Duval in the Supreme Court 0 Comments

Duval in the Supreme Court

Introduction

My previous post, “Duval and Worse: How to Make Management of a Block of Flats Impossible” was published in article form last year in the Landlord and Tenant Review: see, (2019) 23 L. & T. Rev 234. That article was written in the light of the decision of the Court of Appeal in Duval v 11-13 Randolph Crescent Ltd [2018] EWCA Civ. 2298. After the article was written, the respondent company appealed to the Supreme Court against the Court of Appeal’s decision. The Supreme Court heard the case on 10 and 11 October 2019, and the decision was handed down on 6 May 2020: Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18. The solejudgment was given by Lord Kitchin, although the Court was unanimous in refusing the appeal. The Supreme Court’s reasoning was slightly different to that of the Court of Appeal, but the result was, for all practical purposes, the same. What follows has, in article form, been accepted for publication in the next edition of the Review.

My earlier post was not solely concerned with Duval, but also with what would be the effect of similar circumstances in the presence of a letting scheme (which the parties in Duval agreed was not present there). This was the “and Worse” of the title, illustrated there by reference to the terms of an actual though unlitigated lease; a recent case where a letting scheme was found to exist, so that covenants by one lessee in a block of flats could be (and was) enforced directly by another lessee, is Fouladi v Darout Ltd & Others [2018] EWHC 3501 (Ch), but the lengthy judgments in that case were primarily concerned with the law of nuisance, and the existence of the letting scheme was not really disputed. My alleged “worst case scenario” (as will be seen, it may not, in fact, produce a worse result than that in Duval), will, therefore, be dealt with by reference to the lease terms set out in that earlier post.

The facts

The property in question was 11-13 Randolph Crescent in Maida Vale. The building originally comprised two houses, but had long been converted into nine flats, each of which was held under a long lease. The lessees involved in the dispute were Mrs Winfield, the lessee of Flat 13, and Dr Duval, the lessee of Flats 11G and 11H. All of the leases were granted for terms of 125 years. The reversion to the leases was held by the freeholder, 11-13 Randolph Crescent Limited, a management company shares in which were owned by all of the lessees in the building. In 2015, Mrs Winfield approached the landlord asking for permission to carry out improvement works to Flat 13. The landlord was willing to grant consent, but Dr Duval said that the terms of the lease prevented it from doing so. The covenants which required to be interpreted for the purposes of the dispute comprised two covenants by the lessee and one by the landlord (the leases were identical). The lessees’ covenants were as follows:

“Clause 2.6: 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”.

“Clause 2.7: 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…”

Clause 2.6 was a qualified covenant, under which work could be done with the previous written consent of the landlord, and to which, to the extent that the works were improvements, the landlord could not unreasonably withhold consent (see, s.19(2) of the Landlord & Tenant Act 1927); whereas Clause 2.7 was an absolute covenant (meaning, in the words of Lewison L.J. in the Court of Appeal) that the lease did not contemplate that consent might be given to do that which the covenant forbade. One fact to be noted here is that the leases were worded so as to exclude from the demised premises most structural parts of the building (i.e., in the usual expression, it was an internal demise); so, irrespective of any covenant by the lessee in relation to the demised premises, the structural parts of the building were left in the ownership of the landlord, and the lessee would not in any event have been entitled to carry out works to them.

basement brick wallMrs Winfield’s proposed works included the removal of about seven metres of load-bearing wall at basement level. No argument appears to have been put to the Court of Appeal or the Supreme Court to the effect that clause 2.7 could not in any event apply, as any negative tenant’s covenant in a lease can only be intended to bite on works or activities which the tenant would, in the absence of the covenant, be entitled to carry out or do to, or on, the demised premises. The courts were, it seems, influenced by the words in clause 2.7 “within or enclosing the Demised Premises”; but suppose the covenant (as is not uncommon) had prohibited only alterations to the structure of the demised premises? On the wording of Clause 2.7 in the Duval leases, the proposed works were clearly considered to be a breach of clause 2.7 (in fact, that was common ground between the parties), and the judgments proceeded on that basis (e.g., in the Court of Appeal, Lewison L.J., referring to the works to the load-bearing wall, said: “It is common ground that this would have amounted to a breach of Clause 2.7 of the Lease.”; although, interestingly, he then added: “The works would also have extended beyond the current demise”. The question arises of whether the argument referred to above would still be available in the case of a lease in which the lessee’s absolute covenant followed the alternative wording noted above? Would a court strain to give meaning to an unnecessary obligation or be willing to ignore it as mere surplusage? The intention here is not, of course, to question the decision, which in any event is final, but simply to note that both the Court of Appeal and Supreme Court decisions were made on the fact of the, by no means standard, wording of the leases concerned; the issue may not be closed for differently worded leases.

