Understanding the Law of Leases: Creation, Assignment, and Covenants that Impact Torrens Title Land Leases
The following outline contains a brief look at aspects of the law of leases. It deals only with common law rules relating to the creation and assignment of leases. It does not attempt to deal with those specific statutory rules that apply to the creation of residential leases, retail leases and agricultural leases.
Creation of leases over Torrens title land** **Legal leases
Section 53 of the Real Property Act 1900 (NSW) requires leases 'for a term exceeding 3 years' to be executed in the approved form. The combined effect of section 53 and section 41(1) (which provides that unregistered dealings pass no interest in the land) is that legal leases of Torrens title land for terms of more than three years are created by the registration of the approved form of lease. That Act does not deal with the creation of legal leases for less than three years. Arguably, even those leases can only be legally created by registration.
Implied yearly tenancies
Despite the provisions of sections 53 and 41(1) of the Real Property Act 1900 (NSW), a tenant who goes into possession of Torrens title land and pays rent under an unregistered lease for more than three years does acquire certain legal rights in the land. This applies regardless of whether the unregistered lease is oral or informal. Although section s 23D(1) of the Conveyancing Act 191 (NSW) suggests that such a tenant should only be a tenant at will, common law courts have treated the tenant as a tenant from year to year. The implied yearly tenancy was even regarded as incorporating those of the terms of the parties' agreement that were applicable to a lease from year to year: Moore v Diamond (1929) 43 CLR 105 at 116, 123; Dockrill v Cavanagh (1944) 45 SR (NSW) 78 at 81.
Tenancies under s 127 of the Conveyancing Act 1919 (NSW)
Section 127 of the Conveyancing Act 1919 (NSW) was designed to overcome the 'judicial legislation' that converted what ought to have been a legal tenancy at will into a legal tenancy from year to year. That section provides that: "No tenancy from year to year shall... be implied by the payment of rent; if there is a tenancy and no agreement as to its duration, then such tenancy shall be deemed to be a tenancy determinable at the will of either of the parties by one month's notice in writing expiring at any time."
In effect section 127 provides that the conditions that would have previously brought into existence a yearly tenancy will instead create a lease terminable at will on a month's notice expiring at any time. Unlike implied common law yearly tenancies, common law courts do not incorporate into section 127 tenancies at will such of the terms of the parties' agreement as are applicable to a lease at will terminable by a month's notice. This means that if at the end of the term of the oral or informal lease giving rise to the section 127 tenancy at will, the lease has not already been terminated by a month's notice, the lease is automatically terminated without notice: Dockrill v Cavanagh (1944) 45 SR (NSW) 78 at 83-4 (Jordan CJ). The New South Wales Court of Appeal in Wykes v Samilk Pty Ltd (1998) NSW ConvR 55-871 at 56,828 explained the position as follows: "Thus at common law, as modified by statute, upon the first payment of rent by the [tenants] they became lessees under a lease at will terminable by a month's notice expiring at any time. The lease incorporated such of the terms of the agreement whereunder the [tenants] went into possession as were applicable to such a lease including, perhaps illogically, its automatic termination without notice at the end of the agreed period."
Equitable leases
A tenant under an unregistered lease of more than three years acquires, in addition to a tenancy at will terminable on 1 month's notice under section 127, an equitable interest in the land. This equitable interest arises out of the specifically enforceable agreement by the landlord to grant the lease: Walsh v Lonsdale (1882) 21 Ch D 9.
The assignment of leases
Privity of contract and privity of estate
- Privity of contract exists between the original landlord (L) and the original tenant (T). This means that all lease covenants are enforceable between L and T as a matter of contract law, even after L sells the land or T assigns the lease.
- Privity of estate exists between parties in a landlord and tenant relationship (such as L and T, T and a purchaser of the land or L and an assignee of the lease). No such privity exists between a landlord and a subtenant. The importance of the doctrine of privity of estate is that where such privity exists, certain lease covenants are enforceable by and against the parties despite the fact that there is no privity of contract between them. The lease covenants that are so enforceable are covenants that 'touch and concern' the land.
Covenants that 'touch and concern' the land
Such covenants affect 'the nature, quality, or value' of, or 'the mode of using or enjoying' the leased land (Horsey Estate Ltd v Steiger [1899] 2 QB 79 at 89) or 'the landlord qua landlord or the tenant qua tenant' (Breams Property Investment Co Ltd v Strougler [1948] 2 KB 1 at 7). In other words, for a covenant to be enforceable by or against a person who was not a party to the original contract, there must be a sufficiently close connection between the covenant and the leased land to justify the running of the covenant with the land. The following covenants have been held to touch and concern the leased land (Butt, Land Law, 3rd ed, 1996, LBC, para [15108]): Tenant's Covenants
- Covenant to pay rent;
- Covenant to repair;
- Covenant to insure; and
- Covenant not to assign without landlord's consent.
