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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The covenant for quiet enjoyment where the landlord also exercises powers in the public interest

In Shebelle Enterprises Ltd v The Hampstead Garden Trust Ltd ([2013] EWHC 948) the Hampstead Garden Trust Ltd (‘the Trust’) exercised the rights and powers of management under a scheme of management under England’s Leasehold Reform Act 1967 (‘the Act’). Shebelle (‘S’) held a long lease of a house in the area covered by the scheme of management and the Trust was the landlord. The lease contained an express covenant for quiet enjoyment. F owned the freehold of the neighbouring house (enfranchised under the Act and subject to the scheme of management) which was higher up a hill than S’ property. Although F owned the freehold, the Trust was ‘for the purposes of the scheme to be treated as the landlord for the time being’.

F proposed to carry out extensive works at their property. The scheme of management required them to get the Trust’s consent to the work. F applied and S objected because of concerns about the the effect of the development on the movement of ground water. When the Trust indicated that it was minded to grant consent to the works, S sought a quia timet injunction on the grounds that this would amount to a breach of the covenant for quiet enjoyment. The Trust cross-applied for summary judgment on the grounds that S had no real prospect of success.

S relied on the proposition drawn from Sanderson v Berwick-Upon-Tweed that: ‘if a common landlord A demises land to B and also demises neighbouring land to C, A will be liable to B for breach of the covenant if it authorises C to act in a way which will interfere with B’s quiet enjoyment.’ ([27] in Shebelle per Henderson J.). Either the Trust was to be regarded as being akin to a landlord ([27]) or else the proposition should be understood in such a way as to rely on the Trust’s degree of control over F and not on privity of estate ([29]).

One element of the Trust’s defence was the argument that the covenant for quiet enjoyment could not be invoked so as ‘to interfere with (and/or subvert) the performance by the landlord, in its capacity as a “custodian of the public interest”, of a role under a statutory scheme under which the landlord owes a duty to act in the public interest.” ‘ ([31]). This argument succeeded and the Trust was granted summary judgment. It did not matter that at the time of the grant of the lease the landlord was a private body:

‘The freehold reversion to the Lease was always freely assignable, and the parties must be taken to have contemplated that it might at some date become vested in a body which had duties of a public nature to perform. If the proper performance of those public duties impinged on the normal use and enjoyment of the demised premises by the tenant, it must in my view have been envisaged that the tenant would to that extent be deprived of a remedy under the covenant.’ ([63]).

Michael Lower

 

Interpretation of user clause: was there a positive obligation to use the property for the specified use

Youseffi v Musselwhite ([2014] EWCA Civ 885, CA (Eng)) is an English Court of Appeal case arising out of a lease renewal application under Part II of the Landlord and Tenant Act 1954. It does, however, raise a general issue about the construction of user clauses.

The clause in question read:

‘at all times during the said term to use the Premises for the purposes of any retail trade within Classes A1 and A3 of the Town & Country Planning (Use Classes) Order 1987 and not to use the Premises or any part thereof for any other purpose without the written consent of the Landlord (such consent not to be unreasonably withheld)…’

There was no keep-open clause.

The tenant had not used the demised premises for the permitted use and the question was whether this covenant positively required the property to be put to the permitted use or whether it was only negative, restraining other uses of the property.

The Court of Appeal, Gloster LJ giving the only full judgment, noted that the clause began with a positive obligation and that, therefore, it did impose a positive obligation to put the property to the permitted use.

Michael Lower

Obligations to repair and reinstate on the expiry of the term: written notice needed?

In L Batley Pet Products Ltd v North Lanarkshire Council ([2014] UKSC 27) L was the intermediate landlord and T was sub-tenant. The head-lease and sub-lease contained full repairing covenants and the terms of the head lease were incorporated in the sub-lease. Both leases required all notices to be in writing. L and T had entered into a Minute of Agreement authorising T to make alterations. The Minute required T to reinstate the property at the end of the term at the request of L and did not expressly require such notice to be in writing. The Minute stated that its terms should be deemed to be incorporated into the sub-lease.

