Duval and Worse: How to Make Management of a Block of Flats Impossible 0 Comments

Duval and Worse: How to Make Management of a Block of Flats Impossible

The decision of the Court of Appeal in Duval v 11-13 Randolph Crescent Ltd [2018] EWCA Civ 2298 has caused a lot of concern to landlords and managing agents. That is not surprising – though I intend to show that the position could be a lot worse. The case is apparently going to the Supreme Court and the Court of Appeal decision could be reversed, though even if it is (depending on the Supreme Court’s grounds), the other scenario outlined below will remain problematic.

The background

But first, the facts and arguments before the Court of Appeal in Duval. The facts were relatively straightforward. 11-13 Randolph Crescent in Maida vale originally consisted of two houses; but long before the case was heard, they had been converted into nine flats, each of which was held under a long lease. Mrs Winsfield owned the lease of flat 13. The claimant, Dr Duvall, owned the leases of flats 11G and 11H. Mrs Winsfield applied to the landlord for consent to carry out alterations (“the proposed alterations”) which included the cutting of a load-bearing wall which encloses the demise of flat 13.

Each of the relevant leases (and all other leases in the block) contained identical covenants by the tenant. The two relevant ones applying to alterations by the tenant were causes 2.6 and 2.7.

Clause 2.6 provided:

“Not without the previous written consent of the Landlord to erect any structure pipe partition wire or post upon the Demised Premises nor make or suffer to be made any alteration or improvement in or addition to the Demised Premises”.

The Court of Appeal noted that a covenant prohibiting the making of improvements without the landlord’s consent is subject to an implied proviso that consent is not to be unreasonably withheld (Landlord and Tenant Act 1927 s19(2)). Although the Court drew attention to this, nothing really turned on it in terms of the issue to be decided as the proposed alterations would have breached clause 2.7.

Clause 2.7 provided:

“Not to commit or permit or suffer any waste spoil or destruction in or upon the Demised Premises nor cut maim or injure or suffer to be cut maimed or injured any roof wall or ceiling within or enclosing the Demised Premises or any sewers drains pipes radiators ventilators wires or cables therein…”.

Unlike Clause 2.6, Clause 2.7 amounts to an absolute covenant, i.e. (in the words of Lewison LJ) it meant that the lease does not contemplate that consent might be given to do that which the covenant forbids – s19(2) does not apply and the landlord can usually grant or refuse consent at his discretion.

However, in Clause 3.19 the landlord covenanted as follows:

“That every lease of a residential unit in the Building hereafter granted by the Landlord at a premium shall contain…covenants of a similar nature to those contained in Clauses 2.6 and 2.7 of this Lease AND at the request of the Tenant and subject to payment by the Tenant (and provision beforehand of security for) the costs of the Landlord on a complete indemnity basis to enforce any covenants entered into with the Landlord by a tenant of any residential unit in the Building of a similar nature to those contained in Clause 2 of this Lease”.

The rival arguments

The claimant’s argument was a simple one; I will use the words used by Lewison LJ in his judgement. As we have seen, Clause 2.7 of the lease contains an absolute prohibition of the proposed works. By Clause 3.19 the landlord covenanted to enforce that covenant if the tenant of another flat so requests. If the landlord had the right to license what would otherwise be a breach of Clause 2.7 or to waive compliance with Clause 2.7, it would by so doing put it out of its power to comply with Clause 3.19 as regards the works the subject of the license or waiver. It is necessarily implicit in a covenant such as clause 3.19 that the landlord would be in breach by putting observance of the covenant out of its power.

Counsel for the landlord did not accept this simple argument. He emphasised the landlord’s right to do as he pleases with his own property. In the normal course of events a landlord is free to consent to what might otherwise be a breach of a tenant’s covenant; and in some circumstances he might be in the unfortunate position of having inadvertently waived a breach or being stopped from relying on a breach. It could not have been intended that in such circumstances the landlord himself would be in breach of covenant.

Moreover, Clause 3.19 did not in terms say that the landlord was precluded from granting a license for what would otherwise be a breach of covenant. Counsel submitted that the covenant has retrospective operation once a breach has taken place. But if the landlord consents in advance to some activity on the part of a lessee, that activity will not amount to a breach of covenant, so that there will be nothing to enforce. Thus, by the grant of a license, the landlord may nullify what would otherwise have been the effect of Clause 3.19. Essentially, the landlord accepted that Clause 3.19 could apply to a threatened breach of covenant, but even in that situation he argued either that the landlord could authorise the breach at any time; or at least that he could do so before another tenant had made the request for enforcement and provided the security required by Clause 3.19. In addition, even if the landlord did authorise what would otherwise be a breach, it would be only the particular breach that is authorised and the covenant itself would remain intact and enforceable for the future.

The Court of Appeal ruling

I have taken largely word for word Lewison LJ’s summary of the arguments of the parties. Anyone reading this may well come to the conclusion that each of the arguments represents an over- literal interpretation of the lease. Indeed, Lewison LJ notes that in oral argument, counsel for the landlord made the point that if any single lessee of a flat had what he called an absolute “veto” over work proposed by another lessee, that was a recipe for conflict and no way to manage a residential block of flats. The practicalities of management, and the commercial common sense of one interpretation over another, were acknowledged by Lewison LJ as having a part to play in contractual interpretation but (and I quote) “the starting point must be the words of the contract itself”.

So, interpreting the lease provisions as they stood, the Court noted that the express promise that the landlord made in Clause 3.19 is that every lease of a residential unit in the building granted at a premium would contain covenants similar to those in Clauses 2 and 3. Again, to quote Lewison LJ: “A covenant is not simply a form of words on a printed page; it is a legally binding obligation.” Thus the promise was that each lease would contain similar legally binding obligations on each lessee. This was, in the Court’s judgement, a promise designed to have practical effect; namely that each lessee would be bound to observe similar legal obligations”.

