Enforcement covenants, a breach too far

By Vanessa Horn, Practice Development Lawyer

In May 2020 the Supreme Court gave its judgment in Duval v 11-13 Randolph Crescent Ltd. It is a significant decision for landlords of blocks of flats, with far reaching consequences.

The decision clarifies the position where leases contain a landlord’s covenant to enforce the covenants in the other leases in the block and a leaseholder requests that the landlord waive a covenant in their lease to permit them to do something that would otherwise be in breach of covenant. In giving their permission, the landlord would put itself in breach of all the other leases.

A landlord’s enforcement covenant of this nature is common in long leases of flats. Although less common in the commercial context, landlords of shopping centres and multi-let office buildings for example, should also take note of this decision.

Background

A block of nine flats had been converted from two mid-terrace houses located in London’s Maida Vale. The freehold owner of the block was a resident-owned company in which all the leaseholders were the shareholders. The freehold company also carried out all the management obligations for the building.

All of the flats were held on long leases in substantially the same form:

• Clause 2.6 was a qualified covenant against making alterations or improvements to the flats without the landlord’s previous written consent.

• Clause 2.7 was an absolute covenant which prevented the leaseholders from cutting into any roofs, walls, ceilings or service media.

• Clause 3.19 contained a covenant that each flat lease would contain covenants of a like nature and that the landlord would, at the request of a leaseholder and subject to payment of and security for its costs, enforce those other covenants.

  One of the leaseholders (W) wanted to carry out works which would involve removing part of a load-bearing wall in her flat and asked the landlord for a license consenting to the works. It was not contested that the proposed works, unless expressly authorised by the landlord, would be in breach of clause 2.7. The landlord was minded to grant a licence. A second leaseholder (D) objected to the granting of a licence and contended that the landlord had no power to give their consent; by granting a licence the landlord would be in breach of the enforcement covenant contained in clause 3.19 of their lease.

  Decision

  The Supreme Court held that the granting of a licence by the landlord to W would be in breach of its obligations to D (and to the other leaseholders in the block) under clause 3.19, giving rise to a claim for damages.

  Clause 3.19 did not expressly say that the landlord could not give permission to W to carry out structural works prohibited by clause 2.7. It was therefore necessary to consider whether that was implicit in clause 3.19. It was. There was an implied promise on the part of the landlord not to deprive itself out of its power to enforce clause 2.7 in the other leases by authorising what would otherwise be a breach of it.

  The purpose of clause 3.19 was to protect all the leaseholders of the flats in the block. Each leaseholder would know that the other leases would contain the same or similar obligations to those in clause 2.6 and clause 2.7. Each leaseholder would know that the other leases would contain the same or a similar covenant by the landlord in clause 3.19 to enforce those covenants. If the landlord had the right to authorise a leaseholder in what would otherwise be a breach of clause 2.7, it would deprive the landlord’s enforcement covenant of practical content. The landlord could not subsequently bring a claim against that leaseholder for breach of covenant if another leaseholder made an enforcement request. The practical effect of clause 3.19 would be dependent on who acted first, the landlord or the objecting leaseholder.

  As to clauses 2.6 and 2.7, the Supreme Court decided that absolute covenants were to be read together with any relevant qualified covenants. If works fell within the scope of clause 2.6 they would not then fall within the scope of clause 2.7. Significantly, clause 2.6 was read in a purposive way to cover routine works, renovations and alterations and the landlord could give its permission to carry them out. Structural and more fundamental, extreme works (ie, works that might be destructive or damaging to a building) fell within the scope of clause 2.7, an absolute covenant.

  Practice points for landlords

  In terms of alterations and improvements, the construction of clauses 2.6 and 2.7 in the context of this case, where they were seen to be directed at different kinds of activity, avoided the difficulties that may otherwise have arisen if W was seeking the landlord’s consent in relation to modest alterations like putting in a new kitchen or bathroom rather than structural alterations.

  The definition of the extent of the flat is likely to be an important distinction in working out the scope of clauses like 2.6 and 2.7. The nature of the proposed works will also be an important factor. It would be reasonable for a landlord to require the requesting leaseholder to provide details of the scope of their proposed works together with a rationale for why those works fall within the ambit of a qualified covenant, meaning the landlord could give their permission, as opposed to an absolute covenant.

  This case involved alterations, but has wider implications and could be applied to a number of other situations where there are absolute covenants, for example against having lodgers, uncarpeted floors, uncurtained windows or the keeping of pets. It could also be applied to a number of other situations in the commercial context, for example against trading outside certain hours, entering into concessions or against the sub-letting of premises.

  As a result of this decision a landlord of a block of flats (whether a resident-owned company or not) who has given the leaseholders in the block the benefit of an enforcement covenant may be reluctant to release or modify covenants, even though objectively in the circumstances it would be reasonable to waive an absolute covenant and where previously they may have exercised their discretion.

  An exception to this may be where the enforcement covenant expressly allows the landlord to permit a departure from a leaseholder covenant in certain circumstances. An express term will override the implied term but depending on what those circumstances are, the landlord may still be constrained. If, for example, the circumstances were expressed to be in the interests of good estate management, the landlord would need to show that licencing a breach or departure from covenants would be in the interests of good estate management.

  A landlord that continues to provide consents where this case may apply potentially runs the risk of a damages claim for breach of covenant or the prospect of an injunction preventing the granting of consent. Attempting to provide consents in secret will be problematic and potentially unwise. To mitigate the risk of being in breach of an enforceability covenant, a landlord will need to obtain agreement from all the other leaseholders in the block, with the benefit of the enforcement covenant, to what would otherwise be a breach of the requesting leaseholder’s lease. In practice it will be difficult, if not impossible, to get a consensus and will likely be time consuming and potentially costly.

  A landlord may want to seek an indemnity from the requesting leaseholder to cover the prospect of any claims in damages and associated costs that may be brought against it by other leaseholders in the block. This will not be without its risks in terms of enforcement as it will be dependent on the solvency of the leaseholder and their traceability (they may move out).

  Retrospective licences are a means of regularising breaches of covenant where a landlord’s consent has not been obtained in advance. They may be problematic. By consenting retrospectively a landlord will potentially be putting itself in breach of its enforceability covenant. This will apply however minor the breach and equally to qualified covenants, like clause 2.6, that have not been strictly complied with.

  Landlords may also be at risk of being in breach of their enforcement covenant where they have previously granted a licence. It will be no defence that this case was an unknown decision at that time. As to the extent of the risk to the landlord of action by a leaseholder after the event, the limitation period in which to bring a claim is twelve years and in a damages claim the objecting leaseholder will need to show their loss. Damages may be low, for example where works have caused no damage. The prospect of injunctive relief for breach of contract recedes with time.

  Varying the terms of the leases in the block may be an option. However, this will not be without its challenges and associated costs, not least that it will require the consensus of all the leaseholders.

  For now, the advice for landlords of multi-let properties with existing leases that contain an enforcement covenant, is to proceed very carefully and to treat requests from leaseholders for licences for consent or even variations with caution.

  Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18