Covenants Running with Interests in Land held under LandlordTenant Relationships

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CovenantsRunning withInterests in Land held
under Landlord-TenantRelationships
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Either L or T (or both) may assign or (in the
case of the T) sublet their interests to
successors. Consider who has the burden and who
has the benefit of the following covenants....
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(Benefit)
(Burden)
Landlord Tenant
T2
L2
Tenant shall paint the premises every five
years.
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(Burden)
(Benefit)
Landlord Tenant
T2
L2
Tenant shall have the right to use Landlords
equipment for painting.
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(Burden)
(Benefit)
Landlord Tenant
T2
L2
Landlord shall paint the interior of the
premises every two years.
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Usually the benefitted and burdened interests
are... Landlord Tenant Rents
Leasehold reversion estate But not
always!
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Lease clause T shall not build any structure
higher than two stories on the leased premises.
Landlords adjacent hotel (not leased)
Thruston v. Minke
Leased premises
Hotel

• L assigns Ls rents and reversion interests to
  a new landlord.
• T builds a building higher than two stories.
• Who can enforce the covenant against T?

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Now its time to talk about covenants running
with land.

• This means that someone who wasnt a party to the
  original covenant might be (1) liable on it, or
  (2) able to enforce it.

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Lease
L1 T1
Assignment of Leasehold Estate
Sale of rents and reversion
Covenant by Tenant to pay rent
Covenant by Landlord to repair.
L2
T2

• Both landlords and tenants might transfer their
  interests. Are their successors...
• Able (as plaintiff) to enforce the covenants
  made by the original party? (Does the benefit
  run?)
• Liable (as defendant) for performance of the
  covenants made by the original party? (Does the
  burden run?)

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How can a plaintiff have a benefitted interest in
land?

• 1. The plaintiff was the original party
  benefitted by the covenant or
• 2. The plaintiff acquired the land after the
  covenant was entered into, and the benefit was
  expressly assigned to the plaintiff or
• 3. The plaintiff acquired the land after the
  covenant was entered into, and the benefit of the
  covenant ran with the interest the plaintiff
  acquired.

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How can a defendant have a burdened interest in
land?

• 1. The defendant was the original party obligated
  under the covenant.
• 2. The defendant acquired the land after the
  covenant was entered into, and expressly assumed
  liability under it.
• 3. The defendant acquired the land after the
  covenant was entered into, and the burden of the
  covenant ran with the interest the defendant
  acquired.

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Despite the conventional terminology, covenants
dont run with land! Thats too vague.

• Instead...

• The benefit or the burden of a covenant (or both)
  can run with...
• A specific interest (either an estate
  possessory or a non-estate) in land that
  someone owns.

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What happens if the burden or benefit runs?

• If the burden runs, the new owner of the interest
  it runs with will be personally liable to perform
  the covenant (as a defendant).
• If the benefit runs, the new owner of the
  interest it runs with will have standing to
  enforce the covenant (as a plaintiff).

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To have a successful action on a covenant we must
have both

• A defendant who is personally liable on the
  burden, and
• A plaintiff who has standing to enforce the
  benefit.
• In other words, a defendant with a burdened
  interest in the land and a plaintiff with a
  benefitted interest in the land.

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Lease
L1 T1
Sale of rents and reversion
Covenant by Tenant to pay rent
Assignment
L2
T2

• Which aspect (burden or benefit) must be shown to
  run with what interest in the land ....

• If L1 sues T1?
• If L1 sues T2?
• If L2 sues T1?
• If L2 sues T2?

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Three tests which must be met for a covenants
burden or benefit to run with an interest in land

• Intended to run (usually presumed if not spelled
  out in the covenant).
• Touches and concerns the land.
• Privity of estate (a chain of both horizontal
  and vertical privity)
• horizontal privity is required only in order to
  make the burden run. (The benefit will run even
  without horiz. privity, if theres vertical
  privity.)
• the privity requirement only applies at law
  (i.e., in an action for damages). Privity isnt
  necessary for the covenant to run in an
  injunction action.

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Definitions of privity of estate

• Horizontal privity
• A relationship that exists (or doesnt exist) at
  the time the covenants are entered into.
• The landlord-tenant relationship always qualifies
  as horizontal privity. So in a lease, there is
  always horizontal privity.
• (Well learn some additional definitions of
  horizontal privity in the fee simple covenant
  section).

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Definitions of privity of estate

• Vertical privity
• A relationship between an original party to the
  covenants and a transferee from that party.
• Vertical privity is satisfied only if the entire
  estate of a party is transferred to a new party.
• Hence (on the Tenants side of the relationship)
  vertical privity exists only with an assignment,
  not a sublease.

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Lease
L T1
Contract

• In the original lease
• L and T1 have both privity of estate and
  privity of contract.
• Privity of estate (horizontal) means T1 and L
  have a direct landlord-tenant relationship.
• Privity of contract means T1 and L entered into
  a contract together.

