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Property lawyers and managers alike have been anxiously awaiting a final answer to the following question:

Where the leases to flats in a block contain enforcement covenants requiring the landlord to enforce covenants at the request and cost of any other lessees, is the landlord entitled to grant a licence to a lessee to do something which is the subject of an absolute covenant?

On 6 May 2020 the Supreme Court handed down judgment in Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18 and answered this question with a resounding “no”. The outcome is, perhaps, not that surprising (although, it is fair to note, the authors of this article still managed to hotly debate the potential outcome!). However, the practical consequences of the decision are far from clear.

Background

The case concerned two mid-terraced houses in Maida Vale that had been converted into a block of nine flats. The freehold owner was a resident owned company, which also carried out all the management obligations with respect to the block. The flats were all held on long leases in substantially the same form, and all leaseholders were members of the freehold company.

Included within the leases was an absolute covenant, clause 2.7 (with the heading ‘waste’), which prevented the lessee from cutting into any roofs, walls, ceilings or service media. Clause 3.19 was a familiar enforcement covenant that required the landlord to enforce certain covenants in the lease, at the request and cost of any other lessee. It also confirmed that all leases would be in similar form.

One of the lessees, Mrs Winfield, intended to carry out works that involved removing a substantial part of a load bearing wall at basement level. It was common ground that the works would amount to a breach of clause 2.7 if not expressly authorised by the landlord. Mrs Winfield duly applied to her landlord for consent to carry out works. The landlord’s board (consisting of a number of the leaseholders) was minded to grant the licence. Dr Duval, a leaseholder, became aware of the request for consent. She objected to granting it, so brought a claim for a declaration that the landlord was not entitled to permit Mrs Winfield to act in breach of clause 2.7 of her lease.

At first instance, the court held that the landlord had no power to waive the covenant in clause 2.7. That decision was reversed on appeal to HHJ Parfitt who concluded that the landlord could give a licence, and once licensed, the works could not be the subject of enforcement action under clause 3.19.

The Court of Appeal took a different view. Lewison LJ concluded that if the landlord were to grant a licence to do something that would otherwise be a breach of clause 2.7, then it would be committing a breach of its agreement with the other lessees who enjoyed the benefit of clause 3.19. It was implicit that the landlord could not do something that would impede its ability to comply with its obligations under clause 3.19 to enforce the covenants against other leaseholders, including clause 2.7.

Supreme Court

On appeal to the Supreme Court the landlord argued that the lease had been construed incorrectly and was a recipe for chaos and conflict in multi-tenanted buildings.

The Supreme Court was not convinced and upheld the decision of the Court of Appeal.

The lease had to be read in the context of the tenants’ entitlement to quiet enjoyment; and the landlord’s obligation not to derogate from grant. It was “uncommercial and incoherent” to deprive clause 3.19 of having any practical effect by entitling a landlord to give consent in respect of works that prohibited under an absolute covenant.

The landlord’s obligation under clause 3.19 was contingent i.e. the obligation to enforce Mrs Winfield’s covenants would arise only if Dr Duval made a request for enforcement and provided security for costs. A party who undertakes a contingent or conditional obligation may be under a further implied obligation not to prevent the contingency from occurring or from putting it out of his or her power to discharge the obligation if the contingency arises. In the circumstances of the case it was necessary to imply a secondary obligation preventing the landlord from granting the licence.

The Consequences

This judgment is clearly of great significance for all involved in leasehold property. Leases where the landlord covenants to enforce breaches at the behest of other leaseholders are common. Absolute covenants (i.e. where there is no provision for consent to be granted) against alterations (usually just structural alterations of some form) are also common.

Landlords could face claims by lessees for breach of covenant arising from licences that were granted many years previously for some act prohibited under the lease. Given that the limitation period for these claims would be twelve years, there is a prospect of a deluge of disputes challenging what were, at the time, consents that landlords thought they were entitled to grant.

Will this deluge materialise? Perhaps the biggest impediment to these types of claims will be whether any individual leaseholder will be able to prove that they have suffered loss as consequence of their landlord granting a prohibited consent. In the vast majority of cases, this must be seriously open to doubt; realistically, the likelihood of damage to the leaseholder’s interest will be nil. However, there is certainly scope to argue otherwise – for instance, if the granting of consent has resulted in more onerous repairing obligations, the cost of which is to be spread amongst service charge payers.

Whilst Duval was about covenants preventing alterations, the reasoning is likely be applied much more broadly. If there is a user covenant that prohibits use of the property for any purpose other than as a private residence by a single family, the landlord will not be entitled to grant a licence allowing occupation by, say, two flatmates (or permitting ‘AirBnB type’ short stays) without breaching covenants owed to other lessees or getting the consent of everyone else in the block. Such a situation may not be a problem for small, tenant-run blocks of flats, but is wholly unworkable for the effective management of large blocks or buildings where leaseholders simply do not get along; just one leaseholder out of perhaps several hundred will be able to veto, potentially contrary to the wishes of the majority. Leases of flats are exceptionally long contracts, usually running for hundreds of years; the way we use property is bound to adapt and change over time.

What of the situation where landlords grant what is misleadingly referred to as ‘retrospective consent’, authorising after the event (often upon payment of a premium and costs)  something that amounted to a breach of an absolute covenant when it occurred? Such consent really amounts to a promise not to take steps to enforce the breach – or, perhaps, to treat the leaseholder’s actions as having been permitted by the lease.

It seems clear that the principles in Duval can also be applied to this situation. However, the grant of a retrospective consent may not always be an actionable breach of the implied obligation identified by the Supreme Court. By way of example, if the breach occurred many years previously, it may be wholly unrealistic for the landlord to enforce that breach if a leaseholder requested he do so; the right to forfeit will have been waived, the covenant may have itself  been waived; and there may well be no loss to the landlord’s reversionary interest. This type of scenario arises frequently where a breach only becomes apparent during the course of a sale of a flat when a purchaser requires the vendor to obtain consent as a condition of purchase. In such a case, is the landlord actually putting enforcement action out of its powers by granting the retrospective consent, if the ability to enforce has realistically been lost anyway?

A potential consequence of the decision will be less transparency in the management of blocks by landlords and managing agents. A landlord looking to grant a consent (and often take a premium, given the covenants in issue here are absolute), but minimise any potential claims by other leaseholders, may wish to  ensure that discussions are kept confidential so as to prevent claims such as Dr Duval’s. There is generally no statutory or other obligation on landlords to consult or provide information to other leaseholders as to the grant of consents. In most instances, lessees will only find out after the event. Of course, any level of secrecy is rather more difficult where the landlord is a lessee owned company, particularly in a smaller block – hence Dr Duval discovering the application for consent in this case. But in larger blocks that is less likely to be so.

A further consequence is that landlords may well insist upon the lessee who is requesting consent to giving an indemnity against any costs or losses it suffers as a consequence of granting consent to something that would otherwise be a breach of an absolute covenant.

Duval has undoubtedly tipped the balance of power in favour of individual lessees when it comes to the granting (and vetoing) of consents, but the practical consequences of the decision are likely to be greater obstacles to effective management of blocks of flats and even greater distrust between landlords and leaseholders.

 

Simon Allison
Brooke Lyne
Landmark Chambers
7 May 2020

This article was first published on the Estates Gazette website on 7 May 2020 and can also be found here.

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