Can landlord of block of flats authorise a tenant to make structural alterations in breach of absolute covenant?

Introduction

In England, the usual arrangement for blocks of flats is for a landlord to retain ownership and control of common parts such as the structure and exterior of the building. Owners are granted long leases of their flats.

This use of leases allows the burden of positive covenants (such as the covenant to contribute to the costs of maintaining, insuring and renewing the building) to be transmitted to the owners of the flats from time to time.

Hong Kong does not need to resort to this device because of section 41 of the Conveyancing and Property Ordinance.

The landlord of the block is then expected to manage the building on behalf of all the tenants and to recover the costs of doing so through a service charge.  The landlord (or its agent) will be entitled by the leases to impose a service charge for this management service.

The leases may contain tenants’ covenants not to do certain things either (a) without the landlord’s consent (a qualified covenant) or (b) not to do them at all (an absolute covenant).

There may be qualified and / or absolute covenants, for example, against carrying out certain types of work.

Qualified covenants envisage that tenants wishing to do work covered by the covenant will apply to the landlord for consent. This allows the landlord to exercise oversight and control in the interests of the proper management of the building.

Absolute covenants envisage that there are certain types of work that tenants will never have any right to carry out.

The lease covenants allow the landlord to manage the building for the benefit of all the tenants. The lease might go further and, for example, require the landlord to enforce the lease covenants at the request of a tenant.

Duval v 11 – 13 Randolph Crescent

The facts in Duval

In Duval v 11 – 13 Randolph Crescent ([2020] UKSC 18) the leases of all flats in the building required the landlord: (a) to impose similar covenants in all leases; and (b) (in clause 3.19) to enforce any breach of covenant by one tenant if asked to do so by another (at the cost of the tenant making the request).

A tenant (‘W’) wanted to carry out works which would involve the removal of part of a load-bearing wall. This would be in breach of an absolute covenant (‘clause 2.7’) not to do work of this nature.

The landlord was, nevertheless, willing to grant the tenant a licence to carry out these works. Another tenant (‘D’) objected and sought a declaration that the landlord did not have the power to waive the absolute covenant in clause 2.7.

The question in Duval

Lord Kitchin (with whom the other members of the UK Supreme Court agreed) framed the question thus:

‘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, would breach a covenant in the lease of his or her flat, where the leases of the other flats require the landlord to enforce such covenants at the request and cost of any one of the other lessees.’ ([1]).

Accepted that the landlord could do so in the absence of an obligation owed to other tenants to enforce the covenant

The parties, and the court, agreed that, in the absence of a covenant to enforce clause 2.7 the landlord could grant a licence to carry out works in what would otherwise be a breach of it. This was so even though clause 2.7 was an absolute covenant ([11]).

The crucial additional facts were that the landlord covenanted to impose a restriction similar to clause 2.7 in all leases and, in clause 3.19, to enforce them at the request and cost of any tenant. These facts made all the difference.

Implied covenant

The court set out its interpretation of the express terms of clause 2.7. It then decided that there was an implied term that the landlord promised ‘not to put it out of its power to enforce clause 2.7 in the leases of other lessees by licensing what would otherwise be a breach of it’ ([52]).

The decision: the landlord could not grant a licence to carry out the work

The UK Supreme Court upheld the Court of Appeal’s decision to grant the declaration sought by D. The landlord could not grant a licence to carry out these works:

‘In my view it necessarily follows that the landlord will not put it out of its power to enforce clause 2.7 in the lease of the offending lessee by licensing the activity that would otherwise be a breach of that clause. The clause is an absolute covenant and, under clause 3.19, the complainant lessee is entitled, on provision of security, to require the landlord to enforce it as an absolute covenant. As Lewison LJ said at para 27 of his judgment, it would not give practical content to the obligation if the landlord had the right to vary or modify the absolute covenant or to authorise what would otherwise be a breach of it.’ ([55]).

Michael Lower

 

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Uncontroverted claim of breach of DMC: grant of an injunction

In Park Vale (Management) Ltd v Tang Wing Kin ([2013] HKEC 342, LT) Park Vale was the manager of a residential estate and T was the owner of one of the flats on the estate. Park Vale adduced evidence to show that T was in breach of the DMC (through installations T had added to the external walls of the flat and adjoining terraces that formed part of the common parts). Park Vale’s letters to T had not resulted in an end to the breaches. T had not opposed Park Vale’s application. Park Vale was granted the injunctions it sought requiring T to remedy the breaches and not to commit them in the future.

