PRIVITY OF CONTRACT AND ESTATE

Note:

While appreciating the concepts in this module, students should be on a special lookout for
the following themes, in addition to the general discussion surrounding privity of contract and
estate.

 Nature, extent and duration of liability under contract

 Enforcement of original parties obligations
 Covenants enforceable by the landlord and tenant and their successors
 Duration of liability

Introduction

This topic is mostly concerned with the running of covenants in leases and of guarantees
given as security for the performance of such covenants. A covenant is a promise under seal,
i.e. contained in a deed. Such a promise is enforceable, according to the ordinary law of
contract, between the persons who are parties to it or their personal representatives. But
certain kinds of covenants are so much part of the system of transactions in land that they are
enforceable in cases which the law of contract does not cover: they partake, so to speak, of
the nature of the estates in connection with which they are made, so that like those estates
they may benefit and bind third parties.

Therefore they belong to the category of interests in land as well as to the law of contract, and
two sets of rules have to be considered together. Common examples of these kinds of
covenants are covenants in a lease, e.g. to repair, and restrictive covenants taken on a sale so
as to bind the purchaser and future occupiers of the land, e.g. not to carry on a business on the
property sold. The rules which govern such covenants also apply, in general, to contractual
promises not made under seal, such as ‘‘covenants’’ contained in a mere agreement for a
lease. The primary question is how far are covenants made in connection with transactions in
land enforceable outside the law of contract. The three fundamental principles are as follows.

1. If there is privity of contract, all covenants are enforceable.

There is said to be privity of contract when the parties are in direct contractual relations, i.e.
bound to one another by the ordinary law of contract. Clearly, if two people have agreed to
do or not to do certain things, their obligations bind them whether their contract has anything
to do with land or not. Should a party to a contract die, that party’s estate (acting through the
deceased’s personal representatives) may enforce, and be bound by, the liability conferred by
the contract; and in general the benefit, but not the burden, of the contract is assignable, so
that assignees of the benefit can sue the original promisor or his personal representatives
without resort to the law of property. A covenant can be enforced both at law, by an action
for damages, and in equity, by an injunction or specific performance.

2. If there is privity of estate, but not privity of contract, only covenants which touch and
concern the land are enforceable.

Privity of estate means that the relationship of landlord and tenant exists between the parties
or, in other words, that there is a relationship of tenure; cases in this category are thus
confined to leases and tenancies. If L1 grants a lease to T1 and then T1 assigns it to T2, there
is no privity of contract between L1 and T2 since there is no contract between them. However,
there is privity of estate, for T2 has become L1’s tenant by acquiring the estate which L1
created and which is held of L1 as the immediate landlord. Similarly, if L1 assigns his
reversion to L2, there is privity of estate between L2 and T2. In such cases any covenants in
the lease which ‘‘touch and concern’’ the land (e.g. repairing covenants) are enforceable both
at law and in equity. They have become ‘‘imprinted on’’ the estate.

Covenants which do not relate to the land are not enforceable under this head, for they have
nothing to do with the relationship of landlord and tenant on which this right to enforce
covenants against third parties is founded. Nor do all covenants in leases ‘‘touch and
concern’’ the land for this purpose, even though they may relate to the land in a general sense.
For example, an option to purchase the freehold is not a covenant which ‘‘touches and
concerns’’ the land, though it may bind an assignee as an estate contract. Here we are outside
the bounds of the law of contract, and the law of property as usual sets limits to the kinds of
interests which can be made to bind all comers.

3. If there is privity neither of contract nor of estate, then with two exceptions, no covenants
are enforceable.

There is privity neither of contract nor of estate between a landlord and a sub-tenant, or
between the vendor of freehold land and a person who buys it from the purchaser. In such
cases the general rule is that covenants are not enforceable between the parties mentioned.
But there are two important exceptions to this rule.
First, even the common law allowed the benefit of a covenant (i.e. the right to sue on it) to be
assigned with the land for the benefit of which it was made, provided that the covenant was
one which ‘‘touched and concerned’’ that land. One example already mentioned is that of a
grantor’s covenants for title in a conveyance: the benefit of these covenants runs with the
land conveyed so that whoever is entitled to the land is entitled to their benefit. Equity went
further, and enforced assignments of the benefit of contracts generally, whether or not
connected with land; and there is now a statutory procedure for assignment which takes effect
at law. Thus it has become the general rule that the benefit of a contract is assignable. But the
burden of a contract (i.e. the liability to be sued on it) has never been assignable by itself:
assignment applies only to rights, not to duties.