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After an Assignment
Lease
L T1
Assign- ment
Contract

• Privity of contract still exists
• between L and T1.
• Privity of estate (horizontal) still exists
  between L and T1.
• Theres also privity of estate (vertical) between
  T1 and T2.
• Thus, theres a chain of estate privity between L
  and T2.
• But theres no privity of contract between L and
  T2.

T2
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After aSublease
Lease
L T1
Contract
Sub-lease
T2

• Both kinds of privity still exist between
• L and T1.
• Theres no privity of estate (vertical) between
  T1 and T2 (since T2 doesnt have the full estate
  that T1 had).
• Hence, theres no chain of privity of estate
  between L and T2.
• Theres also no privity of contract between L and
  T2.

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Lets consider the tenants covenant to pay
rent...
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After an assignment, who is liable to L for rent?

• T1 on what theory?
• (privity of contract)
• T2 on what theory?
• (privity of estate, a chain of horizontal and
  vertical combined)
• But of course, L is not allowed double recovery.

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lease
Landlord Tenant 1
Covenants
Assign- ment
In an assignment, the burden of the covenant to
pay rent runs with the tenants estate to T2.
Tenant 2
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After a sublease, who is liable to L for rent?
T1 on what theory? ?(Privity of contract) T2
why not liable? Could any conduct by T2 make T2
liable for rent? ?(An assumption by T2)
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Abbott Thompson
Implied assignment?
Written assignment
Bobs U-Drive
Contin- ental
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Some questions about this transaction

• What is the covenant in dispute?
• Who had the original benefit and burden of it?
• What aspect is now alleged to run to Continental?

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Did Continental...

• Assume the lease covenants?
• Take an express assignment?
• Take an implied assignment?
• (How did the court know it was an assignment and
  not a sublease?)
• Does the S/F require a writing?

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Tests of touch and concern

• Legal interests as owner made more or less
  valuable?
• Promises intimately bound up with the land?
• Would average person assume covenant runs?

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Is T1 discharged if...

• L is asked to consent to the assignment?
• L actually consents?
• T2 takes possession?
• T2 assumes T1's covenants?
• L releases T1?

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Is the court correct? (last paragraph on p. 642)
that unless it imposes this covenant on
Continental... a lessee, through the formation
of a corporation, could enjoy the benefits of a
lease and at the same time insulate himself from
liability on the covenants contained in it.
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In a landlord-tenant relationship, are the
burdened parties still burdened after they assign
their interests?

• If T1 assigns to T2, does T1 remain liable for
  breaches of tenant covenants by T2?
• Yes, definitely.
• If L1 assigns to L2, does L1 remain liable for
  breaches of landlord covenants by L2?
• Probably so, but cases are inconsistent.

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In a landlord-tenant relationship, do benefitted
parties still have the benefit of covenants after
they assign their interests?

• If T1 assigns to T2, can T1 still enforce
  covenants made by L?
• If L1 assigns to L2, can L1 still enforce
  covenants made by T?
• Answer (to both questions) probably not. (Do you
  see why?)

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Summary

• In a landlord-tenant relationship, parties who
  assign
• Still have the burdens of their covenants.
  (Although cases on landlord assignments are
  inconsistent.)
• But can no longer enforce the benefits of their
  covenants (unless they can show some legitimate
  need to do so).

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On fee simple land, former owners no longer even
have burdens!

• If you sell your house, youre off the hook for
  breaches of covenants by the new owner.
• Is this a sensible rule? Why?

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Now some issues with touching and concerning
the land.
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Holmes, J., in Norcrossv. James (Mass. 1885)
The grantor of a deed covenanted not to operate a
quarry on the nearby land he retained.
Held The covenant against operating a quarry on
adjacent land does not touch and concern the
benefitted land because (i)t does not make the
use or occupation of (the dominant estate) more
convenient. It does not in any way affect the use
or occupation it simply tends indirectly to
increase its value, by excluding a competitor
from the market for its products.
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Do these covenants touch and concern?

• T (of a dairy) promises to maintain creamery
  route customers.
• T (of a gas station) promises to buy all gasoline
  products from L (an oil co.).
• T promises never to operate a grocery store on
  premises. (L owns a nearby grocery store.)

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Implicit in Holmes opinion is the idea that...

• If the benefit doesnt touch and concern the
  benefitted estate (and hence would not run with
  it),
• then the burden wont run with the burdened
  estate either.

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The same principle (touch and concern) applies
to the running of benefits.

