Wednesday 6 May 2020
Duval v 11-13 Randolph Crescent Ltd: Limits on Landlords
The Supreme Court has now given judgment in the case of Duval v 11-13 Randolph Crescent Ltd and there can be little doubt of its significance for landlords of blocks of flats and flat owners alike.
Where a building or estate is occupied by a number of leaseholders, there are three general models for the enforcement of covenants in their leases.
In the first model, the enforcement of covenants is entirely a matter between the landlord and each individual tenant. This is the model most commonly used in commercial settings. The landlord retains control over the enforcement of each tenant’s covenants: it alone can sue for breach or choose to overlook a transgression; it retains the power both to grant consent under qualified covenants (where a tenant promises to do or not to do something, save with the landlord’s consent) and to authorise a departure from an absolute covenant (where the tenant promises to do or not to do something, without qualification).
At the opposite end of the spectrum is a letting scheme. Under a letting scheme, each tenant covenants not only with their landlord but also with all other tenants in the building, with the intention that the covenants of all tenants should be mutually enforceable. The result is a form of local law, effective in equity. If Tenant A is in breach of a covenant in their lease, Tenant B may sue Tenant A directly: at least if the covenant is a restrictive one, for there is some doubt about the ability to enforce positive covenants through a letting scheme: Arnold v Britton  AC 1619, . A letting scheme imposes significant limitations on the landlord’s freedom of action but despite these drawbacks they are not unknown. In the 1960s and 1970s, a number of letting schemes were set up in residential buildings or estates: the holiday chalets in Arnold v Britton were subject to one. Letting schemes are, however, rare in commercial buildings.
The third model involves a middle way. There is no letting scheme, and tenants cannot sue each other directly for breaches of covenant. But the landlord agrees with each tenant that upon certain conditions, such as the payment of costs and the provision of security for those costs, they may request the landlord to take action against another tenant in the building. This model is very common in residential buildings and many leases, old and new, may be found which contain such provisions.
Duval concerned a model of the third kind. The building was previously two mid-terrace houses, converted into nine flats, with the freehold owned by a company of which the lessees were shareholders. In clause 3.19 of the leases, the landlord covenanted with each tenant that all other flat leases would contain covenants of a similar nature to those the tenant was giving and that at the request of the tenant, and subject to provision of security for costs, the landlord would enforce the covenants given by other flat owners. Mrs Winfield, lessee of one flat, wished to carry out works which would involve removing part of a load-bearing wall. This was prohibited by clause 2.7 of her lease, which contained an absolute covenant against “cutting or maiming…any roof wall or ceiling within or enclosing the demised premises”. She applied for a licence to the landlord, which the landlord was minded to grant. But another tenant, Dr Duval, contended that to do so would be a breach by the landlord of the obligations it owed her. And so the battle lines were drawn.
The question for the Court was whether the grant of a licence by the landlord to Mrs Winfield would be a breach of its obligations to Dr Duval. The Supreme Court upheld the Court of Appeal’s judgment, holding that it would. The important thing to note was that the landlord’s obligation under clause 3.19 was contingent: the obligation to enforce Mrs Winfield’s covenants would arise only if Dr Duval made a request and provided security for costs: the case proceeded on the basis that she had done the former but not the latter. So the landlord was not under any express obligation to do, or refrain from doing, anything. But the Court explained that it is well-established that a party who undertakes a contingent or conditional obligation may, depending on the circumstances, be under a further obligation not to prevent the contingency from occurring or from putting it out of his or her power to discharge the obligation if the contingency arises. This is not, as Dr Duval contended, an immutable rule of law. It is an implied term which, like other implied terms, is sensitive to the express terms of the contract and must satisfy the tests of business efficacy or obviousness: Marks and Spencer Plc v BNP Paribas  UKSC 72  A.C. 742 -. The Supreme Court concluded that it would be “uncommercial and incoherent” to say that clause 3.19 could be deprived of practical effect by a landlord giving consent to a lessee to carry out work before another lessee could make a request and provide the necessary security.
The implications of this judgment on buildings let under the third model are profound. Though the Supreme Court’s decision turned on the implication of a term into Dr Duval’s lease in relation to the potential breach of one particular absolute covenant (clause 2.7 of Mrs Winfield’s lease), the logic of it applies to any absolute covenant, however minor: if a lease says that a lessee cannot keep pets, for example, the landlord will put itself in breach of all other leases if it allows the tenant to keep a dog, cat or hamster. It equally applies to any qualified covenant which is not strictly complied with: a landlord cannot, for example, give retrospective consent to works carried out in breach of a clause requiring the landlord’s prior approval. Further, though the Supreme Court confirmed that its decision was based on an implied term (and therefore in any future case, the Marks and Spencer test would have to be met in order for the term to apply), it is difficult to envisage a lease of the third kind where such a term would not ordinarily be implied (in the absence of some specific express wording). Landlords’ freedom of action in managing blocks with leases of the third kind has been seriously curtailed by the Supreme Court’s decision. Commensurately, the power wielded by other tenants in the block has increased exponentially.
Further, it is not just future licence requests that landlords should be concerned about. The Supreme Court’s decision declares the law as it always was. The limitation period for a breach of covenant is 12 years. Therefore, tenants in the block may challenge the grant of a licence or permissions given or concessions made to their neighbours a number of years ago. Though the potential damages available are likely in most cases to be minimal, the nuisance value of these claims alone may become a serious headache for landlords and managing agents in the future.
The Supreme Court has answered the question raised in Duval by confirming that landlords in the third model of multi-let building have substantially less room for manoeuvre than many had previously understood. But the approach adopted in the judgment raises a whole host of new and difficult questions for landlords.
The full judgment can be downloaded here.
On Tuesday 19th May, Joanne and Emer provided a #WilberforceWebinar where they discussed Duval with 300 attendees. The webinar was chaired by Julian Greenhill QC.
The recording of the webinar can be found below.
If you have any queries please email email@example.com