The vice of absolute covenants

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The Court of Appeal decision in Duval v. 11-13 Randolph Crescent Limited will come as a rather unpleasant surprise for landlords who have included a clause in their leases that they will enforce similar covenants in lettings of other units in the same block.

Background

This case concerned two houses that had together been converted into nine flats. It appears from the judgment that each lease of a flat contained:

  • an absolute covenant by the tenant not to "cut maim or injure or suffer to be cut maimed or injured any roof wall or ceiling within or enclosing" the premises demised by the lease (Absolute Covenant); and
  • a covenant by the landlord that every lease of a flat in the building would "contain … covenants of a similar nature to those contained in clauses 2 and 3 [which included the Absolute Covenant] … AND at the request of the Tenant and subject to payment by the Tenant of (and provision beforehand of security for) the costs of the Landlord on a complete indemnity basis to enforce any covenants entered into with the Landlord by a tenant of any residential unit in the Building of a similar nature to those contained in clause 2 of this Lease" (Enforcement Covenant)

One of the tenants applied to the landlord for consent to undertake works that included the removal of a portion of a load-bearing wall at basement level. The works were prohibited by the Absolute Covenant but the landlord was minded to grant consent. However, a tenant of another flat objected on the basis that the lease prevented the works and if the landlord consented to them it would be in breach of the Enforcement Covenant.

The question before the Court of Appeal was whether the landlord of a block of flats is entitled to grant a licence to a tenant to carry out works which would otherwise breach an absolute covenant (being a covenant like the Absolute Covenant, that absolutely prohibits a certain action) contained in that tenant's lease, where the leases of the other flats have the benefit of a covenant equivalent to the Enforcement Covenant that the landlord will enforce the lease covenants where requested to do so by another tenant.

Decision

The landlord argued that "if the landlord consents in advance to some activity on the part of a lessee, that activity will not amount to a breach of covenant, so that there will be nothing to enforce". The court disagreed.

The court noted that the effect of the Enforcement Covenant was twofold:

  • firstly, it was a promise that each lease would contain similar legal binding obligations on each tenant; and
  • secondly, it was a promise that the landlord would enforce the covenants at the tenant's request and expense. As such it was a contingent promise, the contingency being the tenant's request and the provision of security.

While the landlord had the power to license what would otherwise be a breach of the Absolute Covenant (thereby precluding any subsequent action by the landlord against that tenant for breach of covenant) that did not mean that the grant of the licence would not amount to a breach of the Enforcement Covenant leaving the landlord open to a claim from one of the other tenants.

Although the Enforcement Covenant was contingent, there was a long line of authority that where a party undertakes a contingent obligation he must not take steps to prevent the contingency from occurring or put it out of his power to comply with the obligation if and when the contingency arises. Consequently the court concluded "once the landlord has granted a licence permitting what would otherwise be a breach of covenant, a lessee cannot make the request for enforcement effectually. Thus the need to make the request is dispensed with; and the landlord has broken his own contract because he is no longer able to fulfil the request".

The landlord was therefore held to be in breach of the Enforcement Covenant.

Commentary

This decision raises a number of issues including what power tenants should have over their landlords and whether a clause equivalent to the Enforcement Covenant hinders a landlord's ability to manage a building.

A landlord will not have a right to do as it pleases with its own property if its leases contain wording akin to the Enforcement Covenant since such a clause can prevent the landlord from granting consent to an action that would otherwise breach an absolute covenant. There are practical reasons why landlords will want to include absolute covenants in a lease (for example, in order to control certain activities) but this does not necessarily mean that the landlord will never be minded to grant a one-off exception and consent to those activities at some point in the future.

Where there is a covenant like the Enforcement Covenant, the other tenants in the building can take steps to prevent the landlord granting consent to the works proposed on the basis that it would be a breach of an absolute covenant. If the works have already been approved by licence and completed, the other tenants could have an action against the landlord for damages for breach of covenant. This could leave a landlord in the unfortunate position of being reliant on the other tenants only exercising their right to prevent the works for reasonable and proper reasons. However, the provisions could be abused leading to other tenants bringing vexatious claims.

The judgment confirms that if the Absolute Covenant had been qualified by expressly stating that the works could be carried out subject to the landlord's prior consent, the landlord could have provided consent without being in breach of the Enforcement Covenant. However, is it right for a landlord to have to qualify its covenants to escape liability from a clause similar to the Enforcement Covenant? Had the Absolute Covenant been qualified then, in relation to any works constituting improvements, there would have been an implied term that the landlord's consent could not be unreasonably withheld (section 19(2) Landlord and Tenant Act 1927). This leaves the landlord with an unenviable choice: either impose absolute covenants to ensure control over a particular activity and risk breaching any clause equivalent to the Enforcement Covenant; or, avoid breach of a clause similar to the Enforcement Covenant by only including qualified covenants which will restrict the landlord's control and discretion through the application of the principles of reasonableness. The view of the court, however, was clear – the "vice" in this case lay not in the drafting of the Enforcement Covenant but in the inclusion of the Absolute Covenant in the Lease.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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