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As a business owner, you are unlikely to often come across land law when running your business. However, there may be occasions when you need to understand restrictive land covenants in the context of your business premises, which can confuse newcomers. You need to understand the rules concerning the business premises you use so that you can abide by them and get on with running your business. Therefore, this article will explain the general effect of restrictive covenants to give you a basic understanding. It will then consider the kinds of covenants you are most likely to encounter in a commercial context.
Restrictive Covenants
A covenant is an obligation to do something or to refrain from doing something with or to the land you occupy. They are legally binding regardless of whether you are a residential or commercial occupier. A covenant is attached to the land, not the landowner. It follows that while landowners can change over time, covenants remain in place and enforceable.
Covenants are rules which can benefit one party at another’s expense. For instance, if a lease requires the tenant to refrain from noise after 9 pm, the tenant has an obligation from which the neighbours benefit.
However, this article focuses mainly on covenants which are likely to affect you as a business owner, such as restrictive land covenants.
Restrictive vs Positive Covenants
Most covenants are obligations to refrain from doing something with the land. These are called restrictive covenants because they restrict your ability to do something with (or to) the land.
Some common examples of restrictive covenants are not to:
- undertake additional building or development work on your piece of land;
- use the premises for residential purposes;
- create a nuisance; and
- transfer or sublease your lease without your landlord’s permission.
However, positive covenants require you to do something, which usually involves a cost. The most common positive covenant is an obligation to keep some part of the land in good condition.
Freehold vs Leasehold Covenants
There is also a difference between freehold and leasehold covenants. A leasehold concerns the interest you, as a potential landowner, have in the land. Most business owners lease their premises rather than own them; this article will only consider leasehold covenants.
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Landlord vs Tenant Covenants
There are two parties to a commercial lease: the landlord and the tenant. As a result, the law distinguishes between landlord covenants and tenant covenants. Below are some examples:
|
Landlord Covenants |
Tenant Covenants |
|
Responsibility for maintaining the common parts and the structure and exterior of the building |
Responsibility for internal, non-structural repair and upkeep |
|
To pay for lighting, cleaning and heating |
Not to create a nuisance |
|
To insure the building |
Not to assign the lease without landlord’s consent |
Creating Covenants
A covenant can be created in two ways:
- implied covenants; or
- at the express intention of the parties to the initial lease, otherwise known as express covenants.
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Implied Covenants
Implied covenants are present because the law implies them automatically into every lease. These are listed below.
Quiet Enjoyment
The most important implied covenant is the landlord’s obligation to respect the tenant’s right to quiet enjoyment of the premises. It usually prohibits your landlord from entering the premises without your consent. Your landlord cannot try to exclude this obligation from the lease agreement. If they attempt to, the law will ignore it.
Rent Owed in Arrears
Unless your lease specifies otherwise, the law implies a covenant in the lease that you owe your landlord rent in arrears. This means you must pay your landlord for the previous period, such as the last month or last quarter.
In practice, all commercial leases will override this with an express term — usually to pay your rent in advance.
Express Covenants
Most covenants for your business premises are express covenants, meaning they are expressly stated in your lease agreement. Even if you were not the original party to the lease when the leasehold was created, you are bound by the leasehold covenants.
Typical express covenants are as follows:
Covenants on the Use of the Premises
Most commercial lease agreements will specify what you, as the tenant, may use the land for. For instance, the lease may state the building is to be used for retail purposes, so you will breach the covenant if you try to turn the premises into an office.
Covenants Against Alienation
Alienation is a term that refers to when a tenant either sells their lease to another party or creates a new lease over the top of the existing one, which is subleasing.
A covenant restricting alienation limits the tenant’s rights to sell the lease or sublease the property. Commercial leases require the tenant to obtain the landlord’s permission before alienating the lease. You should note that your landlord cannot unreasonably withhold consent.
Effect of Breaching a Covenant
Most lease agreements are written so that if either party breaches their obligations under their covenants, the other party can terminate the lease agreement.
Liability for Subsequent Tenants
For example, imagine you are the first tenant to enter into a new leasehold agreement with your landlord. The lease is for 30 years. One of the lease terms is a covenant not to assign the lease without the landlord’s consent.
After ten years, you want to upgrade your offices, so you need to sell the lease to a new tenant. Mindful of your obligations under the alienation covenant, you obtain the landlord’s permission to sell the remainder of the lease to a new tenant.
Later, the new tenant subleases the property without the landlord’s consent. The successive tenant later goes bankrupt and quits paying rent. In some cases, the landlord may be able to come after you for damages. Therefore, you may want advice on mitigating your liability, such as through indemnity agreements with successive tenants and insurance.
Key Takeaways
Covenants are obligations that bind individuals with an interest in a particular piece of land. Unlike contractual arrangements, the obligations exist in the land itself rather than between you and your landlord. Therefore, although you did not agree to the covenant, you are still bound by it. The most common covenants you are likely to encounter are restrictions on land use and your right to sell the lease to another party or create a sublease.
You need to understand your restrictions through land covenants because the effect of not abiding by them can cause you to lose your business premises.
If you need help understanding the effect of restrictive land covenants within your commercial lease, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
As a commercial tenant, a restrictive covenant in land forbids you from using the property in some way. For instance, a covenant may restrict your ability to use the land as a residential property.
For commercial leases, restrictive covenants are attached to the leasehold itself. This means that it binds anyone in possession of the lease.
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