The Court of Appeal held that a landlord of a block of flats is not entitled, without breach of covenant, to grant a licence to a lessee to carry out work that would breach an absolute covenant in their lease, where the leases of the other flats require the landlord to enforce covenants at the request of the lessees of those flats. The decision raises important questions about the powers enjoyed by lessees over landlords, and their ability to veto landlords granting other lessees a licence to do something otherwise prohibited by the lease.
Facts
Mrs Winfield (‘W’) and Dr Duval (‘D’) both held long leases of flats at 11-13 Randolph Crescent, the freehold of which was held by 11-13 Randolph Crescent Ltd (the ‘Landlord’). D and W’s leases contained two important covenants of note. First, clause 2.7 absolutely prohibited the cutting of any roof, wall or ceiling by the lessee. Second, pursuant to clause 3.19 the Landlord covenanted to enforce covenants entered into with a lessee at the request of the other lessees, provided that the lessees seeking enforcement covered the costs of any such action.
A dispute arose when W sought permission from the Landlord for works that would amount to a breach of clause 2.7, with D arguing that the landlord was prevented from granting that permission as a result of clause 3.19. DDJ Chambers found that the Landlord was unable to grant the permission sought without committing a breach of covenant, with HHJ Parfitt disagreeing on appeal.
Argument and decision
D argued that, if the Landlord could license or waive what would otherwise be a breach of clause 2.7, the Landlord would then be unable to comply with clause 3.19 as regards to the actions licensed or waived. It should be implied into clause 3.19 that the Landlord will not put it out of his power to comply with the covenant and, as such, the Landlord was prevented from licensing or waiving acts that would amount to a breach of clause 2.7.
The Landlord argued that it was free to do as it wished with its property and that, in the normal course of events, a landlord is able to consent to what would otherwise amount to a lessee’s breach of an absolute covenant. In addition, clause 3.19 did not expressly say that the Landlord was prevented from authorising what would otherwise be a breach of clause 2.7.
The Landlord also argued that breaches of clause 2.7 could be authorised at any time, and that doing so would nullify the effect of clause 3.19. Authorisation meant that there would be no breach of covenant by W, and clause 3.19 could not be engaged by D to seek a remedy for the breach of clause 2.7.
Lewison LJ, delivering the judgment of the Court of Appeal, held that clause 3.19 could be relied upon in the face of both actual and anticipated breaches of clause 2.7. In addition, the Landlord could not put it out of its power to enforce an actual or anticipated breach of clause 2.17 by authorising acts that would otherwise be a breach of that covenant. All of the lessees had entered into their leases on the understanding that their leases contained similar covenants, and that the Landlord could be compelled to enforce those covenants upon the lessee providing security for the Landlord’s costs of doing so. In the circumstances, it should be implied into clause 3.19 that the landlord will not put it outside of his power to comply with the covenant, as to do otherwise would not give practical or commercial coherence to the contract (Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72).
Therefore, when the Landlord authorised acts that would otherwise be a breach of clause 2.7, the Landlord was in breach of clause 3.19, as it put it out of its power to comply with the obligation contained in clause 3.19.
Initial thoughts
The consequences of the decision in Duval will extend far beyond 11-13 Randolph Crescent, and raises much broader questions concerning the desirability of lessees’ powers over landlords and the good management of residential blocks of flats.
One consequence of the decision is that, where there is a covenant such as clause 3.19 present between a landlord and lessee, each lessee can effectively veto works proposed by other lessees that would be in beach of that absolute covenant. The landlord in Duval submitted that enabling a single lessee to veto the actions of other lessees is a recipe for conflict, and not the way to manage a block of flats. By giving a single lessee a veto over the works of other lessees we are relying on them to only exercise their veto for proper and reasonable reasons, as it would be possible for them to veto works for improper or vexatious reasons, such as personal misgivings about the other lessee as opposed to concerns about the work itself. Indeed, in Duval, the Landlord accused D of adopting a “dog in the manger” attitude towards the works proposed by W.