• Can an assignee of a lease enforce
• A landlords obligation to make repairs on the
  premises?
• A landlords promise not to operate a business
  that competes with tenant?
• An option to renew or extend the lease?
• Yes, held 718 Associates, Ltd. v. Sunwest N.O.P.,
  Inc. (Tex.App.1999)

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Should the touch and concern test be
abandoned? Should all covenants in leases be
held to run with the respective interests of L
and T?
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Note 3, p. 645
Lease
Burroughs Blanchard
Burton (L)
Deed (Assmt)
Forest Land (Chesapeake)
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The covenant by T to insure

• Forest Land did not assume the covenant.
• Did the covenant touch and concern the land? Why
  not?
• Could the covenant TC if it were reworded?

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Would the covenant touch and concern if...

• It required L to use the insurance funds to
  restore the damage?
• Would L want to so covenant?
• What if the obligation to pay insurance premiums
  were styled additional rent?

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Note 5, p. 647
(Burden)
(Benefit)
Landlord Tenant
L2

• Covenant L shall refund Ts deposit when lease
  terminates, if there has been no breach by T.
• Who is liable to refund the deposit after an
  assignment by L?

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Lease
Gerber
Pecht
(Plaintiff)
Assign. Assumpt?
Christensens defaulted Gerber sued Pecht the
assignees for the rent.
Moskowitz
Assign. Assumpt.
Christensens
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Gerber (L) sues Pecht (T1) for rent.

• Is Pecht still liable for rent after assigning?
  Why?
• Is T2 (Moskowitz) also personally liable for the
  rent? Why?
• How about T3 (Christensens)?
• Must L attempt to recover first from T1 (Pecht)
  or T2 (Moskowitz)?

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Why is T3 liable?

• T3 assumed the tenants burdens under the lease.
  (They also have the full tenants estate, and
  thus vertical privity.)
• Can L require T2 or T3 to assume? Whats Ls
  leverage?
• Is that a commercially reasonable condition
  (under Kendall)?
• Can it be made automatic? (Any assignee is
  deemed to have assumed.)

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How can Pecht get off the hook?

• Express release by L.
• A modification in the lease between T2 and L,
  provided
• it makes the tenants duties more burdensome, and
• its not authorized in the lease itself.
• A novation.

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Since T1 is a surety...

• If L recovers back rent from T1, what can T1 do?
• (T1 can also sue T3 to force T3 to pay the back
  rent.)
• If L recovers back rent from T3, what can T3 do?

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Heres a short review of what weve learned about
liability after a tenants assignment.
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Is T2 liable for covenants in the lease?
Lease
L T1

• T2 is liable if
• T2 assumed or
• T2 took an assignment and the covenant TCs.
• T1 is a surety because T1's personal liability
  continues

Assigmt
T2
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If T2 reassigns

• T3 becomes liable if T3 assumes or if the
  covenant TCs.
• T1 remains liable
• T2 is liable for defaults accruing before the
  reassignment
• T2 is not liable for default accruing after the
  assignment unless T2 assumed.

Lease
L T1
Assigmt
T2
Assigmt
T3
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If T3 is primarily liable...
Lease

• T1 is a surety
• (based on T1's contractual liability)
• T2 is a surety if...
• T2 assumed.
• Otherwise, T2 no longer has personal liability at
  all, since T2 no longer has the estate with which
  liability runs.

L T1
Assigmt
T2
Assigmt
T3
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Summary

• A tenant can be personally liable on either of
  two theories

• The tenant has contractually assumed the lease
  covenant in question, and hasnt been released.
• The tenant has taken (and still has) an
  assignment (not a sublease), and the burden of
  the covenant Touches Concerns the estate in
  land.
• (Which one lasts longer?) (see note 3, p. 610)

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Which is better for the landlord?

• a covenant that runs with the land or
• a covenant that the assignee or subtenant
  expressly assumes?
• How does the L make sure that an assumption
  actually occurs?

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? Kimko proposes to lease space to Schnucks (a
grocery chain). ? Tippecanoe seeks declaratory
order that this would violate the lease
covenant. ? Tippecanoes owners also own several
nearby grocery stores.
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Lets analyze the covenant

• Who had the benefit?
• Who had the burden?
• What interest in what land was benefitted?
• Is there now any practical harm to that interest
  from a violation of the covenant?
• Should the court enjoin the violation?

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Should burdens run with subleases in equity
even though theres no vertical privity?

• Assume lease states T shall not operate a grocery
  store (and assume this covenant TCs).
• T subleases to T2.
• Should a court enjoin T2 from operating a grocery?

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Can a subtenant enforce

• A landlords implied covenant of quiet enjoyment?
• A residential landlords implied warranty of
  habitability?

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Assume T1 assigns in return for T2's promise to
pay all the rent directly to L, and in addition,
to pay T1 200 per month.

• If the lease is terminated later (e.g., by fire),
  is T1 still entitled to the 200/month?

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Lease
L T1
Sublease

• Assume that a sublease provides that T2 will pay
  rent to T1, and T1 will continue to pay rent to
  L.
• How can T2 be assured that T1 will pay?
• Payment escrow
• Notification clause
• Nondisturbance agreement

T2
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The end