The short-term lettings market is big business and far from being the reserve of large portfolio property investors.
Taking a quiet moment to step away from the maelstrom of landlord & tenant disputes which have arisen as biproducts of the pandemic, I sip my cup of tea and reflect on how many ‘well intentioned’ landlords have fallen victim to procedural deficiencies leaving them not only financially out of pocket but also trying to navigate sanctions or risking forfeiture of their own leases. As ever, unlawful subletting remains a popular territory for dispute.
The question as to which type of damages (the sums which may be claimed by a Claimant) could be sought for unlawful subletting recently came before the Court in the case of Almacantar & Anr v C.I.D Investments Limited & Ors [2021] EW Misc 11 (CC), and whilst that case may be fact specific, the judgment delivered by HHJ Luba QC provides helpful guidance to practitioners and landlords alike.
Subletting
Subletting (or underletting) is where a tenant lets their property creating a new tenancy under their own – for long residential leases remain in themselves a tenancy agreement. The result of an underletting means that the long leaseholder becomes an ‘intermediate landlord’.
It is not uncommon to come across ‘Headleases’ over a whole building (between the individual demised units and the freeholder) or to come across multiple ‘sub-tenancies’
With the popularity of Airbnb short-term style lettings, lease provisions relating to ‘alienation’ and ‘single private families’ became regularly scrutinised and frequently landed a fatal blow to lessees’ intentions.
Whilst these forms of provisions may have hampered the progression of the ‘Airbnb style’ of letting, it should not simply be taken for granted that a leaseholder can generally sublet for a greater period, without preconditions, or at all.
Lessees considering subletting will be looking for provisions such as:
- Not to sublet without consent;
- Alienation;
- Letting in part;
- Single family provisions;
- Underletting on the same or similar terms; and
- Compliance with law and regulations.
For example, a lessee who underlets to a group of individuals when there is no single family or prior consent provision may nevertheless fall foul of compliance provisions say if the property is not licensed as an HMO. They will equally want to consider the terms of their mortgage.
Lessees may take the view that ‘of course it will be ok’, and whilst they may have a good relationship with their landlord, their neighbours may have a reserved right to compel the enforcement of leasehold covenants.
As such, subletting without proper forethought, or with a general disregard of their contractual obligations, can be an expensive position to adopt in regularising the situation. But other than the cost of legal fees – what else may a defaulting party be liable for?
Almacantar v C.I.D Investments
HHJ Luba QC summarises the pertinent provisions of the lease (in this case) as:
“The clauses provide that the tenant is free to sublet the whole of the apartment, provided that it obtains in advance the consent of the landlord. Because the provisions of the lease will need to be mirrored in the underlease for which consent is needed, subletting will be for use of the apartment as a private residence for one family only. To ensure that the income from any authorised subletting enables the tenant to meet its own financial responsibilities, the rent charged to the subtenant must be higher than the rent and service charges due under the lease itself. In case, for any reason, the landlord cannot enforce the obligations of the lease against the tenant, it will by any underlease be given a direct right to re-enter and oust the sub-tenant.”
Helpfully for the reader, the court also here explaining why provisions of this nature may be included in any lease in the first instance.
In this case it was accepted that the tenant had repeatedly sublet without consent, and that the landlord had been successful in obtaining injunctive relief. There was also general criticism raised of the evidence provided by the agent acting for the long leaseholder, to the extent that:
“I am further satisfied that he, on behalf of his agency and on behalf of the first defendant, then embarked on a strategy designed to obscure the truth and to delay the day of ultimate reckoning…
His witness statement completely misrepresents the series of events which happened so as to culminate in the surrender which actually took place at the court hearing on 29 March 2019. He had at least the good grace to acknowledge that he was “possibly wrong” in his evidence. That may be recorded as ‘the understatement of the year’”
So, with this backdrop of determined breaches of lease and cynicism toward the honesty of the agent of the long leaseholder, the question then before the Court was:
“Where a lease provides that a tenant is not to sublet without the landlord’s prior consent, what measure of damages, if any, is the landlord entitled to recover from the tenant and/or any sub-tenants if the property subject to the lease is sublet without its consent?”