The relevant landlord’s covenant was crucial to the case. Clause 3.19 of the Lease contained this covenant by the landlord:

“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 arguments and decisions

(a)   Court of Appeal

In both courts, Dr Duval relied on Clause 3.19 of the lease. Her argument was described by Lewison L.J. in the Court of Appeal as a simple one. Clause 2.7 of the lease contained an absolute prohibition on cutting a wall which enclosed the demise of Flat 13. By Clause 3.19, the landlord had covenanted to enforce that covenant if the tenant of another flat so requested. 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 have put it out of its power to comply with Clause 3.19 as regards that license or waiver. It was necessarily implicit in a covenant like Clause 3.19 that the landlord may not put it out of its power to comply with it when the time came.

Counsel for the landlord argued differently. 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 otherwise would be a breach of the tenant’s covenant; and in some circumstances he might be in an unfortunate position of having inadvertently waived a breach or be estopped from relying on a breach. It could not have been intended that, in such circumstances, the landlord would be in breach of covenant. Moreover, Clause 3.19 did not expressly say that the landlord is precluded from granting the license for what would otherwise be a breach of covenant.

In the Court of Appeal, Lewison L.J. agreed with the landlord’s counsel that Clause 3.19 did not specifically prohibit the grant of licenses but added: “The question, as it seems to me, is whether that is necessarily implicit in the way that the obligation has been drafted. This, in turn, requires an answer to the question: is the implication necessary to give commercial or practical coherence to the contract”: see, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2016] A.C. 742, at [21]. The Court’s answer was in the affirmative.

Lewison L.J. outlined the long line of authority in which the courts have consistently held that, where an obligor undertakes a contingent or conditional obligation, he is under an obligation not to prevent the contingency from occurring; or from putting it out of his power to comply with the obligation if and when the contingency arises. The Court decided that Dr Duval’s argument was correct (i.e., that for the landlord to grant consent for works within Clause 2.7 would amount to a breach by the landlord of its obligations under clause 3.19). On a subsidiary point, the court also considered that that is the case not only where the lessee has already made the request and provided the required security, but also where the obligation under Clause 3.19 to enforce remains contingent.

The Court of Appeal accepted that, if this interpretation were correct, then every lessee would have a veto over the grant by the landlord of a license to do something otherwise prohibited by the lease. Thus, the Court clearly recognised the correctness of counsel for the landlord’s argument that this would effectively disable the landlord and management company from granting consent under, or waiving, any absolute covenants by any lessee, save with the consent of all other lessees; a very inconvenient result for those concerned with the management of multi-let buildings (including, in principle, commercial buildings as well as flats – see below). Nonetheless, the Court of Appeal agreed with Dr Duval and dismissed the landlord’s appeal.

(b)   Supreme Court

The Supreme Court agreed with the Court of Appeal that there must be implied into the leases a promise by the landlord not to put it out of its power to enforce the clauses similar to Clause 2.7, which it was obliged to include in the leases of other flats in the building, by licensing what would otherwise be a breach of covenant by the lessee. The only difference between the reasoning of the Court of Appeal and the Supreme Court concerned the inter-relationship between Clauses 2.6 and 2.7. In the Court of Appeal, it was apparently accepted that Clause 2.7, in effect, set the boundaries of Clause 2.6. But Lord Kitchin stated, at [31]:

“To take an example, a routine re-wiring of one room in a flat would necessarily involve “cutting” a wire and a wall. On the parties’ interpretation, an activity such as this would fall within the scope of Clause 2.7 and so would necessarily be outside the scope of Clause 2.6. Indeed, it is difficult to think of any alteration or improvement within the apparent scope of Clause 2.6 which would not involve some “cutting” of a wall, pipe or wire.”