Secondly, equity allows the transmission of both the benefit and the burden of restrictive
covenants. A restrictive covenant is a covenant imposing a negative obligation (e.g. not to
build) as opposed to a positive covenant (e.g. to build); and the benefit and burden of a
restrictive covenant can run in equity provided that there is both land which is benefited and
land which is burdened. As usual, however, in cases where the doctrine of notice is still
relevant, a purchaser of a legal estate without notice takes free from the burden.

PART 1: PRIVITY OF CONTRACT

1. Liability of the original tenant throughout the term

(a) Liability notwithstanding assignment. Where a lease is granted by L1 (the original

landlord) to T1 (the original tenant), there is privity of contract between them. In principle,
this means that, where the lease is granted before 1996, L1 may enforce all the covenants in
the lease against T1 throughout the term, provided that L1 retains the reversion. Subject to
statutory exceptions, T1’s liability continues notwithstanding any assignment of the lease by
him to T2. T1 cannot divest himself of his personal contractual liability by parting with the
land; and L1 may sue T1 for unpaid rent, or for damages if a covenant e.g. to repair is not
observed by T2. T1 cannot defend an action by L1 on the basis that T2 is also be liable to L1
(by reason of privity of estate) and that L1 should therefore pursue his remedy against T2.

(b) Extensions of the term. The term of a lease may be extended where the tenant exercises an
option for renewal contained in the lease, or where the tenant holds over pursuant to a
statutory right to do so. Where T1 has assigned the lease before it is extended, he will not be
liable for breaches of covenant committed by T2 during any such extension unless and to the
extent that he has undertaken that liability. Where T2 exercises an option for renewal, this
will normally involve the grant of a new lease under which T1 will not be liable. But T1’s
liability may continue where the effect of renewal is that the old lease is merely extended
under its own terms.

(c) Liability to the assignee of the reversion (L2).

At common law, the benefit of a covenant did not pass on an assignment of L1’s reversion to
L2. Therefore L2 could sue T1 neither for his own breaches nor for those of T2. It was
thereby considered to create privity of contract between those who had privity of estate.
Despite some decisions to the contrary, it became established that T1 was liable to L2 for
breaches of covenant committed by T2, because L1’s privity of contract passed on
assignment to L2 under statute.

2. Liability of the original landlord (L1) throughout the term.

On principles similar to those explained above, L1 remains liable on his covenants for the
whole term, notwithstanding any assignment of the reversion to L2. Furthermore L1 is liable
not only for his own breaches of covenant, but for those committed by L2. It has been
suggested that, in such circumstances, L1’s liability can be enforced by T2 if T1 has assigned
the lease to him. This way, the burden of covenants in the lease passes on an assignment of
the reversion.

3. Liability of an assignee (T2) on a direct covenant.

It is explained below that an assignee of a lease is liable only for breaches of covenant
committed while the lease is vested in him. Commonly, however, a lease can be assigned
only with the landlord’s consent. It is now usual in commercial leases for L1 to require T2 to
enter into a direct covenant with him to observe all the terms of the lease as a condition of
L1’s licence to assign. In the absence of contrary provision, T2’s liability to L1 on this direct
covenant will not be confined to the period that the lease is vested in him but will continue
until it expires. This will be so even though T2’s covenant is not made specifically for the
residue of the term.

PART TWO: PRIVITY OF ESTATE

1. The meaning of ‘‘touching and concerning’’.

The rights and liabilities of assignees, either of the lease or of the reversion, depend upon two
things: whether there is privity of estate between the claimant and the defendant, and whether
the covenant sought to be enforced ‘‘touches and concerns the land’ or, to use the modern
statutory phraseology, ‘‘has reference to the subject-matter of the lease’’. ‘‘Generations of
conveyancers and law students have been familiar with these phrases and with writers’ lists
of covenants held by courts to be on or other side of the line.’’ The two phrases are technical
expressions which bear the same meaning, and refer to the limited class of covenants which
can be made to bind third parties so that the right to enforce them is a proprietary interest as
well as a merely contractual right. A covenant which does not ‘‘touch and concern’’ the land
cannot run with the land by reason of privity of estate.

