In May 2020, the Supreme Court (‘SC‘) handed down its judgment in the case of Duval v 11-13 Randolph Crescent Ltd  UKSC 18. The decision raises interesting points in practice for parties that are looking to obtain or grant consent to alteration works in commercial and residential leasehold properties. This article analyses the potential consequences for landlords, property owners, and developers operating in the commercial property sphere.
The final decision centred around the interpretation of mutual enforceability clauses, qualified versus absolute covenants.
The case related to a single block residential building, separated into nine individual flats, each let under a 125 year long lease on similar terms. The landlord, 11-13 Randolph Crescent Limited, was a freehold company owned by the respondent, Dr Duval, and the other tenants in the building.
In 2015, Mrs Winfield, one of the tenants, wanted to carry out works to her flat. The proposed works included the removal of a section of an internal load-bearing structural wall, which was absolutely prohibited under her lease.
The landlord was willing to grant consent to the works, however, Dr Duval objected. In December 2015 and February 2016, Dr Duval requested that the landlord secure an undertaking from Mrs Winfield not to act in contravention of a clause prohibiting structural works by cutting or maiming any of the load-bearing or structural walls within her flat. On both occasions, Dr Duval agreed to indemnify the landlord if legal action became necessary.
In May 2016, Dr Duval began proceedings against the landlord, seeking a declaration that the landlord did not possess the power to permit Mrs Winfield to carry out structural works to her flat.
Leasehold models for enforcement of covenants
The enforcement of covenants by leaseholders differs on a case-by-case basis, but there are generally three models that apply.
Model 1: The first model, which is most prevalent in the commercial property sphere, sees the landlord control the enforcement of covenants for each tenant.
Model 2: Contrastingly, a letting scheme is often used in the residential property sector. Under a letting scheme, each tenant covenants directly with all other tenants, with an intention for mutual enforceability of each covenant.
Model 3: The third model operates as a middle-ground between the former models. Here, there is no letting scheme, and the leasehold tenants cannot sue each other directly for breaches of covenant. However, tenants can request that the landlord takes action against a fellow tenant upon certain conditions being met, such as the payment of costs and the provision of security for such costs, just as Dr Duval did.
The relevant lease clauses
So what are the relevant lease clauses, what do they mean, and what is the relationship between them?
The first clause was concerned with alterations, improvements and additions. It stated that a tenant cannot undertake works to their property without permission from their landlord. This is a qualified covenant. In the absence of express drafting, it is implied under statute that such consent from the landlord cannot be unreasonably withheld.
The second clause was:
“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…”
Contrastingly, this is an absolute covenant, which means a complete ban on a particular activity. Common absolute covenants include prohibitions against subletting the premises, structural works, keeping pets at the premises, and running a business from the premises for instance.
This case highlights the relationship between these two types of clauses. The absolute prohibition of the second clause did not extend to routine repairs, renovations, and alterations, these are covered by the qualified covenant. Consequently, routine works and alterations would not impinge on the other lessees or adversely affect the structure.
The last relevant clause was the mutual enforcement clause, the clause on which this case was decided. The clause points to the prohibitions above and precludes the landlord from granting a licence to any lessee to do anything that would otherwise amount to a breach of an absolute covenant in that lessee’s lease. Whilst the clause does not expressly state that the landlord cannot grant consent to the works, it was found to be implied.
The SC confirmed that where a lease contains an absolute covenant, a requirement for all tenant leases to be granted in substantially the same form, and a mutual enforceability covenant obligating the landlord to enforce such covenants upon request, then the landlord would be in breach if they give consent to another tenant to carry out works in breach of an absolute covenant. The SC argued that it would be “uncommercial and incoherent” to suggest that a dissenting tenant’s enforcement request could be overlooked by the landlord.
Application to commercial properties
The impact of this case on a commercial property is yet to be fully appreciated in practice. If a landlord is approached by tenants who wish to undertake prohibited alteration works that require landlord consent, any of the following could apply:
- A landlord could be mandated by way of an injunction to take enforcement action against a breaching tenant, requiring them to reinstate such work.
- Recently issued licences for works may be open for challenge due to the 12-year limitation period in which to bring a claim for breaches of covenants. Damages may be minimal, but nuisance claims could be significant.
- A landlord, property owner and/or developer alike could face uncertainty, which could be enough to reduce and/or hinder development opportunities.
- Its application may extend to qualified covenants that are not complied with; for instance, a landlord will not be able to grant retrospective consent to works performed in breach of any covenants requiring a landlord’s prior approval.
The potential challenges are varied, and there is no reason why the mutual enforceability clause could not be applied to other situations where absolute covenants prohibit certain types of flooring, signage, and usage for instance. Where landlords have previously shown discretion around such matters, they may now be more cautious.
But is it all doom and gloom for landlords who find themselves in a position where they are happy to grant consent to alteration works to be performed by a leaseholder, but a separate leaseholder is objecting to the proposed works as per their mutual enforceability covenant? The following proposed solutions present options for landlords to consider to resolve this potential issue:
- Decline to grant consent to the works.
- Re-seek consent from all the affected tenants.
- Grant consent to the works in the form of a licence and suffer the potential damages which could be minimal, should all the tenants not consent.
- Grant consent to the works on grounds that the landlord is protected against claims by other tenants, for example, by requiring an indemnity from the tenant, and granting consent on the condition that the tenant reinstates the premises in the event of a compliant for breach of the mutual enforceability clause.
- Formally vary the relevant lease, as opposed to granting a licence, on the premise that the landlord is ‘enforcing the lease’.
- Make an application to the Lands Tribunal under Section 84 of the Law of Property Act 1925, which allows the modification or discharge of a restrictive covenant. This option is a possibility if the lease was granted for a term of more than 40 years, and at least 25 years have expired.
These are just some of the issues and solutions presented by the Duval case. In practice, it is likely that more will come to fruition.
- Mutual enforceability provisions may become obstructive to proposed alteration works.
- Previous landlord discretion surrounding alteration works may now require greater thought.
- There is uncertainty as to how this case will impact landlords in the commercial property sector, but it may result in potentially reduced development opportunities for tenants.
- The power wielded by tenants could increase, and more varied options may need to be considered by landlords to solve alteration works being blocked by dissenting tenants.