And at [32]:

“It seems to me to be most unlikely that the parties intended that routine works of this kind should fall within the scope of Clause 2.7 and so outside the scope of Clause 2.6 with the consequence that the landlord could, however unreasonably, withhold its consent. It is much more likely, in my opinion, that the parties intended the two provisions to be read together in the context of the lease and the leasehold scheme of the building of a whole. On that approach, it becomes clear that the two clauses are directed at different kinds of activity. Clause 2.6 is concerned with routine improvements and alterations by a lessee to his or her flat, these being activities that all lessees would expect to be able to carry out, subject to the approval of the landlord. By contrast, Clause 2.7 is directed at activities in the nature of waste, spoil or destruction which go beyond routine alterations and improvements and are intrinsically such that they may be damaging to or destructive of the building.”

This led Lord Kitchin to conclude, at [59]:

“I do not accept that Clause 2.7 extends to the kind of routine repairs, renovations and alterations which the landlord describes. Those alterations fall within the scope of Clause 2.6 and so the landlord can give its permission for them to be carried out. By contract, Clause 2.7 is directed to more fundamental works which go beyond routine alterations and improvements and are intrinsically such that they may be damaging to or destructive of the building. These are the kinds of work which it is entirely reasonable to suppose should not be carried out without the consent of all the other lessees.”

This rather different interpretation of the relationship between the two lessee’s covenants is included only because it tends to emphasise the point made above that a differently worded lease may be differently construed (i.e., that Duval was to a considerable extent a decision made on the facts). The key point, however, is that the Supreme Court agreed with the Court of Appeal’s implication of an obligation on the part of a landlord not to put it out of its power to enforce the equivalent of Clause 2.7 in other leases, and dismissed the landlord’s appeal.

Both the Court of Appeal and the Supreme Court, on their different interpretations, did not appear to think that the promise implied by Clause 3.19 would prevent the landlord from granting consent under Clause 2.6 to works which did not infringe Clause 2.7. I respectfully agree that this was the case on the facts in Duval. It is mentioned here only because the position may be different in a case where there is a letting scheme, to which this article now turns.

Is a letting scheme worse?

mutualityI suggested in my earlier article that it was, but that assertion now needs to be reviewed. As indicated at the beginning of this post, the review will be by reference to the terms of the lease referred to and set out in the earlier article (the illustrative lease). There is no doubt whatsoever that the illustrative lease was one of a considerable number which created a letting scheme. In the words of Lord Neuberger in Arnold v Britton and Others [2015] UKSC 36, at [49]:

“A letting scheme involves properties within a given area being let on identical or similar terms, normally by the same lessor, with the intention that the terms are to be enforceable not only by the lessor against any lessee, but as between the various lessees – even by an earlier lessee of one property against a later lessee of another property.”

Interestingly, Lord Neuberger also stated, at [51]:

“First, it seems to me to be unclear whether a provision such as Clause 3(2)” (a covenant by the lessee to pay a service charge) “could be, or was, subject to the scheme. There is room for argument whether a letting scheme can only extend, like freehold schemes, to restrictive covenants or whether it can also extend to positive covenants (on the basis that positive covenants between lessor and lessee are enforceable as between their respective successors, whereas only restrictive covenants are enforceable as against successors of covenantors in relation to freeholds). Even if a leasehold scheme can extend to positive covenants, it is also questionable whether a lessee’s covenant pay a service charge, or any other sum of money to a lessor, can be within the ambit of a scheme.”

Lord Neuberger’s reference to positive obligations within the context of a letting scheme is important for current purposes. The illustrative lease contained a covenant by the lessee “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.”

The Schedule referred to contained both negative and positive covenants; for example, positive covenants to keep the demised premises in repair and to decorate the demised premises at defined intervals. The point raised by Lord Neuberger remains arguable in relation to positive covenants other than covenants to pay money to the landlord. I am not aware of any subsequent authority on this point but logic suggests (as Lord Neuberger implied) that (with the exception stated) positive covenants in the case of a letting scheme should be distinguished from positive covenants affecting freeholds. Thus, it may well be that a lease which is subject to a letting scheme may create greater rights for other lessees than the leases in Duval. This may not, however, be seen by landlords and managing agents as overly problematic; the fact that other lessees may have the right to enforce, say, repairing obligations against a particular lessee will not detract from the landlord’s own right to enforce the covenants. On that basis, it is fair to say that letting schemes produce a different result to that in Duval, but not necessarily a significantly worse one.

