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Absolute Covenants: An Absolute Nightmare?

When many of today's properties are purchased, their buyers intend to carry out major renovations, which often include structural alterations, to create more modern and open plan living environments.  Whilst structural alterations are prohibited under most leases, freehold companies usually allow such alterations to take place subject to appropriate licences being put in place and premiums being paid.  However, the recent case of Julia Duval v 11-13 Randolph Crescent Limited [2018] EWCA Civ 2298 may have put a stop to this.

In this case, the Claimant was the tenant of two flats at 11-13 Randolph Crescent.  The Defendant, 11-13 Randolph Crescent Limited, was the freehold owner of the building.  There were nine other flats in the building and each tenant had a share in the freehold company. All leases in the building were in a standard form and contained two covenants that are commonly found in buildings of this type.

Clause 2.7 was an absolute prohibition on cutting into any wall or ceiling.  Clause 3.19 was a similar covenants provision, i.e. that all leases in the building (granted at a premium) would contain similar covenants and that at the request of a tenant, subject to them providing security for costs, the freehold company would enforce the covenants given by another tenant.

In July 2015, the tenant of flat 13 approached the freehold company for consent to carry out various alterations to her property, including structural alterations such as widening a door way.  The freehold company was minded to grant consent to these works, but for various reasons the Claimant did not wish consent to be granted.  She contended that pursuant to clause 3.19, the freehold company was obliged to enforce covenants in other tenant's leases, subject to an appropriate indemnity being given.  She said that if the freehold company were to licence an activity which would otherwise be a breach of the lease (in this case, structural works), it would have put it out of its power to comply with clause 3.19 with regard to the licence of waiver, and that its implicit in the covenant that the freehold company could not do this.

The freehold company disagreed, and argued that a landlord has the right to do as it wishes with its own property and is free to consent to what otherwise might be a breach of the lease and waive breaches of the lease if it chooses to do so.  They argued that clause 3.19 does not prevent a landlord from doing so and that if a licence has been granted, no breach of the lease has taken place, so there is nothing to enforce.

At first instance the Court found for the Claimant, but on appeal to the County Court at Central London, the Court found for the freehold company.

The Court of Appeal have now handed down their ruling which is a middle ground between the two parties.  LJ Lewison has ruled that the freehold company does have the power to licence what would otherwise be a breach of covenant, but in doing so, commits a breach of clause 3.19 of the other leases.  If another tenant wishes to enforce clause 3.19 against the freehold company, they have a right of action.  If the licence has already been granted and acted upon, the freehold company will not be able to enforce the covenant, and the other tenant's only remedy will be in damages for breach of covenant. If the licence has not yet been granted, the other tenant could apply for injunctive relief to prevent it being granted, but before deciding whether to grant the remedy the Court would have to examine what the tenant's objections were to the grant of the licence.

Clauses of this type are common in long residential leases, so where does the ruling in this case leave freehold companies and their tenants who wish to renovate their properties?  The short answer, is in a very tricky position.

If the directors of freehold companies are asked to licence structural works, they may be advised that they should only do so if they first obtain the consent of all other tenants in the building.  If they fail to do so, they will leave themselves open to a claim for breach of the lease by the other tenants, but obtaining the consent of all tenants is often not a practical or sensible option.  The same goes for the installation of LED lighting or wifi, which technically  involve breaches of covenants not to cut walls or ceilings.

This ruling not only applies to structural works, it applies to any breach or proposed breach of the lease.  For example, leases often state that floors must be carpeted but most freehold companies allow wooden floors to be laid, subject to appropriate sound deadening materials being used.  Following this ruling, such licence could not be given without either first obtaining consent of all other tenants, or the freehold company risks opening  itself up for a potential claim for breach of the lease, which it may not want to risk. 

It was argued at the Court of Appeal, that tenants would act reasonably were they approached for such consents, but the wealth of landlord and tenant case law shows this is rarely the case!  In the case of the wooden floor, a tenant who would not be in any way affected by the wooden floor, could still object to it being laid, or in the case of structural works, may only agree to give consent if paid a personal premium.  In such situations, a freehold company may decide to grant consent if it believes it is the right course of action and deal with any claim brought by the capricious tenant.  If such a tenant had no valid reason for objecting to the licence of the activity, it is questionable that they would receive damages for the breach of the lease, but time and money would have to be spent in defending such a claim.

So practically speaking, this may mean that freehold companies will decide simply not to licence any acts, which, but for the licence, would constitute a breach of the lease, so no structural works will be permitted.  What impact this will have on the residential property market remains to be seen.  It could result in falling sales and lower prices being paid, as if a purchaser knows that no renovations will be permitted they would likely think twice about buying.  It will likely lead to an increase in disputes as tenants take action against the freehold company for permitting breaches of other leases to take place and it will almost certainly lead to unhappy tenants, who are now reliant on their neighbours to act reasonably when it comes to the management of the building. 

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