The case highlights the pitfalls of absolute covenants and the importance of reviewing leases as a whole.
Background
11 – 13 Randolph Crescent Ltd was the landlord of previously two mid terrace houses, converted into nine flats, each of which was let under a long lease (for a term of 125 years). Dr Duval was the leaseholder of one flat.
The lease of each flat contains an absolute covenant prohibiting the leaseholder from cutting into the walls or ceilings (clause 2.7).
Clause 3.19 of the lease has two parts:
- The landlord promises that every lease of a flat in the building granted by the landlord will contain covenants of a similar nature to those contained in clauses 2 and 3 of the lease.
- The landlord promises that it will enforce covenants of a similar nature to those contained in clause 2 of the lease, provided the relevant conditions are satisfied. It is a condition of this particular lease that the landlord will enforce certain covenants in the lease (including clause 2.7) at the request of a lessee and subject to the payment by the lessee of the landlord’s costs.
Mrs Winfield, the leaseholder of flat 13 sought permission from the landlord to carry out structural works which included the removal of a load bearing wall and would, absent of permission, amount to a breach of clause 2.7. The landlord was minded to grant Ms Winfield a licence to complete the works.
Dr Duval objected to the consent and contended that the landlord could not grant permission because by doing so would amount to a breach of the obligation to enforce the covenants in other leases (clause 3.19). Dr Duval issued proceedings to seek a declaration that the landlord did not possess the power to permit Mrs Winfield to act in breach of the lease.
The Circuit Judge and Court of Appeal found for Dr Duval.
The issue
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, breaches a covenant in the lease of his or her flat, where the leases of the other flats require the landlords to enforce such covenants at the request and cost of any one of the other lessees.
The Supreme Court’s decision
On 6th May 2020, the Supreme Court dismissed the landlord’s appeal.
The Supreme Court held that a landlord could not grant consent to undertake works prohibited by the absolute covenant (clause 2.7) as to do so would breach their obligation to the other leaseholders.
The enforcement clause (clause 3.19) did not expressly state that the landlord could not provide a licence to the lessee. However, the Court concluded that it is well established that a party who undertakes a contingent obligation may be under a further obligation “not to put it out of its power” (i.e. not to act in a manner that takes away its power) to discharge the contingent obligation, should the contingency arise.
It is therefore implicit within clause 3.19 of each lease that the landlord would “not put it out of its power” to enforce clause 2.7 in the leases of all the other lessees, by licensing what otherwise would be a breach of its terms.
Clause 3.19 of the lease would have no practical effect if the landlord was able to authorise a breach of covenant and thereby prevent any other leaseholder(s) from asking the landlord to enforce the breach. It was held that the parties could not have intended that a valuable right held by the objecting lessee could be defeated depending on who manages to act first (a landlord or a lessee).
Therefore, in order for a license to be granted and the works to take place the landlord should have sought the consent of all the leaseholders (including Dr Duval).
A copy of the full judgment can be found here.
What could this mean for Housing Associations?
Firstly, it is important to remember that all leases must be construed in light of the terms of the document as a whole.
Whilst Duval v 11 – 13 Randolph Crescent Ltd was about covenants preventing alterations, the reasoning is likely to be applied to all absolute clauses (i.e. user/keeping of pets, subletting) a landlord either licensing a breach, prospectively licensing a breach or waiving a breach (by not doing anything) may well be in breach of the enforceability clause and any leaseholder(s) who objects to the breach may be able to take action against the landlord. If a request for permission or license is made, it will need to be considered very carefully to ensure that landlords do not find themselves in breach.
Housing Associations should be particularly wary of absolute clauses in shared ownership leases. Similar to the lease in Duval, many shared ownership leases also contain covenants that all leases in the scheme will be in the same format and that the landlord will enforce covenants at the request of tenants subject to the tenant indemnifying the landlord for the costs of enforcement.
To qualify for grants providers must ensure that leases contain the fundamental clauses detailed in the Homes England’s model lease. Where the model leases are not used providers must ensure their leases contain the fundamental clauses exactly as worded in the model leases. The fundamental clauses which include alienation provisions are set out at paragraph 5.2 of the Capital Funding Guidance. More particularly, the guidance also provides that shared ownership leases must prohibit sub-letting by the leaseholder. In the past providers have provided licenses to sublet in exceptional circumstances. However, the judgment in Duval, suggests that providers do not have any discretion when it comes to providing permission or licenses when dealing with absolute covenants.
The current Capital Funding Guidance does set out that providers must also consider requests to sub-let on a case-by-case basis. The provider must take into consideration various criteria, but ultimately, it is the provider’s decision as to whether they agree to the request and permit sub-letting. However, in light of Duval, it seems likely that where circumstances dictate providers will be not able to consent to a license to sub-let even where their own criteria is met.
If permission or a licence for an absolute covenant is sought, providers must review their respective leases and if at risk they should consult all affected tenants and seek their consent. Alternatively, providers could attempt to vary the fundamental clauses which typically requires Homes England’s consent. Any such request will be fact specific but generally, the chances of obtaining the required consent is likely to be low. All providers will need to take greater care when it comes to dealing with requests for licences as it could lead to leaseholder(s) seeking injunctions and or damages for breaches of the terms of their leases.
If you have any questions or queries regarding this matter, please do not hesitate to contact a member of the Housing & Regeneration team.