Lewison LJ’s judgement continues:

“In the context of the present case, however, it is important to note the two-fold limb of the promise. It is not only a promise that the lease of a residential unit would contain a covenant similar to clause 2.7 (i.e. an absolute covenant not to cut walls etc) but also a covenant similar to clause 3.19 (i.e. a covenant to enforce such covenants). Thus, each lessee would have known that the landlord had covenanted (or would covenant) with every other lessee to enforce the obligations contained in the lease.”

I will try and bring this analysis to a close so we can move on. There was no dispute in Duval that the only person able to enforce the covenants in a given lease is the landlord. As between the landlord and the lessee, the landlord has the power to license what would otherwise be a breach of covenant. So, if the landlord were to grant a license permitting what would otherwise be a breach of covenant, the license would be effective to preclude a subsequent action by the landlord for breach of covenant. But it would not follow from that that the grant of the license would not amount to a breach of the co-lateral contract as between the landlord and the lessee of another flat who has the benefit of clause 3.19.

It is worth recalling at this stage that one of the tenant’s covenants in question was an absolute covenant. A covenant not to do something without the consent of the landlord, not to be unreasonably withheld, would entitle the landlord to grant consent. But in granting consent under an absolute covenant, the landlord would be effectively putting it outside the landlord’s power to perform its obligation to other tenants in the building by enforcing the absolute covenant against the lessee proposing the alterations.

The inconvenience likely to be caused by the literal interpretation adopted by the Court of Appeal was acknowledged: the landlord would not in the management of the building be in a position to grant licence under, or waive, any absolute tenant’s covenant. But the strict legal interpretation prevailed. We will see what the Supreme Court makes of it all.

Duval and worse

Moving on, the title of this blog post is “Duval and worse”. The reason is that it was common ground in Duval that the way in which the leases were drafted did not create a letting scheme, i.e. a scheme under which all lessees’ covenants were mutually enforceable amongst the lessees as well as by the landlord. At one time, especially in the 1960s and 1970s, leasing structures which did create a letting scheme were by no means unusual. I am going to refer to one such lease in detail, although I will withhold identification details on confidentiality grounds and redact property names.

The key provisions of the lease for relevant current purposes are summarised below.

First, a recital makes the parties’ intentions quite clear:

the Superior Landlord and the Landlord intend that each of the flats complied in the building known as [redacted] which forms part of the premises described in the First Schedule…will be demised by way of underlease to nominees of the Superior Landlord (being restricted to persons who are or have committed themselves to become shareholders in the Landlord) on a letting scheme and upon the express understanding that each lessee of a flat in [redacted] is to have the benefit of the stipulations binding on all other flats therein whether the same are leased to the respective lessees of them before or after the date of the lease by the Landlord to each such lessee”.

The introductory words of the tenant’s covenants are:

“The Tenant HEREBY FURTHER COVENANTS with the Landlord and as a separate covenant with other tenants of flats in [redacted] for the benefit of [redacted] and every part thereof to observe and perform the covenants contained in the [redacted] schedule hereto.”

The Tenant’s covenants include this:

“That the Tenant will not cut maim alter or injure any of the principal bearing walls or timbers of [redacted] nor any wiring plumbing pipes or cables of any kind laid in or through or under [redacted] whether or not the said walls timbers walls pipes or cables shall have been demised by this Underlease and will not make any alterations or additions to the demised premises.”

The landlord covenants as follows:

“That the Landlord will at the written request of the Tenant or on the written request of any mortgagee of the Tenant enforce by all means available to the Landlord the covenants entered into by any tenant in the terms of Clauses [redacted] of this Underlease.”

The clauses covered include the tenant’s covenant set out above. The landlord’s covenant set out above is qualified to some extent. The landlord is not to be required to incur any legal or other costs without security provided by the tenant or mortgagee requesting action and the landlord is entitled to obtain the opinion of leading counsel at the cost of the tenant or mortgagee requesting action.

The effects of provisions of this kind are, I suggest, clear. There was no suggestion in Duval that carrying out alterations absolutely prohibited would require the consent of every other tenant in the building – but that is the effect of the provisions quoted above. In the case of a substantial block of flats (in cases I have looked at, say 50 upwards), the management burden is virtually impossible. As indicated earlier, I seriously doubt whether any decision of the Supreme Court in Duval will alter this position.

Conclusion

So, what could be done to mitigate this virtually impossible management burden? Theoretically, it would be possible for the landlord and each one of the tenants to enter into deeds of variation to remove the landlord’s covenant referred to above. If there is a management company in which every flat lessee has a share, I suppose it would be possible to amend the Articles of Association of the management company to give the company the power to grant consent on behalf of all tenants. The trouble is (and would be with any other remedial scheme) that every single lessee in the block would have to be a willing and active participant. I suggest that this will rarely be the case – in my experience it is inevitable that one or more lessees will take the view that they are giving away a useful power and decline to do so. I did very briefly look at S35 of the Landlord and Tenant Act 1987 (as amended by the Commonhold and Leasehold Reform Act 2002) but the LVT only has the power to vary leases on the grounds that they fail to make satisfactory provision in respect of the calculation of service charges.

I find myself unable to propose a solution to the management problems arising in the case of a letting scheme and I would be very interested to hear from anyone who has any suggestions.

Of course, flat leases granted in the 1960s or 1970s would probably have been for a term of 99 years and by now, some of the terms may well have been extended under the Leasehold Reform, Housing and Urban Development Act 1993. However, in most cases (including the one I have been looking at) the extension lease will be on the same terms as the existing lease and the problem is therefore carried forward for another 90 years.

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