Duval: granting permission for alterations and other works

On Thursday morning, the Supreme Court handed down its long awaited decision in Duval v 11-13 Randolph Crescent Limited [2020] UKSC 18.

The appeal, which was heard back on 10 October 2019, concerns whether or not a landlord is entitled to grant a licence to a lessee to carry out works which would otherwise be a breach of covenant and, if the landlord does so, whether he would himself breach the lease.

I appreciate it all sounds a little convoluted and hard going.  However, this is an important issue which I’m sure that landlords and management companies (and their agents) will find themselves dealing with on a frequent basis.  So although this doesn’t, at first blush, sound the most exciting of blogs, please persevere …

 

Terms of the leases

The block in question comprise nine flats in Maida Vale.  11-13 Randolph Crescent Limited own the freehold interest.  Interestingly, all shares in the freehold company are owned by the lessees of the flats.

Each of the leases contain the usual covenants in relation to what’s demised (and what isn’t).

Each of the leases also contain obligations which each lessee is required to abide by.  These include covenants relating to alterations, improvements and additions, and also covenants relating to waste or destruction.

For these purposes, I have set out the relevant clauses.

Clause 2.6 is concerned with alterations, improvements and additions, and reads as follows:

“Not without the previous written consent of the Landlord to erect any structure, pipe, partition, wire or post upon the Demised Premises nor make or suffer to be made any alteration or improvement in or addition to the Demised Premises.”

This is, therefore, a qualified covenant and by virtue of section 19(2) of the Landlord and Tenant Act 1927, consent should not be unreasonably withheld.

Clause 2.7 is entitled “Waste” and reads as follows:

“Not to commit or permit or suffer any waste, spoil or destruction in or upon the Demised Premises nor cut maim or injure or suffer to be cut, maimed or injured any roof, wall or ceiling within or enclosing the Demised Premises or any sewers, drains, pipes, radiators, ventilators, wires and cables therein and not to obstruct but leave accessible at all times all casings or coverings of Conduits serving the Demised Premises and other parts of the Building.”

In contrast to clause 2.6, this is an absolute covenant.  It is not, therefore, qualified by reference to the landlord’s consent.

Although everyone accepted that, as between the landlord and lessee, the landlord “has the power to licence what would otherwise be a breach of this covenant”, the question was whether in doing so the landlord itself would be in breach of its covenants in the lease.

In particular, clause 3.19 reads as follows:

… every lease of a residential unit in the Building hereafter granted by the Landlord at a premium shall contain regulations to be observed by the tenant thereof in similar terms to those contained in the Fifth Schedule hereto and also covenants of a similar nature to those contained in clauses 2 and 3 of this Lease AND 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 those contained in clause 2 of this Lease.”

 

What happened in Duval?

In the spring of 2015, the lessee of Flat 13RC asked for permission to carry out various works, including the removal of a substantial part of a load-bearing wall at basement level.

After some to-ing and fro-ing, permission was given.

This then prompted Dr Duval (lessee of Flats 11G and 11H) to issue these proceedings.  In these proceedings Dr Duval sought, amongst other things, a declaration that the landlord did not have the power to permit the lessee of Flat 13RC to act in breach of clause 2.7 of her lease.

In the County Court trial, the Deputy District Judge agreed that the landlord had no power to waive any of the covenants in clause 2 without the prior consent of all lessees of the flats in the building.

This was appealed.

On appeal, the Judge found the landlord had power to licence works that would otherwise amount to a breach of clause 2.7 and that, once licensed, such works could not be the subject of enforcement action pursuant to clause 3.19.

Dr Duval appealed this.

My earlier blog (available here) deals with the decision of the Court of Appeal, which was handed down in October 2018.

The Court of Appeal said that the landlord had made two promises in clause 3.19, as follows:

  1. A promise that every lease of a residential unit in the building would contain covenants similar to those in clauses 2.7 and 3.19; and
  2. A promise to enforce the covenants at the request and expense of a lessee.

The Court of Appeal went on to say that if the landlord were to grant a lessee a licence to do something that would otherwise be a breach of any of its absolute covenants, it (i.e. the landlord) would be committing a breach of its agreement with the lessee of every other flat in the building who enjoyed the benefit of clause 3.19.

The landlord appealed.

 

Decision of the Supreme Court

The landlord argued that the Court of Appeal has failed to properly construe the terms of the leases in their context and had ended up with a commercially unworkable scheme.

