20
May
20
Articles, Property, Chancery & Commercial
Covenants to enforce covenants: when the landlord becomes piggy in the middle

In Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18 (6 May 2020) the Supreme Court turned its attention to a staple covenant of long leases in blocks of flats, namely the covenant by which the landlord promises, at the behest of the tenant, to enforce against another tenant some prohibition in that other tenant’s lease which is common to all the leases in the block.  Such covenants, usually relating to alterations, are often subject to a condition that the tenant who seeks enforcement must first undertake to indemnify the landlord against the costs it may incur in enforcing the provision against her or his neighbour.  The question the Supreme Court addresses in Duval is whether the landlord is permitted to relax such a prohibition in favour of one tenant, without first giving all the other tenants an opportunity to object and to require enforcement.

 

The facts

Dr Duval owned two of the nine flats at 11-13 Randolph Crescent in Maida Vale, London.  Mrs Winfield owned one of the basement flats in the same block.  The shared freehold of 11-13 was owned by the eponymous company, in which all the flat owners were shareholders.

Each of the 125-year leases contained the following express covenants: a qualified tenant’s covenant (QTC) by which the tenant promised not, without the previous written consent of the landlord, to carry out specified alterations, improvements or additions; an absolute tenant’s covenant (ATC) by which the tenant promised not to commit any waste, spoil or destruction in or on the flat; and a landlord’s covenant (LC) by which the landlord promised (a) to ensure that every lease of every other flat in the block contains covenants equivalent to the QTC and the ATC, and (b) ‘at the request of the Tenant and subject to payment by the Tenant of (and provision beforehand of security for) the costs of the Landlord on a complete indemnity basis to enforce any covenants entered into with the Landlord by a tenant of any residential unit in the Building of a similar nature to [the QTC and the ATC]’.

In 2015 Mrs Winfield asked the landlord for a licence to remove part of a load-bearing wall in her flat.  It was common ground that such works were prohibited by the ATC in her lease.  The landlord, having considered representations from Mrs Winfield’s engineer and architect, was minded to grant her a licence, thereby waiving any breach of the ATC that she might otherwise commit.  However Dr Duval, who was one of the directors of the landlord company, objected and asked the landlord to secure an undertaking from Mrs Winfield not to breach the covenant.  She (Dr Duval) also said she would indemnify the landlord for its legal costs if proceedings against her neighbour became necessary.  The landlord refused to secure any such undertaking from Mrs Winfield.

Dr Duval therefore issued a claim against the landlord seeking a declaration that the latter would be in breach of the LC in her lease if it were to waive the ATC in Mrs Winfield’s lease and permit the proposed works to proceed.

 

The decision

The district judge found in favour of Dr Duval and granted her the declaration: he held that the landlord had no power to waive the ATC or to grant a licence to Mrs Winfield without the prior consent of all the other tenants in the block.  HHJ Parfitt allowed the landlord’s appeal, but the Court of Appeal ([2018] EWCA Civ 2298 per Lewison, Newey LJJ, Sir Stephen Richards) restored the original decision, albeit on a different basis: whilst the landlord had the power to licence the works, to do so would be a breach of Dr Duval’s lease.  The LC imposed a conditional obligation on the landlord (to enforce upon provision of security), and it was necessary to imply a term that the landlord would not put it out of its power to comply with that obligation if and when Dr Duval fulfilled the condition.  By granting the licence to Mrs Winfield the landlord had rendered itself powerless to comply and thereby breached the implied term.

The landlord therefore appealed once more.  The Supreme Court unanimously dismissed the appeal, essentially for the same reasons relied on by the Court of Appeal.

The decision is interesting in two particular respects:

  • First, Lord Kitchin’s judgment shows the process by which the court interprets potentially conflicting and/or incomplete provisions in a professionally drafted contract such as a lease. It considers the individual express terms, set against the background facts and seen within the commercial context of the lease as a whole.  In relation to the QTC and the ATC, the Supreme Court adopted an essentially purposive approach, finding that – despite a degree of overlap in their language – the two covenants had been intended to cover mutually exclusive kinds of activities: the QTC applied to essentially routine improvements, for which the tenant could reasonably expect to obtain the consent of the landlord; whereas the ATC applied to works in the nature of waste that intrinsically might be damaging to or destructive of the building as a whole, and for which no consent should be expected.  The judgment also shows the court applying its own earlier decision in Marks & Spencer v BNP Paribas [2015] UKSC 72, emphasising that it is only once the process of construing express terms is complete, and only when that process exposes a gap in the agreement that requires filling, that the issue of an implied terms falls to be considered.
  • Secondly, the decision has troublesome practical implications for landlords of residential blocks of flats that are subject to these kinds of leases – particularly those landlords who, as in Duval, are companies owned by the tenants themselves. Where the tenants share the freehold between them, they will have a vested interest in ensuring that the landlord deals proportionately and fairly with requests for permission to carry out major works: it might be their turn next.  How are such landlords to respond to a request from a tenant to license works that, whilst prohibited by an absolute covenant in the tenant’s lease, in their judgment do not threaten the structural integrity of the block and otherwise appear to be safe and reasonable?  Some will presumably feel they have to adopt a blanket policy of withholding a licence in all cases, for fear of provoking action by a disgruntled tenant.  But that will be to the detriment of the tenants as a whole.  Others, more pragmatically, will send every tenant a written notice of intention to license, explaining why the works are deemed safe, and inviting any objecting tenant to explain the basis of their objection, and to furnish evidence of their ability to provide security for an undertaking to indemnify the landlord for its costs of enforcing the ATC.  The least risk-averse may conclude that the threat posed by a tenant like Dr Duval is more apparent than real, and proceed to grant the licence anyway.  They may calculate that if the works in question really do pose no threat to the integrity of the block, then the worst that can happen is that the objecting tenant will sue them for having breached the implied promise not to render themselves powerless to enforce the ATC, and will recover, at best, only minimal damages when it is proved that the breach has caused them no loss beyond the temporary inconvenience of living in the vicinity of unwanted building works.
Written by or involving: Justin Althaus

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