Supreme Court makes ground-breaking ruling on enforcement of covenants

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The Supreme Court’s judgment in the case of Duval v 11-13 Randolph Crescent Ltd has profound implications for both landlords of blocks of flats and flat owners.

There are generally three ways in which leaseholder covenants can be enforced.

Under the first model, which is most prevalent in the commercial world, the landlord has control.

In contrast, the model followed under a letting scheme entails covenants being made between the tenant and all other tenants in the building. It’s generally used in residential scenarios and is rare in commercial schemes as the purpose of this structure is to ensure that covenants are mutually enforceable.

The nature of the third model, commonly found in leases pertaining to residential buildings, falls somewhere in between. Like the commercial model, a letting scheme is not involved and tenants cannot sue each other directly for breaches of covenant. Instead, subject to certain conditions such as those relating to costs, tenants can request that the landlord takes action against a fellow tenant.

It was this third model that was under scrutiny in Duval v 11-13 Randolph Crescent Ltd. The building had been converted into nine flats and the freehold was owned by a company of which the lessees were shareholders. The lease contained a covenant between the landlord and each tenant that all other flat leases would contain covenants similar to those the tenant was giving and that, at the request of the tenant and subject to provision of security for costs, the landlord would enforce the covenants given by other flat owners.

Mrs Winfield, a lessee, wished to refurbish her flat which would involve removing part of a load-bearing wall. However, an absolute covenant in the lease prohibited against “cutting or maiming…any roof wall or ceiling within or enclosing the demised premises”. She applied for a licence to carry out the works which the landlord was prepared to grant. But another tenant, Dr Duval, objected on the grounds that to do so would be a breach by the landlord of the obligations it owed her and a legal battle ensued.

The Court had to decide whether the grant of a licence by the landlord to Mrs Winfield would constitute a breach of its obligations to Dr Duval. The Supreme Court upheld the Court of Appeal’s judgment that it would.

The Court concluded that the landlord’s obligation under clause 3.19 was contingent. The obligation to enforce Mrs Winfield’s covenants would only arise if Dr Duval made a request and provided security for costs. Because Dr Duval did not provide security for the costs, despite having made a request, the landlord was not under any express obligation to respond.

However, the Court highlighted that, depending on the circumstances, it’s common practice for a party undertaking a contingent or conditional obligation to be under a further obligation not to prevent the contingency from occurring or from relinquishing the power to discharge the obligation if the contingency arises.

Dr Duval’s contended this was an express term. The Supreme Court decided it was an implied term and, therefore, sensitive to the express terms of the contract and must satisfy the tests of business efficacy or obviousness. In this case, the Supreme Court concluded that it would be “uncommercial and incoherent” to say that clause 3.19 could be rendered impractical by a landlord giving consent to a lessee to carry out work before another lessee could make a request and provide the necessary security.

This judgment is likely to have acute effect on ‘third model’ lettings as the reasoning behind it applies to any absolute covenant or qualified covenant which is not strictly adhered to. Therefore, it might affect anything from structural alterations to keeping a pet. Generally, such a term will be implied. As a consequence of this decision, a landlords’ jurisdiction in such situations will be severely restricted and shifted to the other tenants involved.

Furthermore, the limitation period for a breach of covenant is 12 years, and so tenants may be in a position to retrospectively challenge the grant of licences, permissions or concessions made by landlords as far back as 2008.

Consequently, the judgment presents a myriad of dilemmas for landlords operating under the third model and we are likely to see the ripple effect of it for some time to come.