When a lease is assigned, the new tenant normally signs a deed of covenant. This binds the new tenant to all the lease terms and creates the contractual relationship between the landlord and tenant. Often landlords require the new tenant to sign a deed of covenant as a condition of its consent to the assignment.

A recent case has shown that landlords are not always entitled to do this with the result that some lease terms may not be enforceable against the assignee tenant.

In Robert Gracie Dean Limited v Corunna Bay Holdings Limited the Court confirmed that, unless the lease states that the assignee must enter into a deed of covenant, the landlord cannot insist upon this as a condition of granting its consent to the assignment. To do so would be unreasonable. A landlord may find itself unable to force the new tenant to comply with all the lease terms (unless the lease terms 'touch and concern the land'). They would also be unable to sue that tenant for breaches by any subsequent tenants.

A lease contains rights and obligations which arise from the landlord/tenant relationship - otherwise called obligations which 'touch and concern the land or privity of estate'. These are obligations which you would normally expect between the landlord and tenant (eg. the tenant's obligation to pay the rent and rates, repair obligations). A lease may also contain obligations that don't have anything to do with the land being leased (eg. covenant by the landlord not to open a competing business). These obligations which do not touch and concern the land pass onto a new tenant if the tenant accepts them by agreement with the landlord. A landlord will usually seek a deed of covenant from the new tenant to create this agreement with the tenant - known as privity of contract.

If the assignee doesn't sign a deed of covenant, there is no contract between the landlord and the assignee. The tenant is not bound by obligations that do not 'touch and concern the land'. The absence of a deed of covenant also has implications if the lease is further assigned. An assignee is usually liable for a tenant's obligations under a lease whilst the assignee remains a tenant. It is common for deeds of covenant to make an assignee liable for the remainder of the lease term even if there is a further assignment of the lease. This ensures that the landlord has a chain of previous tenants that it can look to if the existing tenant has defaulted under the lease. Each tenant/assignee has agreed to be responsible for the lease obligations.

The case illustrates that there may be significant consequences if a landlord cannot obtain a deed of covenant from an assignee of a lease.

This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.

Copyright Phillips Fox, December 2001

For further information please contact Michelle Hill: michelle.hill@phillipsfox.com

Web site: Phillips Fox