Clear words needed for a general waiver

Real Honest Investment Ltd v Attorney-General ([1997] 2 HKC 436, PC) concerned a restrictive covenant in a 1923 Government Lease that prohibited the erection of any building exceeding 35 feet in height. In 1948, the site had been redeveloped and the Government had waived the height restriction. Now RHI proposed a further redevelopment and argued that the 1948 waiver had been a general waiver and that the height restriction no longer applied. This failed. The 1948 waiver had been a waiver in respect of the particular development then proposed. Clear words are needed to express an intention to grant a general waiver (Lord Clyde at 440) and they were not present in the 1948 waiver.

Halsall v Brizell: benefit and burden

In Halsall v Brizell ([1957] Ch 169) O and J bought a large area of land near Liverpool and built a housing estate on it. They retained ownership of common parts including the roads and the sewers under them. No easements were granted over these common parts but they were held on express trust for the use and enjoyment of the owners and occupiers of the houses on the estate. The owners covenanted to contribute to the maintenance and repair of the common parts. Decades later, F became the owner of one of the houses. The question was whether, as a successor in title, he was obliged to contribute to the cost of maintenance and repair. Clearly, the burden of this positive covenant had not passed to successors-in-title of the original covenantor. Upjohn J. pointed, out that, ‘it is ancient law that a man cannot take benefit under a deed without subscribing to the obligations thereunder.’ (at p. 182). F clearly wanted to carry on using the estate roads and so he would have to make the contributions.

Breach of covenant? Can failure to enforce against others amount to acquiescence?

In Hoi Luen Industrial Centre (IO) v Ohashi ([1995] 2 HKLR 448, HC) D was the owner of a unit in an industrial building and was bound by the terms of the Deed of Mutual Covenant for the building. He erected a water cooling tower on the external wall of the building even though the incorporated owners had informed him that they regarded this as being a breach of the terms of the Deed of Mutual Covenant. There had been many such breaches and the management committee had delivered a notice to all owners in the building warning of the dangers of the unauthorised cooling towers and of their intention to take action to deal with this problem. The incorporated owners then began proceedings against D seeking a mandatory injunction.

D argued that the failure to take action in respect of earlier breaches amounted to acquiescence. This failed. Acquiescence was akin to estoppel. Here, the incorporated owners had made it clear to D even before he erected the tower that they objected to it and were prepared to take legal action in the event of breach. Nor was a mandatory injunction inappropriate: it was reasonable (given limited financial resources) for the incorporated owners to make an example of just some owners in breach and to choose those whose breach post-dated their notice of intention to bring proceedings.

Squatter of land subject to a DMC takes subject to DMC covenant not to convert common parts to private use

In Mountain View (IO) v Heart Cuisine [2012] 4 HKLRD 628, CA) S was a former owner of a shop in a building covered by a DMC. There was a service lane next to the shop which was a common part of the building. S sold the shop but retained possession of the service lane. The IO brought proceedings to enforce the covenant not to convert common parts to private use (implied into the DMC by s.34I of the Building Management Ordinance). The practical effect was that S would have to give up possession. The IO succeeded; S’s possessory title was subject to the implied covenant (section 41(3) of the Conveyancing and Property Ordinance and the general law on restrictive covenants as applied to possessory title in Re Nisbet and Potts’ Contract[1906] 1 Ch 386). The Limitation Ordinance did not apply since this was not an action to recover possession but an action to enforce the covenant. The Lands Tribunal’s jurisdiction to deal with matters of this nature was confirmed by the Court of Appeal.

Non-derogation from grant: relevance of the circumstances at the time of the transaction

In Harmer v Jumbil (Nigeria) Tin Areas Ltd ([1921] 1 Ch 200, CA (Eng)) L granted T a lease of certain land for the purpose of storing explosives. L owned nearby land which had been used for tin mining but it was assumed that the mines had been worked out. T needed a Government licence to store explosives and it was a condition of the licence that there would be no buildings within prescribed distances. L’s successor granted a lease of the nearby land and the tenant of that land started to work the mines and proposed to erect buildings so close to the explosives store as to breach the terms of the explosives licence. T sought and was granted an injunction to prevent the building work during the term of the current licence on the basis that this would be a breach of the covenant not to derogate from grant.

Younger L.J. explained that the principle ‘merely embodies in a legal maxim a rule of common honesty.’ (p. 225). He continued:

‘The obligation … must in every case be construed fairly, even strictly, if not narrowly. It must be such as, in view of the surrounding circumstances, was within the reasonable contemplation of the parties at the time when the transaction was entered into, and was at that time within the grantor’s power to fulfil.’ (p. 226).

The act complained of did not need to involve any physical interference with the demised property.

Here both parties knew that the lease was of property to be used to store explosives. T knew the precise terms of the licence while L could at least be taken to have known that a licence was needed and that it would impose some restriction on proximity to other buildings. In these circumstances, the scope of the implied covenant was such as to prevent the use of L’s retained land for building works during the term of the current licence.

