Planning to do work to a leasehold property? – You should read this: Lease Covenants and Duval:
The Duval case raises a number of interesting points in practice for those looking to obtain or grant consents to works in a leasehold property. In this article Mark Chick takes a look at the key issues that have arisen as a result of the decision in this case and suggests a number of potential solutions for those affected by these issues in practice.
For those of us dealing with Landlord and Tenant law on a daily basis, the Duval case is troubling on a number of different levels.
What does the case say?
To recap, what the case effectively says is that if there is an absolute prohibition in the leases of a building against alterations, and there is also a covenant on the part of the landlord to enforce the terms of the leases and to keep the leases on similar terms, if the landlord wants to grant a consent for someone to undertake work which would otherwise breach the terms of the absolute covenant contained in the lease, that this not permitted.
The case operates on a number of levels, as the lease clauses themselves in the case were slightly unusual, but not entirely uncommon. There was a division between those works on which there was an absolute ban and those subject to a more “qualified” restriction.
Where the covenant is qualified (i.e. if it says that the consent of the landlord must be obtained) then there is generally a proviso implied by statute that this consent cannot be unreasonably withheld.
Of course, no such provision can be implied into a situation where there is an absolute bar and there is no opportunity in the clause as drafted for the landlord to give any kind of consent.
What does this mean in practice?
In many, many cases up until now, landlords (whether they are a freehold company owned by the residents, or an unconnected external landlord company), have granted consent for works or agreed variations of absolute restrictions found in leases often in exchange for a premium, in a situation where the flat owner wants to do work which would otherwise be prohibited under the terms of the lease.
To give an example, a fairly major piece of work by way of an alteration, or improvement such as removing a wall, might well be the sort of work which is not permitted but which is (subject to appropriate structural advice et cetera) the one that the landlord might be prepared to give consent to, especially if compensation is paid.
There are plenty of cases in existence already where these types of consents have been given.
The Duval case was decided by the Supreme Court in May of this year.
So, the question is really, after the 8th of May 2020, what happens to all of these types of consents in the future?
Well, it appears that landlords simply cannot give them – and this is troubling on a number of levels. Firstly, there may be works that are already in train under licences granted pre-Duval; these are now being carried out in breach.
Secondly, there may well be a two-tier system around consent for works which are going to be sought in the future where historically in a building the landlord has been able to (or prepared to) license these types of works, but now this is no longer possible. Landlords are going to have to explain to flat owners the reasoning as to why they have now moved to what will appear to be an inconsistent approach to identical works.
Why was the decision in Duval decided the way it was?
Let us not forget this is a decision of the Supreme Court and therefore has had full and careful judicial consideration.
There is an intellectual attraction in the logical consistency between covenants given on the one hand to keep all the leases on similar terms and to enforce the terms of the leases at the request and cost of the tenant, and on the other hand, a position under which the landlord, perhaps for their own gain, (or for other reasons) wishes to vary an absolute covenant that they have given in one of the leases.
A key feature of the thinking here is that when a flat owner purchases their leasehold property, or when they sign up as a party to the original lease, they are deemed to be aware of all of its terms. If the particular term of the lease is “absolute” then surely it is not something which is capable of variation?
I agree with the intellectual and logical consistency of this. The two clauses cannot sit hand-in-hand unless both remain as they are. This is no doubt what attracted of the Supreme Court to the decision that it made.
In addition, in Duval, the lease clauses were little “blurred” and the clause that contained the absolute prohibition in fact also referred to the covenant against committing what is known as “waste,“ which is a general covenant not to damage or destroy, or to carry out activity which might be detrimental to the property interests of the landlord.
However, the principle of this case holds good for all other cases.
So, what are the issues?
Well, the first problem is as mentioned above: that ongoing works might be compromised by the nature of this decision.
The second problem is one for the future, in the sense that consents that might have been given in the same form cannot now be given.
The third question is really what (if anything) can be done to work around the consequences of this decision?
I have given some thought to this and some ideas appear below:
Who does the work?
The covenant is likely to be against the tenant breaching the terms of the lease. In theory, if the landlord does the work rather than the tenant, then no breach will occur.
Where is the work being done?
Is the work being done to an area which is not in fact owned by the tenant under the terms of the lease? In other words, is the area in question is outside of the “demised premises”?
If so, is there an argument that, in fact, that the work involves dealing with something belonging to the landlord? This might be a trespass if it is not properly authorised, but it does not constitute a breach of the terms of the lease because the area in question is not covered by the lease covenants.
