when rented commercial property sales what happens to my deposit?

Why commercial rent deposits are not quite so simple

Posted: 28/08/2019

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In today's insecure commercial lettings market, it is condign increasingly mutual for landlords to accept a meaning rent eolith when granting a new lease and to enforce their rights under the rent deposit deed. This is putting the drafting and enforcement of rent deposit deeds under scrutiny. How do the parties to a hire deposit deed protect their positions when the landlord assigns the reversion to the charter? In this article, we presume that the hire deposit business relationship is in the landlord's name and that the tenant'southward involvement in the account - and the monies in it - are charged to the landlord.

What happens when:

• The landlord transfers or assigns its interest?
• The landlord grants an intermediate charter?

Transfer or assignment: new tenancies

A rent deposit human activity that relates to a "new" tenancy is a "collateral understanding" to the tenancy, as defined in section 28(1) of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Human action). Covenants contained in collateral agreements are "covenants" for the purposes of the 1995 Act.

Section 3(3) of the 1995 Deed says that, where a landlord transfers or assigns its interest, the transferee or assignee will become bound by the landlord'southward covenants whether they are covenants contained in the tenancy or in the rent deposit act (except where they are stipulated to be personal) and will become entitled to the do good of the tenant'due south covenants. This is a statutory exception to the established principle that the burden of a contract cannot be assigned. In these circumstances, the covenants contained in the rent eolith act are enforceable by and confronting the new landlord.

Transferring the charge

The charge on the rent deposit account does not fall within the definition of a "covenant" under the 1995 Human action. A charge is not a "term, condition or obligation"; it is an encumbrance on the asset that is subject to the charge and gives the landlord the right to advisable the charged property.

The fact that the do good and brunt of the rent deposit deed covenants accept transferred to the landlord'due south successor past virtue of the 1995 Act does not mean that the benefit of the charge has also been transferred. If the parties practise non take farther activity, the beneficiary of the charge may be the old landlord even though he is no longer able to enforce the covenants nether the deed.

Defining the "landlord"

If the act is personal to the named landlord, a new rent deposit deed containing a new accuse is required. A new charge will create a chargee/chargor relationship between the new landlord and the tenant. Without a new charge, although the new landlord can enforce the tenant's covenants in the human activity, it volition exist an unsecured creditor with no priority in a tenant insolvency.

The fundamental purpose of a hire deposit human activity is to protect the landlord in the example of tenant insolvency. In a worst-case scenario, a new landlord may detect that the eolith is entirely swallowed up by the creditors ranking above it, resulting in the total loss of its security.

It is common for rent deposit deeds to define the "landlord" to include successors in title, so that the tenant'south charge of its interest in the deposit account is to the electric current and all future landlords. The benefit of the accuse will automatically transfer when the landlord transfers or assigns its interest.

Release under the 1995 Act

Under section half-dozen of the 1995 Act, the outgoing landlord volition remain liable for the landlord's covenants in the rent deposit act until information technology obtains a release from the tenant.

The landlord is released if it serves observe on the tenant telling the tenant of the proposed assignment and requesting that it is released from the landlord'southward covenants and:

• the tenant does not serve a written notice objecting to the release inside four weeks of service of the landlord's notice;
• the tenant serves such a detect but the court makes a declaration that it is reasonable for the covenants to be released; or
• the tenant serves written discover consenting to the release (and withdrawing any prior find objecting to it, if applicable).

If this procedure is not followed, a landlord remains liable for the performance of the landlord covenants. However, owing to complications arising if some (only non all) tenants release the landlord, it may non exist appropriate in every case to seek such a release.

Summary

If a rent deposit deed to a "new" tenancy incorporates the landlord's successors in championship, no action needs to exist taken. Where advisable, a landlord should consider post-obit the procedure in section 8 of the 1995 Act to release its liability to the tenant.

If the deed does not incorporate successors in title, a new rent eolith deed will need to be entered into between the tenant and the landlord's successor. The covenants will be extinguished and the successor will offer new covenants.

Transfer or assignment: old tenancies

Ane of 2 dissimilar sets of rules will govern:

Sections 141 and 142 of the Law of Belongings Act 1925

If the charter and/or the rent deposit human action define covenants given in the rent eolith deed equally lease covenants, and then sections 141 and 142 of the Law of Property Act 1925 (the 1925 Act) apply. As lease covenants they are enforceable by and against the landlord's successor in championship automatically. To pass on the benefit of the charge automatically, the charge must be drafted to refer to successors in title.

Mutual police force rules

If the covenants in the rent eolith act are not lease covenants, the mutual police rules for the consignment of contractual obligations and privity of contract apply.

The benefit of a contract may be assigned. The assignment must exist absolute, in writing and signed past the assignor, and notice of the consignment must be given to the tenant.

The burdens of a contract may not be assigned. When the hire eolith human action relates to an "sometime" tenancy, the parties must create privity of contract between the new landlord and the tenant. Two methods are available:

• Assignment from one-time landlord to new landlord and deed of covenant from new landlord to tenant: The assignment can exist completed within the suite of sale documents, and the human activity of covenant can exist entered into unilaterally by the new landlord on completion. If the human activity does not comprise successors within the definition of the "landlord", the benefit of the charge will not transfer.
• Novation of the hire eolith deed: The new landlord and the tenant enter into a new rent deposit deed on identical terms to the previous act. This could be dealt with as a condition subsequent, so as not to interfere with fourth dimension pressures or confidentiality obligations relating to a sale. Consideration should exist given every bit to whether the tenant may not comply or may delay and to which political party should bear the tenant'due south costs. A prudent landlord should ensure that the tenant is in a financial position to requite the new charge earlier completing the new deed.

Grant of an intermediate lease

The 1995 Act does not apply where the landlord grants an intermediate lease of the property. The granting of a new lease is not an "assignment" and the intermediate tenant is not treated as stepping into the landlord'southward shoes.

The grant of an intermediate charter may qualify equally a disposition of the reversionary estate immediately expectant on the determination of the term of the lease to which the rent deposit human activity relates. The provisions of sections 141 and 142 of the 1925 Act may utilize as above and, if they do not, the common law rules employ.

Registration

Charges created by companies on or before 5 April 2013 had to be registered at Companies Firm within 21 days of the date of execution or they are void. If the accuse created by a rent deposit human activity is non registered, a tenant's insolvency practitioner will affirm that the accuse is void and the landlord is an unsecured creditor.

The landlord has two options:

• Debate that the charge did not require registration at Companies House.
• Enter into a new rent eolith act with the tenant.

Charges created on or afterwards vi April 2013 are non required to be registered at Companies Firm.

Conclusion

In summary, rent deposit deeds should be given advisable consideration both during the drafting process and during due diligence relating to the disposition of the landlord's involvement.

This article was first published in Estates Gazette in June 2019.

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