L argued that oral notice that it required the alterations to be removed and the property to be reinstated at the end of the term was sufficient. T argued that it had no obligation to deal with dilapidations (breaches of the repairing covenant) nor to remove the alterations and reinstate the property because it had not received written notice before the end of the term.

Lord Hodge (with whom the rest of the Supreme Court agreed) dealt first with the dilapidations point. A repairing covenant in the form used here ‘imposes a continuing obligation on the tenant which does not require any notice for the landlord to activate it.’ ([14])

L should also be allowed to proceed with its claim concerning the removal / reinstatement. It was a question of the construction of the Minute of Agreement and he referred to the accepted approach to contractual interpretation ([18] – [19]). Looking at the clause in question in the context of the document as a whole and of the factual matrix he preferred the straightforward approach to the construction of the clause which did not expressly require notice to be in writing.

Michael Lower

Periodic tenancy: restriction on right of landlord to serve notice to quit

Breams Property Investment Co Limited  v Stroulger ([1948] 2 K.B. 1, CA (Eng)) concerned a quarterly tenancy. The landlord was prohibited from serving notice to quit for three years unless it needed the property for its own occupation. This was held to be a valid restriction that was not repugnant to the nature of a periodic tenancy.

The landlord had assigned the reversion. Another question was whether the successor was bound by the restriction. It was held that the successor was bound by the restriction. It had reference to the subject matter of the lease for the purposes of section 142 of the Law of Property Act 1925.

Construction of ‘curtilage’ covenant in Government lease

In New Mercury Holdings Corp v Secretary for Justice ([2013] HKEC 435, CFI) P wanted to re-develop the residential properties on sites it owned. It sought a declaration that the government should permit these developments. There were two applications. One concerned the redevelopment of property on two neighbouring lots. The other concerned the redevelopment of a ‘stand-alone’ lot. The relevant leases contained the following covenant:

“[The plaintiff] … shall at all times during the term hereby created maintain and preserve in respect of and exclusively for the purposes of the residential premises now erected or being upon the demised premises a curtilage or compound of an area (including the area covered by buildings) of not less than Eight thousand square feet; AND shall at all such times provide maintain and preserve in respect of and exclusively for the purposes of any other residential premises which may at any time be erected upon the demised premises in each case a curtilage or compound as aforesaid of like minimum area”

Essentially, the question was whether, as the government contended, the purpose and effect of the covenant was to control the density of permissible development: did the clause require each house to have its own ‘curtilage or compound’ of eight thousand square feet? The developer contended that this was not the correct interpretation and that houses could share their curtilage with each other (so that two semi-detached houses could share some of the eight thousand feet with each other).

The government succeeded.

The court reminded itself of the relevant legal principles:

‘7. These are not in dispute: (a) when construing the terms of a land grant, the court can take into account the matrix of fact (that is, the objective surrounding circumstances known (or reasonably known) to both parties) at the time of the grant: see, for example, Gold Shine Investment v Secretary for Justice [2010] 1 HKC 212 , 218; Investors Compensation Scheme Ltd v West Bromwich [1998] 1 WLR 896 , 912; Jumbo King Ltd v Faithful Properties [1999] 4 HKC 707 , 726;

(b) the court shall have regard to the object and purpose of the term, which can be informed by the genesis, the background and the context: River Trade Terminal Co Ltd v Secretary for Justice (2005) 8 HKCFAR 95 , 107 (para 34 to 36);

(c) the above are applicable to the construction of a lease: Woodfall’s Law of Landlord and Tenant (2012) Vol 1, para 11.007 and 11.008).’  (Andrew Chung J.)

The factual matrix and the relevant term construed in the context of the rest of the document all supported the government’s contention.

Woops! The problem of the missing clause

In Sadd v Brown ([2012] UKUT 438 (LC)) the Upper Tribunal (Lands Chamber) had to deal with a dispute between the tenant of a flat held on a long lease and her landlord. The landlord covenanted to insure the building for its full reinstatement value. It sought to recover the cost of insuring the building. Unfortunately, there was no tenant’s covenant to reimburse a share of the premium.

