Ignore the lease at your peril

Paul Henson reflects on the implications of a recent professional negligence claim brought by a developer client against its solicitors.

The recent decision of HHJ Pelling in Prime London Residential Ltd Jersey Master Holding Ltd v Withers LLP [2021] EWHC 2401 (Comm) provides a salutary reminder of the risks of developing properties around occupying tenants without properly considering the provisions of the lease.

The case relates to a professional negligence claim brought by a developer client against its solicitors. From a real estate perspective, the interesting aspect relates to how the court approached the balancing exercise between the rights expressed in the lease for the landlord to develop the property and the tenant’s express right that such development did “not materially adversely affect” its use and enjoyment of its demise (the “proviso”). The result was a resounding victory for the tenant, eliminating any financial gain for the developer from its project.

The facts

The tenant operated a showroom for the sale of luxury motor vehicles from its demise, including Ferraris. As part of the lease agreed in 2011 (with a predecessor to the eventual developer) there were certain rights excepted to the landlord which included a right to carry out any “development” that was widely defined in the lease. The landlord also gave an express covenant for quiet enjoyment to the tenant which it promised to provide without any interruption by the landlord “except as otherwise permitted by this lease”. However, the tenant was clearly concerned about any disruption this might cause to its luxury business and the reservation was qualified so that the landlord in exercising the right to develop must not “materially adversely affect” the tenant’s use and enjoyment.

Some discussions as to the development proposals prior to the grant of the lease in 2011 were undertaken, but these were on the basis that the landlord would not demolish the floors above the tenant’s premises while they remained in occupation (which is what the developer ultimately sought to do). Once the tenant became aware of these extended plans, and that the developer intended to commence works over and around them, it applied for an interim injunction to prevent the works. The developer should not have cause to complain as it had been forewarned that this was the tenant’s intention, as intimated in the pre-action correspondence, and had sought to reach agreement as to how the works might proceed.

Evidence and reasoning

In Prime London, HHJ Pelling was not called on to decide the issue as to the effect of the proviso on the developer’s right to develop. This had already been dealt with before Edwards Stuart J at the interim injunction stage. At that hearing, the developer’s counsel had advised the developer that its right to develop as reserved in the lease had to be read in conjunction with the proviso and the injunction was therefore difficult to resist. HHJ Pelling found this advice was entirely correct and, indeed, contrary to the bullish advice given by the developer’s solicitors but, more pertinently, stated that any advice to the contrary was “untenable” as “it was plainly wrong applying the basic principles of construction that applied to the construction of all documents in English Law because, if right, it deprived the language of the proviso of any affect and could plainly not have been what the parties intended by the language they used when the lease is read as a whole, as it should have been”.

An express quiet enjoyment covenant was contained in the lease in Prime London but, even if it had not been, it is implied as a matter of law and is concerned to protect a tenant’s freedom from substantial interference with the use of their premises by the landlord. Therefore, it clearly conflicts with a landlord’s reservation of rights which allow it to interfere with such use. If the landlord wants to limit the tenant’s right to quiet enjoyment, it must make it very clear in the lease drafting.

Prime London follows previous authorities in Timothy Taylor Ltd v Mayfair House Corporation and another [2016] EWHC 1075 (Ch); [2016] PLSCS 136 and Jafari v Tareem Ltd [2019] EWHC 3119 in that, if a landlord is seeking to undertake works in accordance with a specific reservation in a lease, it must consider the tenant and take all reasonable steps to minimise disturbance. There is, of course, an inherent tension between the covenant for quiet enjoyment and the right for landlords to complete further development works. However, Lewison LJ’s comments in Windsor-Clive & others v Rees and another [2020] EWCA Civ 816; [2020] PLSCS 130 make clear that they must be read together and a landlord needs to ensure any restriction on the tenant’s right to quiet enjoyment is very clearly and expressly reserved in the lease. To ignore a tenant’s position, as happened in Prime London, will lead to serious difficulties.

Lessons learned

The usual remedy sought for breach of the quiet enjoyment clause is an injunction to restrain the landlord and/or damages in lieu. In cases where damages are deemed appropriate, they are usually measured based on the tenant’s loss of convenience resulting from the landlord’s breach. Therefore, landlords who might look to undertake works without giving serious consideration to the tenant’s position may face tenants either injuncting their works, causing significant delay, or seeking damages which may include (in the commercial context) sums for loss of profit and loss of opportunity to trade.

Developers looking to avoid these issues should:

• consult with their tenants at an early stage, explaining their proposals and try to agree a scheme of works that incorporates any workable suggestions before any works begin;
• undertake such works in accordance with that agreed work plan and be cognisant of the tenant’s business requirements;
• if works will disrupt the tenant’s use and enjoyment, offer some compensation such as a rent reduction or attempt to point out the beneficial nature of the works for the tenant (if there are any); and
• if possible, prior to negotiating a lease, the landlord should try to include wording that expressly permits them to carry out works of construction, demolition, alteration or redevelopment and which covers both the premises and any neighbouring premises.

Tenants, on the other hand, should try to dilute the extent of such development rights (which will naturally include additional rights for the landlord to enter with workmen and equipment and erect scaffolding etc) and make clear that the landlord must minimise any such disruption. The insertion of wording similar to the proviso will also assist, as was made clear in Prime London.

Paul Henson is a partner in the real estate disputes team at Irwin Mitchell. This article first appeared in EGi