PART THREE: DURATION OF LIABILITY

The original tenant, T1, is liable for all breaches of covenant throughout the term of the lease,
even after assignment, because there is still privity of contract with the landlord. But, in the
absence of a direct covenant with the landlord, an assignee is liable only for breaches of
covenant committed while the lease is vested in him, for privity of estate exists only while the
assignee holds the estate. An assignee is under no liability for breaches committed before the
lease was assigned to him unless they are continuing breaches (as of a covenant to repair),
nor is he liable for breaches committed after he has assigned the lease. But if a covenant is
broken while the lease is vested in him, his liability for this breach continues despite any
assignment. Thus while the original tenant of an onerous lease cannot divest himself of
liability for future breaches, a subsequent tenant can do so by assigning the lease. For this
reason, it has become the usual practice in business leases to require an incoming assignee to
enter into a direct covenant with the landlord, undertaking to observe all the covenants and
conditions in the lease for the duration of the term.

PART FOUR: PRIVITY NEITHER OF ESTATE NOR CONTRACT (RESTRICTIVE

COVENANTS)

1. The Position at Common Law

London County Council v Allen and Others [1914] 3 KB 642

Facts
The owner of a piece of land applied to London County Council under the London Building
Act 1894, section 7 for the grant of a new street on the land that they owned. London County
Council accepted this on the basis that the owner agreed not to build on a plot of land which
would have been situated at the end of the street, to which the land owner agreed. The
Council did not own any of the lands for which they imposed the covenant. The land owner
subsequently sold the plot of land to the defendant who proceeded to build houses on the plot
without the consent of the Council, despite having notice of the restrictive covenant on the
land. The Council brought proceedings against the defendant for breaking the term within the
covenant.

Issue

The key issue for the court to assess in this case was whether the Council could enforce the
restrictive covenant which would prevent the defendant from building houses upon the land
that had been purchased.

Held

The Council was not entitled to enforce the restrictive covenant against the defendant who
wished to build on the land. The Council did not own any of the land affected by the
covenant and therefore was not considered to receive the benefit from the covenant.
Therefore the defendant could not be bound in equity or by law by the covenant. Kennedy LJ
did note however that he was ‘not at all favourably impressed with her [the defendant]
conduct as a good citizen’.

2. The Position at Equity

Tulk v Moxhay [1848] 41 ER 1143

Facts

The claimant, Tulk, owned several properties in Leicester Square. He subsequently sold the
land to Mr. Elms. Elms covenanted in the conveyance, for himself, his heirs, and assigns that
he would ‘keep and maintain the said piece of ground… uncovered with any buildings, in
neat and ornamental order’. The land was later sold by Elms to Moxhay. The conveyance
itself did not state the covenant but Moxhay was aware of its existence. Moxhay intended to
build on the land.
Issue

Whether the restrictive covenant applied to the defendant

Held

Court held that it is not possible for the burden to run at law. It can run in land through equity.
In order for the burden of restrictive covenants to run with the land four conditions must be
fulfilled before the obligation to observe the burden of a restrictive covenant will pass to a
successor in title to the servient land:

a) The covenant must be negative in substance;

The test is that the observance of the covenant must not need expenditure on the part of the
servient owner.

b) The covenant must, at the date of the covenant, be made to benefit the dominant land
retained by the covenantee;

Restrictive covenant cannot exist ‘in gross’, that is, independently of dominant land. For the
burden of a restrictive covenant to run with the servient land there must be a dominant
tenement at the date of the covenant.

c) The covenant must touch and concern the dominant land;

That is, it must benefit the dominant land. The land benefiting from the covenant must be
sufficiently near to the servient land. This is simply to ensure that the restriction on the
servient land does benefit from the dominant land. The real point is that the covenant must
not be personal.

d) The covenant must be made with intent to burden the servient land.