The landlord sought to rely on a covenant to pay and indemnify the lessor against ‘all rates duties charges assessments impositions and outgoings whatsoever’. This was not adequate since this wording did not indicate an intention to repay an expense voluntarily incurred by the lessor ([18]). The landlord also relied on a number of other aspects of the service charge provisions in the lease but none of them amounted to an obligation to reimburse a share of the insurance premium (not even a covenant to contribute to the costs of estate management) ([16]).

Finally, there was no implied covenant. The lease was detailed and (on its face) a complete record of the terms that had been agreed ([20]). Business efficacy did not demand that a term to reimburse a share of the premium be implied. The mere fact that the landlord covenanted to insure was not a sufficient basis on which to imply the term. Nor was the fact that such a term would have been expected and was commonly encountered ([19] – [20]).

On the contrary:

‘To imply a term in the present case would be ‘to effectively draft a completely new paragraph in the Fifth Schedule to the Lease’ ([21].

The landlord could seek rectification or apply for the lease to be varied under Part IV of the Landlord and Tenant Act 1987 ([23]).

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.

Covenant only to build domestic houses

Expressluck Development Ltd v Secretary for Justice ([2007] HKEC 1352, CFI) concerned land on which houses had been built. The Conditions of Exchange under which the land was held provided that “The lessee will not be allowed to erect any buildings on the lots except domestic houses.” From the 1940s onwards, the ground floors of the houses had been used for commercial purposes without the Government taking any formal action in respect of the breaches of covenant. Where, however, other major changes of use had been proposed, consent had been sought by the owners. Expressluck now intended to build a block of residential units but with the ground floor being used for commercial purposes. It did not want to apply for a variation or release of the covenant. Instead it sought, inter alia, declarations to the effect that the proposed development did not amount to a breach of covenant, that the covenant had been abandoned or waived (because of the long history of tolerating commercial use) or that the Government’s demand for rent based on commercial use of the ground floor of the development gave rise to an estoppel. Expressluck failed in all respects.

First, there was a breach. The covenant did not affect only the type of building that could be built but also its subsequent use. Second, although the Government may have waived breaches of the covenant, it had not waived the covenant itself:

’81. What I glean from the authorities is that waiver of a covenant cannot be lightly inferred. It can be, but only where acquiescence by the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct.
82. Further, it is important to distinguish between waiver of a breach of a covenant and the covenant itself.
83. Acquiescence will not amount to a waiver of the covenant unless in the particular circumstances, there was a clear intention to do so for all time.’ (Deputy Judge Gill)

Finally, there was no estoppel the Commissioner for Rating and Valuation had issued the demand but this did not bind the relevant department of Government (the Director of Lands).

Lost waiver and its effect on later agreement between the parties

In Favourable Issue Co Ltd v Secretary for Justice ([2012] HKEC 1416, CFI (later overturned as regards the issue of waiver by the Court of Appeal) the Government granted a lease to F’s predecessor of some land in 1962. The lease contained a special condition prohibiting any building exceeding 30% of the overall size of the Lot. The Lot was eventually assigned to F. The Government later wrote to F informing it that it was in breach of the special condition and requiring it to carry out work to comply with the special condition. Both F and the Government believed that there had been a breach of the special condition. A Temporary Waiver (and certain ancillary documents concerning breach of the terms of the licences of adjoining Government land occupied by F) were agreed.

Later, it was discovered that the relevant Government departments had, at the time the building was erected, given their express consent to the building as it stood even though it covered significantly more than 30% of the Lot.  F successfully argued that the Government had waived the breach long before the Temporary Waiver. Thus, the Temporary Waiver was the result of a common mistake that the Government had been entitled to enforce the special condition and so the Temporary Waiver was void or rescinded ([78]). F was not estopped (by its entry into the Temporary Waiver and associated dealings) from attacking the basis on which the Temporary Waiver had been entered into ([87] – [88]).

F failed, however, in its attempt to argue that it had taken over the benefit of Permits to occupy adjoining Government Land granted to F’s predecessor. Further, the Government’s claim that there had been breaches of these Permits was accepted.