Duval v 11-13 Randolph Crescent Ltd (2020) UKSC 18

The issue before the Supreme Court was whether “the landlord of a block of flats is entitled, without breach of covenant, to grant a licence to a lessee to carry out work which, but for the licence, would breach a covenant in the lease of his or her flat, where the leases of the other flats require the landlord to enforce such covenants at the request and cost of any one of the other lessees”.

The Court of Appeal had said no, the landlord would be in breach of the enforcement covenant if it licensed another leaseholder’s breach of covenant. (Our report here). The landlord appealed.

At issue was the effect of two (or three) covenants in the leases of flats in the building. The landlord was a Freehold Management Company formed when the leaseholders enfranchised. The relevant lease clauses were:

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

“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 covenant which is qualified by reference to the landlord’s consent. However, by operation of section 19(2) of the Landlord and Tenant Act 1927, such consent is not to be unreasonably withheld.

Clause 2.7 is entitled “waste” and reads:

“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.”

And then at clause 3.19

“… 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.”

The Court of Appeal held that it was implicit in clause 3.19 that the freeholder granting a licence to another lessee to do something that was in breach of an absolute covenant would be a breach of the freeholder’s obligation under 3.19.

In the Supreme Court, the landlord argued that the Court of Appeal:

failed properly to construe the terms of the leases in their context; failed properly to analyse whether the term it implied satisfied the relevant test for the implication of terms; and ended up with a commercially unworkable scheme, which was not that which was contemplated by the parties to the leases when they were granted, and which is a recipe for chaos and conflict in multi-tenanted buildings.

The leaseholder argued that the Court of Appeal was right.

The freeholder had raised overlap and potential confusion between clause 2.6 and clause 2.7 to argue the context of the lease, for example that re-wiring a flat would require cutting wire and possibly cutting into the wall. The Supreme Court was not impressed by that:

It seems to me to be most unlikely that the parties intended that routine works of this kind should fall within the scope of clause 2.7 and so outside the scope of clause 2.6 with the consequence that the landlord could, however unreasonably, withhold its consent. It is much more likely, in my opinion, that the parties intended the two provisions to be read together in the context of the lease and the leasehold scheme for the building as a whole. On that approach it becomes clear that the two clauses are directed at different kinds of activity. Clause 2.6 is concerned with routine improvements and alterations by a lessee to his or her flat, these being activities that all lessees would expect to be able to carry out, subject to the approval of the landlord. By contrast, clause 2.7 is 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. It seems to me that this concept of waste, spoil or destruction should also be treated as qualifying the covenants not to cut, maim or injure referred to in the rest of the clause. In my opinion and in the context of this clause these words do not extend to cutting which is not itself destructive and is no more than incidental to works of normal alteration or improvement, such as are contemplated under clause 2.6.

The context to the lease was that these were long leases, bought at a substantial premium.

Secondly and importantly, the parties would have appreciated that over the lifetime of the lease it would inevitably be necessary for works to be carried out to each of the flats. Those works would include the routine repair and replacement of the plumbing, drainage, wiring and heating systems of each flat as necessary or thought desirable from time to time. They would also have been well aware that the lessees might at any time wish to modernise their flats or refurbish them to reflect changing tastes and fashions; or to incorporate technological developments and improvements relating to, for example, the supply of services such as water, gas and electricity, the provision of heating, or the transmission and reception of data for telecommunications, the internet or television.

Thirdly, the parties would have understood that routine improvements and modifications of this kind would be unlikely to impinge on the other lessees or affect adversely the wider structure or fabric of the building and that it would be entirely sensible for the landlord to be in a position, where appropriate, to give permission to the lessees from time to time to allow such works to take place.

Fourthly, the parties must have appreciated the desirability of the landlord retaining, in the interests of all of the lessees, not just the reversionary interest in the flats but also the rights in possession of the common parts of the building such as the stairwells, lobbies, corridors and the outer and load bearing walls; and similarly, the important and active role the landlord would play in managing the building and fulfilling its obligations under the covenants to which I have referred in para 14 above.

