Assignments of lease by a landlord or tenant – covenants that run with the land vs personal covenants

An important matter which needs to be considered when a lease is assigned by either a landlord (selling the land) or tenant, is which lease covenants are enforceable against a purchaser of the land or an assignee of the tenant.

Generally, lease covenants that run with the land will bind a purchaser of the land or an assignee of the tenant, and covenants which are personal in nature will only bind the original landlord and tenant unless expressly assigned.

Covenants that run with the land

A lease covenant will bind a purchaser of the land or an assignee of the tenant if the covenant ‘touches and concerns’ the land.

Although there is no exhaustive test, generally a lease covenant will touch and concern the land if the covenant:

• affects the nature, quality, or value of the land, or the mode of using or enjoying the land; and

• is not otherwise expressed to be personal.

Some examples of covenants which 'touch and concern' the land are:

Covenants that are personal in nature

A covenant that is personal in nature will only bind the parties who first entered into the obligation, unless expressly assigned.

Side agreements (including incentive deeds) or licences which grant rights separate to the lease, are likely to be considered as personal and only bind the original landlord and tenant.

Some examples of lease covenants which have been held not to touch and concern the land are:

• landlord’s covenant to sell its interest in the land

• landlord’s covenant to purchase tenant's fixtures

• landlord’s obligation to return the tenant’s security deposit at the expiration of the lease

• tenant’s option to purchase the land

Each case will need to be considered depending on the particular facts and the legislation applying in the relevant state.

Assignments of lease by tenants

Most leases require tenants to obtain the prior consent of the landlord and enter into a deed of consent to assignment of lease (under which the tenant assigns its lease covenants to the assignee), before assigning a lease.

In such cases, all the lease covenants are expressly assigned to, and enforceable against, an assignee.

Assignments of lease by landlords

In contrast, leases do not usually contain any restriction on landlords selling the land or any obligation regarding assigning the lease covenants to a purchaser. Unless expressly assigned, only covenants that run with the land are enforceable against a purchaser of the land.

Recommendations

In order to avoid any uncertainty as to which covenants will bind a purchaser of the land or an assignee of the tenant, leases and side agreements should be carefully drafted.

If the parties intend for personal covenants to also bind a purchaser of the land or an assignee of the tenant, an obligation must be imposed on the assignor to ensure that the purchaser/assignee and subsequent purchasers/assignees enter into a deed with the remaining party, agreeing to be bound by and perform all relevant covenants.

Authors: Natasha Zusman and Stella Sun

Contributing author: Melissa Potter