What's the difference between privity of contract and privity of estate?
Posted on 23rd October 2019
First of all, you may ask, what is privity of contract and what is privity of estate, and why do I need to know about them? Well, our solicitors in Preston are here to explain why...
Within commercial property transactions, a relationship between the landlord and the tenant is formed. Both parties with a mutual goal; landlords, with the objective of obtaining a tenant to pay rent on their premises, and tenants wanting to achieve a set of premises to carry on their business within. Seems like the perfect match, does it not?
As our solicitors in Preston know, it is often not as simple as this and there are a plethora of items which should be carefully considered before entering into, or indeed granting, a lease to achieve these common goals landlords and tenants share.
One particular topic concerns privity of contract and privity of estate. These doctrines provide landlords with two forms of remedy, in the event of issues with tenants, such as non-payment of rent. They set out the following:
Privity of contract essentially sets out that, only the parties to the contract can be actioned against. This means that, should there be an issue, such as a default on rent payments by sub-tenants, the original tenant may still be liable for such payments.
Common situations often concerned tenants of premises who had then assigned their lease and moved on. This was the case for one particular couple who had previously tenanted a fish and chip shop, however, had assigned their lease and retired. The assignee then stopped paying the landlord the required rent and, as the assignee could not come up with the funds, subsequently, went after the retired couple under the privity of contract principle. This meant that the original tenants were liable as, when they had taken on the lease, they had agreed to be responsible for the performance of the lease for the whole term, under this principle.
This, to our team of property solicitors in Preston, seemed unfair. The dangers surrounding privity of contract did not, however, go unnoticed. There were numerous newspaper reports on the matter and complaints from tenants before, eventually, the government listened and picked up on this as an issue of law.
This brings us to privity of estate which applies only to the landlord at the time and the tenant at the time of the liability. Unlike privity of contract, privity of estate only lasts for the term of the relationship between that landlord and tenant. When, therefore, the lease is assigned to another, this relationship, and so this remedy for the landlord, is defeated.
Following various complaints and reports on the issue, these principles were reviewed with a view to abolishing the privity of contract rule. The argument put forward by landlords, however, was that they had entered into these leases and long-term contracts with tenants, with the knowledge that they would have two forms of remedy, should there be an issue such as defaulting on rent payments. This, they submitted, was unfair as, had they known they may not have such remedies available, they would not have entered into the contracts in the same way, and on the same terms with the tenants.
This brings our solicitors in Preston to the present position. The law was changed in 1995, and set out within the Landlord and Tenant (Covenants) Act 1995. The law was changed so that for all future leases, the principle of privity of contract would be eliminated and, based upon this, the respective parties could then enter into agreements on correct choices.
In contrast, all old leases and, for the purposes of this mechanism, old leases are considered to be those entered into before 1st January 1996, the principle would still apply. This is something that should be carefully considered when entering into a lease as, if the same pre-dates the change in law, as an incoming tenant, there is an element of risk of being caught by the principle. This is something that our solicitors in Preston would be looking at from the outset of your matter, should you be taking on, or assigning a Lease of such date.
Further developments within commercial property law saw the introduction of Authorised Guarantee Agreements, within the Landlord and Tenant (Covenants) Act 1995. Such Agreements allow landlords, in appropriate circumstances, or where expressed by the lease itself, to require the assigning tenant to act as guarantor for their assignee, as a form of protection.
The benefit of this mechanism, in contrast to the privity of contract principle, is that the tenant only acts as guarantor for their own assignee, not those that follow for the remaining term of the Lease. In effect, each assignor would guarantee their own assignee, if entering into an Authorised Guarantee Agreement. Such Agreements work to strike a balance between the landlord and tenant relationship and, with a common interest, our solicitors in Preston can help you achieve this.
Whether you be considering entering into a new commercial lease, or considering whether to grant a new lease to a prospective tenant, consult MG Legal’s commercial property team. Our solicitors in Preston and Lancaster, deal with leases, and the many considerations that come in turn with them, on a daily basis. Our expert property solicitors are, therefore, best equipped to discuss and deal with your matter for you.
For more information, contact us today at firstname.lastname@example.org.
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