On the whole, the decision in Duval is probably only workable where all lessees are reasonable. Whilst it is true that the practicalities of management and commercial common sense will be a factor in the interpretation of any given contract, the starting point is always express words of the contract; and if the words of any given contract are as clear as they were in Duval, it seems that a recipe for conflict has been brewed.
Absolute vs. qualified covenants
Lewison LJ suggests that the Duval ‘problem’ is not really caused by clause 3.19, but the fact that the covenant prohibiting the works desired by W was an absolute covenant. If the prohibiting covenant had been qualified and expressly stated that the prohibited works could be carried out with the prior consent of the landlord, then it would have been open for the landlord to give its consent to those works, and not be in breach of clause 3.19.
However, it cannot be satisfactory to say that a landlord should qualify its covenants with its lessees to escape liability under an enforcement clause, such as clause 3.19, as to do so requires the landlord to choose the lesser of two evils. One the one hand, if a landlord choses to utilise absolute covenants, they are exposed to liability under an enforcement clause. That liability may prevent them from waiving or authorising breaches of the absolute covenant, even where those breaches may be desirable, and curtails the landlord’s power to manage its property. On the other hand, if the landlord choses to utilise qualified covenants, that covenant contains an implied proviso that the landlord’s consent to any breaches will not be unreasonably withheld (Landlord and Tenant Act 1927, s19(2)). Therefore, the landlord will be restricted in its ability to withhold its consent, which also curtails the landlord’s freedom to manage its property, but will enable it to escape liability under an exclusion clause.
Therefore, the decision in Duval requires us to ask ourselves just how much of the landlord’s freedom to use and manage their property we are willing to take away.
Remedies
The finding of liability in Duval loses some of its bite when it is considered that the Court of Appeal granted only declaratory relief, leaving the county court to determine the remedy. It is foreseeable, if not likely, that Duval will be a situation where there is liability in principle, but where no significant remedy is forthcoming. Therefore, whilst it seems that the Court of Appeal was willing to curtail the Landlord’s freedom over its property, the effect of that curtailment is limited by the remedies question.
Duval produces the result that a landlord who has breached an enforcement covenant by putting compliance with that covenant beyond his power faces lesser consequences than a landlord who is yet to breach the covenant, but is considering doing so. Where a landlord is yet to breach a covenant, or where permission to do prohibited works has been granted but not yet acted upon, the lessees entitled to the benefit of the enforcement covenant could seek injunctive relief to either prevent the grant of a licence or undo a grant of permission. However, where permission for prohibited works has been granted and acted upon, lessees entitled to the benefit of the enforcement covenant will be restricted to a remedy in damages only (see paragraph 33 of Duval, Lewison LJ). The measure of damages will, in many cases, be insubstantial, as the ‘losses’ suffered by the enforcing lessees will likely be minimal and of little consequence.
Therefore, Duval could be seen as encouraging underhanded behaviour from landlords by encouraging them to secretly grant licences authorising the breach of tenant covenants. By not alerting lessees entitled to the benefit of the enforcement covenant that a breach of that covenant is about to occur, landlords are remain free to grant the licences without the threat of injunctive relief, and will only be ordered to pay a remedy in damages. Furthermore, a landlord could stipulate that the granting of permission to breach a tenant covenant is conditional upon that lessee indemnifying the landlord for any resulting damages liability incurred by the landlord. In effect, the landlord retains the freedom to manage its property, with very little consequence should it breach an enforcement covenant in the process of doing so.
On the other hand, if landlords behaved “nicely” and consulted lessees entitled to the benefit of the enforcement covenant before granting licences to breach covenants, lessees would have the opportunity to seek injunctive relief, and restrict the landlords freedom to control what happens to its property. There seems to be little incentive for landlords to behave in a congenial way, as the consequence of doing so is that they forfeit their freedom to manage their property.
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