement outlined by my noble friend Lord Courtown was put forward, it was clearly a matter for close consideration.

Reservations about the effect of aspects of the agreement, in particular on small business tenancies, have been mentioned. It was a matter of concern to the Government that notwithstanding the influence and breadth of representation of the British Retail Consortium and British Property Federation, the agreement which has been put forward could not be said to have been tested against the views of every sector of the property industry. In particular, while what might be described as the big battalions were supportive of the spirit of the agreement, it was considered necessary that smaller commercial tenants, residential tenants and agricultural tenants should be given the opportunity to make their views known.

In accordance with that view, I and my colleague, the Minister in another place, initiated consultation to that end. That consultation produced a clear vote in favour of the compromise, a notable feature of which was the number of respondents who expressed the view that no progress could be made without compromise and urged the Government to seize the opportunity and act on the agreement.

In the light of the views expressed, the Government decided that the package of extra measures should be accepted as a proper and widely-supported compromise and the best way of making progress. It was decided, however, that while the three elements aimed at alleviating the difficulties of former tenants were of benefit to all tenants and should apply to all types of lease, the first element, allowing for new leases a greater degree of control over assignment by the tenant, should apply only to commercial leases and not to residential or agricultural tenancies. A number of respondents argued—and it is accepted by all sides—that the commercial and economic arguments for applying the measure to new commercial leases had no real application to tenancies of dwellings. It was also accepted that agricultural tenancies, to which a different regime for control over assignment has always applied, should also be excepted from the change.

As your Lordships have been told, the acceptance by the Government of the principle of the additional changes, and cross-party support for the agreement in the other place, enabled the Bill to pass to this House unopposed, so that the necessary amendments might be considered by your Lordships. In the circumstances, your Lordships may think that that was the best way forward. I am happy to confirm my readiness to offer all the necessary assistance to my noble friend in bringing forward those amendments and in assisting your Lordships to give them the consideration which they deserve.

Quite apart from those amendments, I am advised that there are some areas of the Bill which will require amendments, not to introduce additional changes but as a matter of technical necessity, to ensure that the Bill will effectively implement all aspects of the reforms. My noble friend will no doubt be relieved to hear that I consider it proper that I, rather than he, should consider those matters and bring forward the necessary amendments on behalf of the Government.

I am sure that my noble friend will also wish to consider the further points made by the noble Lord, Lord Meston, and those made on behalf of the noble Lord, Lord Irvine of Lairg. I believe it only right that we should consider them in preparation for the Committee stage. Indeed, I do not think that they are points upon which we would wish to elaborate at this juncture.

My noble friend referred in his opening speech to the attitude of the Law Commission and outlined the package of additional changes. I believe that it would be both helpful and right if I were to expand on what has already been said in that respect. The Law Commission expressed concern about the terms; of the package in its response to my department's consultation paper. Its concern is principally in relation to the amendment of Section 19 of the Landlord and Tenant Act 1927, which it fears will seriously weaken the protection enjoyed by tenants, particularly small business tenants, in terms of freedom to assign the property. That protection was recently strengthened by Parliament, implementing Law Commission recommendations, in the Landlord and Tenant Act 1988. The commission is also concerned that to allow the parties to negotiate in advance the grounds on which any future assignment will be permitted will be likely to lead to delay and greater expense in leasehold conveyancing. I shall be happy to supply a copy of the commission's response to any noble Lord who may be interested to read it.

Your Lordships will appreciate that the Law Commission is concerned with the long-term aspects of reform. On the other hand, your Lordships and the Government have also to consider the shorter-term situation.

The consultation suggested an urgent need to deal with the matter while at the same time suggesting that unless there were a degree of compromise it would not be possible to make progress. While I understand the Law Commission's reservations, it is in that spirit that we are continuing. The Law Commission will wish to keep the long-term arrangements under review and make what proposals it considers right in that connection.

As my noble friend mentioned, notwithstanding its concerns the Law Commission has been prepared to lend its expertise. I should like to add my thanks to those already expressed for the Commission's gracious assistance, which will without doubt enable the production of a greatly superior end product. I am sure that your Lordships will wish to mark that notwithstanding the fact that the Commission has reservations about the compromise it has been willing to give the benefit of its great expertise to enable us to do the best that we can with this Bill. It may go some way towards reassuring those who share the Commission's reservations if I say that all parties have very much in mind the need to ensure that while the amendments which are to be brought forward are fully effective to implement the essence of the agreed compromise, they should not unwittingly extend beyond it to possible deleterious effect.

To sum up, your Lordships may agree that the history of this matter shows a need throughout for a degree of accommodation and compromise so that genuine conflicting interests may be reconciled to the overall benefit of all. It is perhaps of the essence of this type of reconciliation that the final result may not please everyone and that those who take the very long view may see the need for the position as a whole to be assessed again in the longer term. However, it seems to me that the consensus is very much in favour of doing now what is possible to extend to the people who really need it the relief that they require. It is in that spirit that I am happy on behalf of the Government to support the Bill and support the Motion that it should now have a Second Reading.

2.46 p.m.

The Earl of Courtown

My Lords, I thank noble Lords who have taken part in this debate. This has been a serious discussion on a very serious matter. The more I listened to the debate the more it confirmed my belief that neither is this a simple matter, but one in which it is very difficult to strike the proper balance. On the other hand, I remain hopeful that the spirit of compromise will remain uppermost and that we may be able to reach the statute book with an agreement which, while it may not be ideal for many, will be acceptable to most.

Due to the adjournment yesterday and the second reading being held over until today a number of noble Lords have been unable to speak in the debate. In particular, my noble friend Lady Gardner of Parkes wishes me to say that she fully supports the Bill and intends to support it on behalf of the British Retail Consortium.

I should like to thank the noble Lord, Lord Graham of Edmonton, for putting forward the views of his noble friend Lord Irvine of Lairg, and also the noble Lord, Lord Meston. I have noted the queries raised by noble Lords and hope that these can be considered before the Committee stage.

I thank my noble and learned friend the Lord Chancellor for the help he has given personally and the encouragement that he and my honourable friend the Parliamentary Secretary to the Lord Chancellor's Department have given to the endeavours to carry this Bill through. I also thank the Lord Chancellor's Department, the Law Commission and parliamentary counsel for their continuing assistance. I hope that with the good will that has been shown this afternoon we may succeed and that your Lordships will agree that the Bill be now given a Second Reading.

On Question, Bill read a second time and committed to a Committee of the Whole House.