In Almacantar the Court considered two different measures of damages which the landlord claimed:
- Disgorgement (an account of profits which have arisen from the wrongdoing (breach of lease), as payable to the wronged party); and
- Negotiating Damages (a payment of the amount which the superior landlord could have hypothetically obtained in negotiating the right for the intermediate landlord / tenant to let in the manner they unlawfully did).
These damages were claimed ‘in the alternative’ (being that if the landlord was awarded one of them, they would not be awarded the other).
Disgorgement of Profits
The popularity of legal dramas set outside of this jurisdiction can often give rise to unrealistic expectations in a litigants’ mind, and regularly I find myself having to ask the question: but what loss have you actually suffered from the opponent’s conduct?
Punitive (or ‘exemplary’) damages are not commonplace; damages are designed to place a party back in the position they would have been but for the wrongdoing. Although the Court may have the power to hold a Defendant liable to pay profits arising from a breach of contract to a Claimant, the Court will still in the first instance consider what harm the Claimant suffered.
Disgorgement notably came before the then House of Lords in Att. Gn. v. Blake [2001] 1 AC 268, and whilst the Court recognised that a defendant may in certain circumstances be liable to account to a claimant for profits, they had made arising from them breaching a contract, it was not treated to be commonplace or the norm.
Further interpretation of Blake has led to the general approach toward assessing whether disgorgement damages are appropriate, in light of:
- Whether other damages / remedies are inadequate;
- There being any fundamental obligation to maintain the contract;
- Whether there is a legitimate interest on the part of the claimant in precluding the defendant from making a profit; and
- Whether it is an ‘exceptional’ contract.
HHJ Luba QC heard submissions on ‘deterrents’ to tenants to avoid them simply disregarding their obligations and as to the conduct of the tenant in prolonged and deliberate breaches of their lease.
However, he found that this was not an ’exceptional’ contract, there was no fundamental fiduciary duty owed to the Landlord by the Tenant, and the Landlord had no legitimate interest in precluding the tenant from profiting from any underletting.
“In my judgment, such a remedy cannot sensibly be fashioned from Attorney General v. Blake so as to be made available to the landlord in this case or to landlords generally in this class of case. That is not to diminish in any way the court’s disapproval of the conduct of the first defendant and the other defendants in this case. It is simply to say that this case does not reach the exceptional threshold necessary to come within disgorgement of profits territory. As I have already said, the scenario emerging in this case is not one in which a contracting party is without an effective remedy. I have set out those remedies already. Indeed, standing back from the case overall, it is perhaps no surprise that, in the many centuries that leases of this type have been in existence, no previous argument has been advanced to suggest that damages of this type might be recoverable.”
As such, the defaulting tenant had no liability to account to the landlord for profits it had received, notwithstanding that they were only able to derive those profits through breaching a contractual obligation to the landlord.
Negotiating Damages or Licence Fee Damages
This measure of damages is not novel, and those with an academic or historical interest in this area may know them as having been previously referred to as Wrotham Park damages.
The Supreme Court in One Step (Support) Limited v. Morris-Garner [2018] UKSC 20 adopted the appellation of this measure of damages as ‘negotiating damages’ (coined by the then Neuberger LJ in the Lunn Poly case).
The question before HHJ Luba QC was now:
“In what circumstances can damages for breach of contract be assessed by reference to the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation which he failed to perform?”
Summarily, if a tenant does not have an inherent contractual right to do something, then a landlord may be able to obtain a ‘licence fee’ for granting them permission to do it (however, those following the legal commentaries will be aware of the risk of compromising another tenant’s contractual rights through any such licence).
In this instance, the landlord argued that they would have been entitled to a licence fee for allowing the sub-occupancy of tenants which were not otherwise permitted under the general terms of the lease.