Landlord's Covenants
- Covenant to renew the lease;
- Covenant to supply the premises with water;
- Covenant not to build on adjoining land; and
- Covenant to maintain car parking areas for use with the leased premises.
On the other hand, the following covenants have been held not to touch and concern the leased land:
- Landlord's covenant to sell the reversion;
- Landlord's covenant to purchase tenant's fixtures;
- Tenant's covenant to pay a security deposit on execution of the lease; and
- Landlord's covenant to repay the deposit at end of the lease.
Note that although the landlord's covenant to sell the reversion does not 'touch and concern' the land, if the lease is registered, section 53(3) of the Real Property Act 1900 (NSW) provides that: "[I]n case the lessee shall pay the purchase money stipulated and otherwise observe his covenants expressed and implied in such instrument, the lessor shall be bound to execute a transfer of the said land to such lessee." The protection afforded by this section does not apply to unregistered leases.
No privity of contract or privity of estate
Where there is no privity of estate or contract between the parties, lease covenants are only enforceable if: a. the benefit of a lease covenant is expressly assigned; or b. they constitute (negative or restrictive) freehold covenants (that 'touch and concern' the land benefited by the covenant).
Assignment of lease - T assigns the lease to an assignee (A) It is a well established common law rule that A, the assignee:
- takes the benefit of all the landlord's covenants in the lease in favour of T (for example, L's covenant for quiet enjoyment); and
- is burdened by all the tenant's lease covenants
(for example, T's obligation to pay rent provided that those covenants 'touch and concern' the land (Spencer's Case (1583) 5 Co Rep 16a; 77 ER 72). This common law rule is given statutory effect by sections 70(1) and 70A(1) of the Conveyancing Act 1919 (NSW). Those sections deem covenants 'relating to any land' of a covenantee or covenantor respectively to be made not only 'on behalf of himself' but for the benefit of or on behalf of 'his successors in title'. The words 'relating to any land' are regarded as synonymous with 'touching and concerning any land' (Butt, Land Law, 3rd ed, 1996, LBC, para [15110])
Assignment of reversions - L sells the leased land to a purchaser (P)
Unlike the position in relation to assigned leases, common law did not regard either the benefit or the burden of landlords' covenants as passing to purchasers of the reversion, even though the covenants 'touched and concerned' the land. This is because the common law did not conceive of the reversion as a corporeal 'thing' to which covenants could be attached (Butt, supra, para [15115]). The common law position is remedied by sections 117 and 118, Conveyancing Act 1919 (NSW). Section 117 provides that: "Rent reserved by a lease and the benefit of every covenant or provision therein contained having reference to the subject-matter thereof and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein contained shall be annexed to and incident to, and shall go with the reversionary estate in the land... and shall be capable of being recovered, received, enforced, and taken advantage of by the person from time to time entitled, subject to the term, to the income of the...land leased. " Section 117 accordingly allows P to take the benefit of the lease covenants made by T in favour of L (for example, T's covenant to pay outgoings). Although the words 'having reference to the subject-matter' have been held to be synonymous with 'touching and concerning' the land, the words 'other condition therein contained' may go even further and apply to all conditions, regardless of whether they 'touch and concern' the land. If that interpretation is correct, the effect of section 117 is wider than that of s70(1) in relation to assignments of leases.
It is important to appreciate that, in the absence of an express provision in the contract of sale between L and P to the contrary, section 117 allows only P (and not L) to sue T for breaches of covenant, even those occurring before the assignment of the reversion. Section 118(1) provides that: "The obligation of a covenant entered into by a lessor with reference to the subject-matter of the lease shall... be annexed and incident to, and shall go with that reversionary estate...and may be taken advantage of and enforced by the person in whom the term is from time to time vested..." Section 118 accordingly renders P liable to perform covenants imposed on L in the lease (for example, the covenant of quiet enjoyment). The words 'with reference to the subject-matter of the lease' have been held to be synonymous with 'touching and concerning' the land.
Registered Torrens leases
The common law position relating to assignments of leases and reversions of registered leases over Torrens title land is affected also by certain provisions of the Real Property Act 1900 (NSW), such as: 1. section 51 which provides that on registration of a 'transfer', the transferee 'becomes subject to and liable for all and every the same requirements and liabilities to which he would have been subject and liable if named in such instrument originally as... lessee of such land...'; and 2. section 40(3) provides that a person recorded in the Register as entitled to the reversion shall be held to 'have all powers, rights and remedies to which a reversioner is by law entitled, and shall be subject to all covenants and conditions therein expressed to be performed on the part of the lessor'. This subsection appears to be the Torrens title equivalent to sections 117 and 118 of the Conveyancing Act 1919. Diane Skapinker
