Landlords beware when granting consent – the danger of contingent obligations
On the 6th May 2020 the Supreme Court gave its judgment in the case of Duval v 11-13 Randolph Crescent Ltd UKSC 18 and the resulting implications for landlords or management companies of blocks of flats and their tenants are significant.
The Supreme Court was asked to consider whether a landlord of a residential block of flats is entitled to grant permission to a tenant in the block to carry out works that would otherwise breach an absolute prohibition in that tenant’s lease, in circumstances where leases of the other tenants in the block are granted on similar terms and require the landlord to enforce the breach of the alterations covenant.
The Supreme Court held that in granting consent to a tenant to undertake alterations which would otherwise breach an absolute prohibition in the lease, the landlord would be in breach of their obligations to the other tenants in the block.
Importantly, this breach of the landlord’s obligations will also apply where the obligation to enforce covenants is a contingent obligation; namely where under the terms of the lease the landlord is not under any express obligation to take, or refrain from taking any action against a tenant. The contingency (or condition) being that the landlord is requited to take action to enforce the covenant at the request of a complaining tenant and upon the indemnity of the landlord’s costs of undertaking such action by the tenant requesting the enforcement.
The Supreme Court further confirmed that the limitation period for a breach of covenant is 12 years. In practice this means that tenants in a block may challenge past consents and permissions granted by a landlord to neighbouring tenants.
THE FACTS OF THE CASE
The building known as 11-13 Randolph Crescent, previously two mid-terrace houses had been converted into nine flats. The freehold was owned by 11-13 Randolph Crescent Limited, a company of which the tenants were shareholders.
The leases for the tenants were granted on similar terms and in clause 3.19 the landlord covenanted with each tenant that all other flat leases would contain covenants of a similar nature and that at the request of the tenant, and subject to the provision of security for costs, the landlord would enforce the covenants given by other flat owners in their leases.
One tenant at the building, Mrs Winfield, requested consent from the landlord to undertake works which would involve removing a considerable part of a load bearing wall. Mrs Winfield applied to the landlord for a licence consenting to the works, which was granted.
However the proposed works breached clause 2.7 of the lease which contained an absolute covenant prohibiting cutting into walls or ceilings. There was no dispute between the parties as to whether the works were in breach of this provision.
Another tenant, Dr Duval, objected to the granting of the licence on the grounds that in doing so, the landlord had breached its obligations to her under clause 3.19 of the lease and she required that the prohibitive covenant in clause 2.7 be enforced by the landlord against Mrs Winfield.
THE IMPLICATIONS FOR LANDLORDS OR MANAGEMENT COMPANIES
Although the Court of Appeal did briefly discuss potential remedies prior to the Supreme Court ruling, the Supreme Court decision will no doubt have practical consequences for landlords and tenants alike.
Whilst the power wielded by other tenants in the block has increased, the implications of wielding that power against the landlord and other tenants could have far reaching implications:
- The landlord’s decision making and ability to actively manage the development may be restricted by the possible threat of breaching their obligations to other tenants
- Landlords may be less likely to agree to reasonable requests which would technically be a breach of an absolute covenant in the lease. This could lead to landlords restraining from using reasonable common sense and judgment in granting consents to tenants where there is a risk of liability to other tenants granted leases on similar terms
- Landlords may find their actions more heavily scrutinized and be held accountable for consents previously provided which fall foul of absolute covenants.
- In the same vein, tenants may also find their actions and requests for consent under the same scrutiny from other tenants in a block which may not be conducive to good neighbourly relations
- The drafting of future long leases may look to replace absolute covenants with qualified ones or remove the ability of tenants to enforce obligations against each other. Thereby removing the liability of the landlord for breaching contingent covenants of this nature
- Where absolute covenants exist, the inability to obtain consents and permissions from the landlord may ultimately devalue a tenants property and could put off potential buyers
Whilst the Supreme Court ruling in Duval v 11-13 Randolph Crescent Limited concerned consent for a licence for alterations, the implications of the decision are more far reaching. Any absolute covenant in the lease is subject to the same implications. If a landlord grants permission to a tenant to breach a covenant, regardless of how minor the covenant actually is (such as a prohibition on keeping pets), the landlord will put itself in breach of all other leases.
Another issue to consider arises where there is a qualified covenant in the lease that requires the landlord’s prior consent. Following the logic in Duval, any attempt by the landlord to grant retrospective consent, which is the usual practical remedy, may well place the landlord in breach of a contingent obligation to enforce covenants at the request of tenants.
Finally, where there is a covenant in the lease requiring that all leases be granted on similar terms, the granting of a variation of those terms to individual tenants will also place the landlord in breach of their obligations under the lease. Therefore careful consideration to the terms of the lease and the variation proposed must be given before the landlord considers a variation which is not universally implemented across all leases of a development.
If you would like advice on contingent obligations and remedies to potential breaches of this provision then please contact Laura Gregory in our Property Department: firstname.lastname@example.org or on 0333 0 300 200.