October 26th, 2012 / Insight posted in

Watching for the postman

AA writes: I have agreed terms to sell my retail business on retirement. Five leases will be assigned to the buyer, a limited company supported by directors´ guarantees. The leases, in my name, have between five and 15 years to run. The rentals total about £250,000 a year. I am insisting that the buyer funds an insurance policy at the outset to protect me against potential liability after I have assigned the lease under the “privity of contract” rules for leases. However, the deal seems likely to founder because no protection seems available for longer than a year at a time. Do you know of any practical alternatives that would allow me to retire without watching for the postman each day for the next 15 years?

In the case of leases granted before January 1, 1996, there is little protection available to original tenants, writes Michael Snyder, senior partner of Kingston Smith. The original tenant is liable under the privity-of-contract doctrine in respect of all the covenants contained in a lease during the entire term. You can obtain an indemnity from the incoming tenant against future breaches of covenant. But in practice such an indemnity would be worthless if the incoming tenant was insolvent at the time of the breach. The Landlord and Tenant (Covenants) Act 1995 abolished the concept of privity of contract, so the original tenant’s position is markedly different for leases granted from January 1, 1996. If you were granted a lease on or after this date, your liability as the original tenant for breaches of the terms is automatically released on assignment. But the landlord can require you to enter into an authorised guarantee agreement by which the incoming tenant pledges to abide by the covenants. In practice, you only have one chance to be satisfied that any purchasers and their sale indemnities are worth anything. Insuring this risk (if possible) is likely to be prohibitively expensive. If you have real doubts, it may be better to find a new purchaser.