Dr Duval disagreed.  She argued that clause 3.19 precluded the landlord from granting a licence to any lessee to do anything that would otherwise amount to a breach of an absolute covenant in that lessee’s lease, including clause 2.7.

In deciding this matter, the Supreme Court recognised that each lease is a long term contract.  The term in these leases was 125 years.

They also recognised that, during the lifetime of the lease, it would be inevitably be necessary for work to be carried out to the flats.  These works would include routine repair and maintenance.  But could also include refurbishment and modernisation.

Interestingly, they also recognised the “important and active” role the landlord would play in managing the building and fulfilling its obligations.

The Supreme Court looked at clauses 2.6 and 2.7.  They thought that clause 2.6 concerned “routine improvements and alterations by a lessee to his or her flat“. By contrast, they thought clause 2.7 was “directed at activities in the nature of waste, spoil or destruction which go beyond routine alterations and improvements and are intrinsically such that they may be damaging to or destructive of the building”.

They went on to look at the other restrictions on the landlord’s ability to licence a lessee to make alterations:

  1. Each lessee enjoys the benefit of a covenant for quiet enjoyment;
  2. The landlord cannot derogate from its grant.  As the Court put it: “were the landlord to permit a neighbouring lessee to cut into a load bearing wall in such a way as to remove or substantially interfere with the support it offered to either of Dr Duval’s flats, it would…. constitute a clear derogation from grant“;
  3. Each of the lessees is entitled to be protected against nuisance; and
  4. Landlord has covenanted with the lessee in the terms of clause 3 of the lease.

Before turning to look at what clause 3.19 meant.

They agreed with the Court of Appeal that clause 3.19 has two parts:

  1. A promise by the landlord that every lease in the building will contain covenants of a similar nature to those in clauses 2 and 3.  And also similar to clause 3.19; and
  2. A promise by the landlord that it will (at the request of the lessee and subject to the provision of the required security and promise to pay landlord’s costs) enforce any covenant entered into by another lessee.

As argued by Dr Duval, clause 3.19 “provides a practical way of ensuring that all lessees know the principles and rules upon which the building will be operated and occupied“.

So, with that in mind, can the landlord licence, at the request of the lessee, structural work which falls within the scope of clause 2.7 (which without a licence would amount to a breach on the part of the lessee)?

Although clause 3.19 doesn’t expressly exclude the landlord from giving permission, the Supreme Court considered whether this was nevertheless implicit in clause 3.19.  As Dr Duval argued “where two persons have entered into a contract, the performance of which on both sides is to extend over a period of time, each contracting parties bound to abstain from doing anything which will prevent him from fulfilling the obligations he has undertaken to discharge“.  And “where one party has undertaken a contingent obligation, he will do nothing to prevent the contingency from occurring, or from putting it out of his power to comply with the obligation when the contingency arises”.

And the Supreme Court agreed with Dr Duval, saying:

“The purpose of the covenants in clauses 2 and 3.19 is primarily to provide protection to all lessees of the flats in the building.  Each of those lessees would have known the every other lessee was and would continue to be subject to the same.. obligation and, in particular, to the qualified covenant in clause 2.6 and the absolute covenant in clause 2.7.  Each lessee would also have know that, under clause 3.19, the landlord would…. enforce those obligations.  Clause 3.19 would therefore have been understood by every lessee to perform an important protective function“.

The impact of this is that a landlord is obliged by the second part of clause 3.19 to take enforcement action against a lessee in breach.  So it follows that a landlord cannot licence activity that would otherwise be a breach of covenant on the part of the offending lessee.

 

Commentary

Although this case concerns alterations and the removal of a large chunk of load-bearing wall, *most* leases contain a mixture of qualified covenants and absolute covenants.  Alterations are one example.  Others might include the keeping of pets, subletting, floor coverings and many more.

The decision has potentially wide impact on how blocks are managed.

If a covenant is an absolute covenant, no matter how trivial it might be, if a landlord goes behind that covenant and tries to licence (or permit) what would otherwise be a breach, then the landlord will likely be in breach of the lease (ie in breach of the mutual enforcement covenant with other lessees).

If a request for permission or licence is made, it will need to be considered very carefully to ensure that landlords do not find themselves in breach.  Breaches potentially expose a landlord to enforcement action from the other lessees, together with a claim for damages.

 

 

 

10 May 2020

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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