Then, on to the effect of clause 3.19.

The clause firstly bound the landlord to ensure that other leases in the building would contain covenants of a similar nature to the ones in this lease, and that the other leases would also contain a clause similar to 3.19

Secondly, the clause was a promise by the landlord that it would, on request and indemnification by the lessee, enforce the similar covenants in other leases.

This did not have the wiggle room contended for by the landlord. ‘Similar nature’ did not encompass a ‘limited departure’ from the clause 2.7 prohibition.

The landlord also argued that clause 3.19 had to mean that the requirement on the landlord to enforce could only bite if the landlord could legally enforce, which the landlord could not if the leaseholder had previously been given permission to do the infringing works. This argument did not go well either.

I cannot accept these submissions. I recognise that if a landlord waives its right to complain of an activity by a lessee in breach of clause 2.7 it cannot subsequently bring a claim against that lessee for breach of the covenant. But that does not mean to say that the landlord has not acted in breach of its obligation under clause 3.19 to another lessee. In my view it would be uncommercial and incoherent to say, as the landlord does, that clause 3.19 can be deprived of practical effect if it manages to give a lessee consent to carry out work in breach of clause 2.7 before another lessee makes an enforcement request and provides the necessary security. The parties cannot have intended that a valuable right in the objecting lessee’s lease could be defeated depending upon who manages to act first, the landlord or that lessee.

On the implied obligation on the landlord, the Supreme Court noted

It is well established that a party who undertakes a contingent or conditional obligation may, depending upon the circumstances, be under a further obligation not to prevent the contingency from occurring; or from putting it out of his power to discharge the obligation if and when the contingency arises.

This had been proposed as rule of law in some cases, but was better considered as an implied term, following Stirling v Maitland (1864) 5 B & S 840.

In assessing whether there was an implied term, the approach was

first, that the express terms of the contract must be construed before one can consider any question of implication; secondly, that the term to be implied must be necessary to give business efficacy to the contract or so obvious that “it goes without saying”; and thirdly, that the term to be implied must be capable of clear expression. A way of assessing whether a term is necessary to give business efficacy to a contract is to consider whether, without the term, the contract would lack commercial or practical coherence.

In this case

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

What is more and as the landlord accepts, the first obligation in clause 3.19 is a continuing one with the consequence that the landlord is required to keep in place in every lease covenants of a similar nature to those in clause 2, including clauses 2.6 and 2.7. If a lessee threatens to carry out or has carried out an activity in breach of clauses 2.6 or 2.7 then, at the request of another lessee and on the provision of security, the landlord is obliged by the second part of clause 3.19 to take enforcement action.

In my view it necessarily follows that the landlord will not put it out of its power to enforce clause 2.7 in the lease of the offending lessee by licensing the activity that would otherwise be a breach of that clause. The clause is an absolute covenant and, under clause 3.19, the complainant lessee is entitled, on provision of security, to require the landlord to enforce it as an absolute covenant. As Lewison LJ said at para 27 of his judgment, it would not give practical content to the obligation if the landlord had the right to vary or modify the absolute covenant or to authorise what would otherwise be a breach of it.

Clause 3.19 did indeed imply that the landlord would not act in such a way as to make performance of the clause impossible.

Appeal dismissed.

Comment

We said in the report on the Court of Appeal decision that the judgment had significant potential for leaseholders where the landlord was apparently condoning or permitting breaches of covenant by some lessees. Here it was in respect of a covenant not to damage or alter the building fabric, but the principle could just as easily extend to restrictive user covenants or any other covenant which imposes absolute prohibitions.

Of course, it only works with leases with some form of covenant by the landlord to enforce other leases, even if on a contingent basis (indemnification by requesting leaseholder) as here. But these are far from being uncommon,  many leases will have a clause to similar effect.

For landlords, this should serve as a clear statement that they can’t licence or permit a lessee’s breach of lease (even if they are also a lessee in breach). To do so would itself be a breach of lease by the landlord for all the other lessees. That, of course, may be actionable.