HHJ Luba QC had regard for Lord Reed’s salient comments in One Step:
“Damages for breach of contract are in that sense a substitute for performance. That is why they are generally regarded as an adequate remedy. The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to enforcing either the primary obligation to perform, or the contract breaker’s secondary obligation to pay damages as a substitute for performance (subject, according to the decision in Attorney General v Blake, to a discretion to order an account of profits in exceptional circumstances where the other remedies are inadequate). The damages awarded cannot therefore be affected by whether the breach was deliberate or self-interested.”
and went on to accept submissions that since One Step the correct approach to this measure of damages was not to ‘profit strip’ the wrongdoing party by measuring the benefit which they had obtained, but ‘compensatory damages’ for what the landlord had lost.
Although accepted that there may be the potential for damages in this regard, the landlord had not provided to the Court any expert evidence as to how to quantify the level of any such damages, nor properly sought to plead the same at the outset.
“In effect, Ms Mattsson is asking me to assess what a reasonable landlord would charge for the prospect of ending up in a situation where its property, and the quality of it, was traduced to the extent that it was occupied by a successive chain of back-to-back unattractive tenants, including those offering sexual services. To my mind, no reasonable or responsible landlord is likely to entertain any such negotiation. It seems to me, therefore, that it is extremely difficult to extrapolate from the evidential material — or I should say the evidential void before the court — any reasonable basis for assessing compensatory damages by reference to a negotiated or hypothetically negotiated fee…
Bringing all the strands together, although I am satisfied, therefore, that this is a class of case, and indeed a case, in which negotiating damages might in principle have been awarded to the claimants, I am not satisfied that in fact any such compensation is available to them on the evidence. The alleged damage has not been proven.”
Again, and even in the face of admitted wrongdoing, the landlord failed to prove to the Court that they should be awarded any damages for the breach of covenant.
What happens next?
Concerningly, defaulting tenants may find this judgment encouraging, particularly if they are weighing up the risk of forfeiture / legal costs against the profit which may be derived from an unlawful underletting; as referred, it is not the place of the Court to impute restitutionary damages where adequate remedies are provided for in the contract.
For those considering simply taking a commercial view of risk against reward, it should be remembered that not all leases are drafted on the same terms, and therefore what may not have been here, may be elsewhere.
As HHJ Luba QC concludes:
“I should end where I began, with the question I proposed in the first paragraph. The question was: where a lease provides that a tenant is not to sublet without the landlord’s prior consent, what measure of damages is the landlord entitled to recover from the tenant and/or any sub-tenants if the property, the subject of the lease, is sublet without its consent? The answer in the instant case is none. In a possible alternative case, the answer may be ‘negotiating damages’ where there is sufficient evidence to demonstrate the basis for an assessment. In a wholly exceptional and egregious case, possibly ‘disgorgement’ damages.“
Landlords will also be aware of this judgment, and when faced with similar situations or tenants acting with contempt for the terms of their lease, may now be more inclined to move toward forfeiture as an early resolution. In this instance, the further unlawful subletting in breach of the injunction may have also opened the door for committal proceedings and therefore defaulting tenants should be alive to the fact that the retention of profits is not simply where any risk may end.
For me, I will have another cup of tea, hope that the next judgment I read is as engaging and interesting as that of Almacantar and reflect on Lord Steyn’s comments that:
“Exceptions to the general principle that there is no remedy for disgorgement of profits against a contract breaker are best hammered out on the anvil of concrete cases.”
wondering, with the myriad of differently drafted leases, whether this is in fact the end of the story, or merely the beginning.
Charles Jamieson is an experienced solicitor in the Bishop & Sewell Dispute Resolution Department, taking instructions in Landlord & Tenant, Property, Commercial and Chancery disputes. If you would like to speak with Charles, or any member of the Dispute Resolution team, contact Bishop & Sewell by email to: litigation@bishopandsewell.co.uk
The above is accurate as at 17 August 2021 and was featured in Flat Living magazine. 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.