This will require some relatively creative interpretation and there is a risk that this might be seen as an attempt to subvert the absolute covenant given to the other leaseholders not to permit such breaches.
Often leases contain covenants not to alter the remainder of the building regardless of whether these other parts are demised to them, but in theory, (and this is likely to be specific to the drafting in the particular building), licensing work outside of the lease itself is arguably not covered by it.
What if everyone agrees?
What happens if you can obtain the agreement of every other flat owner? I would guess that if you can, that there should be no issue, because the landlord can then grant consent in breach of the covenant to keep all the leases on similar terms, and that no one can object because they have signed up to agreeing to the consent being given. This might be possible and a small block which is owned by the flat owners together in a freehold company provided that everybody is a member, and in agreement.
In a larger situation, with a landlord that is not connected to the flat owners, multiple votes would have to be ‘bought’ and the question would arise as to what would be “in it” for the flat owners in question. It would also only take one flat owner to object for the scheme to fail.
Clearly the larger the block, the greater the difficulty and the greater the risk.
Publish and be Damned?
What about an approach that says, let’s just do this and worry about the consequences afterwards (within reason, or not as the case may be!)?
In theory, if the landlord allows the work to continue in breach of the terms of the lease, or tries to grant a consent (that it cannot grant), this will be a problem and the leaseholder will have an unlicensed alteration.
The normal solution would be to provide a retrospective licence confirming that whilst the work was done in breach of the lease, that no action can be taken because the length of time that has elapsed; meaning that the landlord cannot pursue one of the more aggressive remedies available to it, such as forfeiture, or an injunction requiring the works to be undone.
Generally speaking, a breach of the covenant against unauthorised alterations is what is called a ‘once and for all breach,’ meaning that if the landlord acknowledges what has been done and does not act, that it will then lose its right to pursue the tenant for the breach in question.
Therefore, it might be possible to engineer a situation in which the tenant does the work, the landlord does not act and then confirms afterwards that it is too late to take any further full enforcement action.
The only other remedy available to the tenants that wish to object would then be an injunction, which once again, provided there is some delay will become much harder to obtain. Then finally, the question that will arise – as it always does where an injunction is concerned – is whether damages (i.e. a payment of money) would be a more appropriate remedy. This sort of arrangement is more likely to put those signing up to such a scheme in a position where the overall risk can be quantified and then dealt with between the parties as a matter of commercial negotiation.
Will such a scheme work?
There is clearly risk on both sides and there is a big risk to the landlord during the course of the breach of the lease, which both the landlord and the tenant are singing up to, that the other leaseholders may take enforcement action against the landlord.
This being the case, the landlord would need to obtain a full and sufficient indemnity from the tenant for the costs of dealing with the application for works and to cover the ‘litigation risk’ in this approach. This is going to frontload costs and not all landlords are going to want to proceed, or feel able to proceed, in this way.
What would the form of licence look like in a situation like this?
As mentioned above, the licence or permission would in fact be something which the landlord actually cannot grant, but the understanding between the parties would have to reflect two things at least – firstly, a full commitment from the tenant to indemnify the cost of all and any enforcement action which the landlord has to deal with as a result of the actions. And secondly, a commitment on the part of the tenant that, if requested by the landlord, that it would “back out of” the works and undo them if requested to do so.
The landlord could be put in a position where it is mandated by way of an injunction to take enforcement action against the tenant, requiring them to reinstate the work. If this happens, the landlord would need automatic cooperation from the tenant to be able to comply.
Licences to alter given in a residential context never normally contain reinstatement obligations. (This is an obligation to put the property back to the way it was before either at the end of the term, or at the request of the landlord). This is a common term in commercial licences of property such as shops et cetera, where after a shorter commercial term (say, five or ten years) the landlord wants the property back just the way it was before it was let. In the residential situation, the tenant is generally going to want to resist this sort of clause.
So, where does this leave us with consents to works after Duval?
These are just some of the issues which the Duval case has thrown up in practice and there are likely to be more that come to light as time goes by and its impact is considered in practice.
However, I am confident that there are ways in which the situation can be managed provided appropriate advice and careful consideration is given to what is required.
As ever, if you would like to discuss any of the points raised in this article, please do get in contact by emailing email@example.com
At Bishop & Sewell, we have more than 40 years’ experience in property with a particular focus on Landlord & Tenant. If you are thinking of buying a leasehold property, or if you already own a leasehold property and you have a question about obtaining a consent to alterations that you are planning please call 020 7631 4141 and ask for a member of the Property team, or email firstname.lastname@example.org.
The above is accurate as at 15 November 2020. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.