Rather more speculatively, there is the question of qualified covenants such as Clause 2.6 in Duval. The landlord in Duval was not judged to be subject to an implied obligation not to grant consent under a qualified covenant, unless, in the case of a qualified covenant to carry out alterations, the alterations had already been carried out in breach of covenant and the landlord was being asked for retrospective consent. In the case of a letting scheme where, as in the illustrative lease, the lessee covenants with all other lessees in the building to observe the covenants entered into also with the landlord, does that mean that if the covenant is qualified, the lessee must obtain the consent of other lessees as well as that of the landlord? In my submission, probably not, although the view that the covenants could have that meaning is consistent with the principal purpose of a letting scheme, which is to, in effect, confer on all lessees the same rights as the landlord in relation to the enforcement of covenants. If that is the case, and my submission to the contrary is wrong, that would certainly be another reason for believing that a letting scheme creates a significantly worse situation for landlords than a Duval-type “scheme”.

What can be done?

In the earlier article, I referred to the possibilities, whether in a Duval situation or in the case of a letting scheme, of a variation of the leases, or, where there is a management company, the effective variation of the leases by amending the management company’s Memorandum and Articles to give it the power to consent under lessees’ covenants on behalf of all other lessees; but, as is pointed out there, the problem then is that for the variation to be effective, it would require all lessees to be unanimous and that is somewhat unlikely, save, perhaps, in the case of a small building with only a few flats.

flatsMention is made in passing of the power of the First-Tier Tribunal to make variations to long residential leases under s.35 of the Landlord and Tenant Act 1927, if only to dismiss it as most unlikely to help in the kind of case under discussion. The FTT can only vary leases which fail to make “satisfactory provision” for one of the matters set out in s.35(2) of the Act. Suffice it to say for present purposes that such is not the case here, and that, notwithstanding s.38, which provides that, if the Tribunal is satisfied that one of the s.32 grounds is made out, it may make an order varying the leases “as the tribunal thinks fit”, it’s jurisdiction is limited to ordering variations necessary to remedy the prescribed defect: see, Re 416 & 418 Manchester Road, LVT, 2nd October 2012, LON/00BG/LVL/2012/0002 & 0012.

Of course, account can be taken of these potential problems in the drafting of leases on the first letting of flats in a building simply by omitting any covenant by the landlord to include identical provisions for other leases and to, subject to conditions, enforce those covenants. Whether this would be acceptable to well-advised lessees, however, is doubtful; it is noted that probably the majority of long leases granted on the sale of flats contain obligations of this kind, as does the precedent for a residential long lease of a flat in a block of flats published by the Practical Law Company for the use of subscribers.

In the case, however, of existing leases which are either similar to the lease in Duval or subject to a letting scheme, the consequence for landlords is, as originally suggested, to make management close to impossible – this is particularly so in the case of a large block containing upwards of 50 or even 100 flats. The only hope in either case is based on the point made earlier in this article about the possible argument that a clause absolutely prohibiting structural alterations might be surplus; but it is noted that in the illustrative lease, the effective tenant’s covenant was not to “cut maim alter or injure any of the principal bearing walls or timbers of [the building] nor any wiring plumbing pipes or cables of any kind laid in or under [the building]”.This is suggestive of a similar result as in Duval. The suggested argument would only work, if at all, in the case of a covenant which prohibits structural alterations by reference solely to the demised premises themselves and not to the building of which they form part.

Finally, it is worth noting that the principles involved in Duval and in letting schemes apply as much to commercial premises as to residential. It is unlikely that a lease of part of, say, an office building will contain a covenant by the landlord similar to that in Clause 3.19 of the Duval lease; there may, however, and probably are, cases where the lease does, and if so, the same problems will apply (perhaps with worse results, as multi-let office buildings are more likely to be micro-managed; and will do so even where the leases are short term lettings at rack rents.

Case links:

http://www.bailii.org/ew/cases/EWCA/Civ/2018/2298.html - para 1 CA

http://www.balii.org/uk/cases/UKSC/2020/18.html - para 1 UKSC

http://www.bailii.org/ew/cases/EWHC/Ch/2019/1674.html - para 2 Fouladi

http://www.bailii.org/cases/UKSC/2025/72.html - page 3 Marks and Spencer

http://www.bailii.org/uk/cases/UKSC/2015/36.html - page 5 Arnold v Britton

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