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Absolute covenants = absolute control. Landlords think again!

Absolute covenants = absolute control. Landlords think again!

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A situation which often grieves residential leaseholders is this – a developer comes along and either purchases the freehold himself, or else enters into a deal with the freeholder, and then proposes to put a new flat or two on top of the existing building. Existing leaseholders seldom like this idea, involving as it does a year or more of disruption with no benefit to them, and, life being what it is, seldom any financial benefit either.

So what can be done? Obviously circumstances alter cases, and there can be little substitute for what at Dewar Hogan we generally refer to in code as RTL, which is an acronym suggesting that parties in such circumstances should start off by considering the terms of their own particular lease. It is also true that there is more than one structure by which a landlord and a developer may seek to go about their plan (or indeed they may be the same person).

A new weapon has been put into tenants’ hands, though, by the decision in Duval –v- 11-13Randolph Mansions Limited. The leases of the flats in Randolph Mansions contained the usual absolute covenant against structural alterations, and also the usual provision that the landlord will grant other leases in the same terms as the existing leases and will, if the tenants ask, enforce those covenants.

A tenant wanted to carry out structural alterations and applied in the usual way to the landlord, who, notwithstanding the objections of Ms Duval, another tenant, decided to grant consent. Ms Duval, however, turned out to be a litigation solicitor and naturally made of strong stuff, and instructed her firm to take proceedings against the landlord claiming that by granting this licence to another tenant the landlord was in breach of its obligations to her, since the landlord could no longer comply with her request to enforce the covenant, having put it out of its own power to do that by granting the licence.

This is not a new argument – it has been around for a while, and we have been advised by very well-qualified counsel more than once that it wouldn’t work, so Ms Duval’s success in the Court of Appeal has come as quite the shock to a number of lawyers.

What are the implications, then? On the face of it, they are considerable indeed.  We suspect that almost any lawyer of experience in the field of landlord and tenant disputes can think of cases from their own experience where the Duval argument would have had an influence on the outcome.

It would seem that any landlord of a block of flats who grants a licence to break an absolute covenant, opens themselves up to a damages claim by other disgruntled tenants. How great a claim is going to vary from case to case, but it might not be negligible – in the case, for example, of a Mayfair penthouse flat owner who finds another penthouse flat being built on top of theirs. In any case, why would landlords run the risk?

And what of the would-be developer tenant? Does he run the risk of an injunction halting his works? Perhaps not, if he has proceeded innocently – after all, he is not in breach of his lease. But what if other tenants have protested directly to the developer tenant and explained to him that by pursuing the request for the landlord to grant a licence the developer is asking the landlord to break its covenants in its lease with the other tenants? There is a tort called procuring a breach of contract – if the developer tenant is aware that it is doing that, probably it may be liable itself. And for what? Might the other tenants even be able to extract so-called ‘licence fee’ damages – in other words, a share in the profits? On the face of it, it seems that in a suitable case they might.

It won’t always be a licence that permits building another flat – it may be a surrender and regrant, or even an entire new lease of the airspace. Will that also be a problem? It will depend on the leases, of course, and probably on further decisions.

Duval isn’t confined to alterations either. That new neighbour’s dog you don’t like – maybe landlord’s permission to keep it isn’t going to be enough anymore? One thing is for certain though – property lawyers will not have heard the last of this case.