Landlords beware when consenting to Tenant’s works

The implications for a landlord consenting to tenant’s alterations in breach of an absolute prohibition contained in a lease were recently highlighted in the case of Duval v 11-13 Randolph Crescent Ltd [2018] EWCA Civ 2298 (Decision 18 October 2018).  Although this is a case concerning a residential lease, the finding also has implications for landlords of mixed use and commercial properties.

Background

• The flat was located at 11-13 Randolph Crescent, a building which had been converted into nine flats.  The landlord was 11-13 Randolph Crescent Ltd, a company owned by all the tenants.
• Each flat was held on a long lease and each lease contained an absolute covenant prohibiting the tenant from “cutting into any walls or ceilings” at the demised property.
• As is common with long residential leases, each lease also contained a covenant on behalf of the landlord that each residential lease granted at the building would include a similar tenant covenant and the landlord would enforce that tenant covenant at the request of a flat tenant, subject to the provision of security for costs.
• The tenant of Flat 13 requested and was granted consent by the landlord to carry out alterations to their flat which involved cutting into several walls.
• The tenants of 11G and 11H objected.  They argued by licencing tenant’s works that would otherwise be in breach of the covenants given by the tenant in the lease, the landlord was unable to comply with its own covenant to enforce the absolute prohibition against certain works at the request of other tenants.  The landlord was therefore not permitted to grant a licence permitting the tenant’s alterations.
• At first instance the Court found for the tenants who had objected but on appeal to the Central London County Court, the Court found for the landlord.  The tenants appealed.

Decision of the Court of Appeal

The Court of Appeal held:

• The landlord was not permitted to consent to tenant works that would be in breach of an absolute prohibition against such works, or waive compliance with such a covenant, as the landlord would be in breach of its own its obligations to enforce the lease covenants at the request of another tenant in the building.
• Although the enforcement covenant given by the landlord in the lease did not expressly state it would be breached if the landlord granted a licence to a tenant to undertake works that would otherwise be in breach of an absolute prohibition, it was implied in the way the obligation was drafted.  A landlord could not put it beyond the landlord’s power to enforce the covenant by licencing works that would otherwise be in breach of covenant.
• There was no obligation on the part of the landlord to inform the other tenants of the building in advance of what it proposed to do.  If a licence granted by a landlord had already been acted upon then the landlord would not be able to enforce the covenant in respect to what had been licenced.
• The only remedy against the landlord would be damages for breach of covenant which, depending on the circumstances, might be insubstantial.
• The Court also commented that in certain circumstances a court might grant an injunction either preventing the grant of the licence or requiring the licence to be undone if a licence had been granted but not acted upon.

How can landlord prevent finding themselves in a similar situation?

When dealing with requests for consent to tenant works under an existing lease, a landlord must also remember to consider in full all landlord covenants contained in the lease in question and consider whether by granting consent they could put themselves in a position where they would be in breach of their own covenants.

When granting a new lease, a landlord should consider whether drafting qualified covenants rather than absolute prohibitions against any particular action by a tenant, would be more appropriate.

What action should be taken by investors and lenders when contemplating acquiring the freehold to such properties or securing lending against them?

Before any transactions are exchanged and / or completed, investors and lenders should ensure all necessary enquiries have been raised and all documentation provided reviewed to identify any licence granted by a landlord which has resulted in a breach of the landlord’s covenants given under any lease.