Derogation from grant: relevant factors

In Platt v London Underground Ltd ([2001] WL 172012) LUL granted a lease of a kiosk to P. The kiosk was in the exit from an underground station. Only people leaving the station through that exit (there was another) would use the kiosk. P claimed that LUL only allowed passengers to use the relevant exit during the morning rush hour and at no other times. Thus, the kiosk was starved of trade. P succeeded in his claim that LUL had acted in derogation from grant.

The surrounding circumstances at the time of the grant were a strong indicator as to what the parties must have had in their mutual contemplation. The kiosk relied on passengers going through the exit as its only source of customers. At the time of the lease, the exit was open for much of the time. This was plainly important to the tenant. There was nothing in the circumstances at the time of the grant or in the communications between the parties, or in the express terms of the lease to indicate that P had accepted a risk that the exit might be closed most of the time. The parties had contemplated that the exit would be part of the station operation during the opening hours of the station. Closure of the exit for much of the time during the lease did amount to a derogation from grant.

Neuberger J. provided some commentary on the law concerning derogation from grant. There is  a ”very substantial degree of overlap, between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term in a contract.’ (p. 5)

He endorsed the approach of Bowen L.J. in Myers v. Catteson ((1889) 42 ChD 470 at 481) who said that the aim of the covenant is to give effect to,  ‘the obvious intention of the parties, so as to give the transaction between them a minimum of efficacy and value which upon any view of the case it must have been their common intention that it should have.’

The judgment contains a set of principles concerning non-derogation from grant (pp. 4 – 8). The express terms of the lease and the surrounding circumstances at the date of the lease will be highly relevant in determining whether an act amounts to a derogation from grant. Where the action complained of is the use of the landlord’s retained land, the tenant cannot complain of uses to which the retained land could reasonably be put after the grant of the lease.

‘When assessing what the parties to a contract actually or must have contemplated, one should focus on facts known to both parties and statements and communications between them. A fact which could only have been known to one party could not, save in very unusual circumstances, be a legitimate part of the factual matrix. A thought locked away in the mind of the parties, or even perhaps of both parties, cannot normally be a relevant factor when assessing the parties’ understanding. In English law at any rate, contract is concerned with communication as well as mutuality’.

Changing the character of a shopping mall: derogation from grant?

In Petra Investments Ltd v Jeffrey Rogers plc ((2001) 81 P & C.R. 21) L granted T a lease of a unit in a shopping mall. L originally intended that it would be aimed principally at a particular market segment (which T sought to serve). Trade at the mall was not as good as had been hoped but there were a number of reasons for this. In an attempt to improve matters, L created extra retail space within the mall and let a large part of the mall for use as a Virgin Megastore. This did not improve trade for T, in fact matters got worse. It had complained about the effect on its business of the works done to create the extra space. L granted it a service charge reduction in full and final settlement of any claim it might have arising out of the creation of the Virgin Megastore. Ultimately, T argued that the creation of the Virgin Megastore was in breach of the covenant not to derogate from grant since it gave the impression that the mall was no more than the Virgin Megastore. It argued that the breach was repudiatory and it purported to accept the breach.

Hart J. said:

‘I am inclined, however, to think that the circumstances of the grant in this case did impose an obligation on the landlord not so to alter or use the common parts of the centre in such a manner as to cause it to lose its character as a retail shopping mall.’ ([53]).

He doubted whether there was any more specific implied obligation (as to the nature or mix of tenants). The decision to let a large part of the retail space to a single retailer ran the risk of breaking this covenant. The defendant’s agreement not to make a claim in respect of the creation of the Virgin Megastore meant that it was unable to pursue this claim. The judge seemed to doubt whether there was a breach in any event since a shopping mall, however small, still remained ([55]).

The judge also said that a construction of the lease terms that would oust the operation of non-derogation in its entirety should be rejected.

Derogation from grant: common honesty: giving with one hand and taking away with the other

In Johnston & Sons Ltd v Holland ([1988] 1 EGLR 264, CA (Eng)) L granted T a lease of a building but reserved a right to use the flank wall for advertising purposes.  T’s successor in title  later acquired the open land next to the flank wall and erected its own hoarding near the flank wall so as (intentionally) to obscure the flank wall and make it useless for advertising purposes. This was held to be a derogation from the grant made by virtue of the reservation. While the reservation could not prevent T from making use of the open land (including the erection of the blocking hoarding) it could prevent this being done for the purpose of frustrating the purpose underlying the grant:

‘Constructing a building is one thing. Erecting a blocking hoarding for the sole purpose of screening the flank wall or erecting one’s own advertising hoarding for the purpose of effectively taking over the advertising site for oneself is altogether different.’ (Nicholls L.J.)