Supreme Court Places Limits on Freehold Company Powers

6th May 2020 Commercial Litigation

The Supreme Court has been working during the lockdown period and has given judgment today in this important case involving long lease disputes. Although as the judgement was given by Lord Kitchin and all the other justices agreed with it, it seems that he has (at least in this case) being doing most of the work!

It is increasingly common for flat leaseholders to band together and create a company to purchase the freehold. They then all become shareholders in the freehold owning company and some or all of them also assume directorships of that company. This can become challenging when a dispute arises between leaseholders as they then often wear multiple hats as leaseholders and officers of the freehold company and it can be hard to separate their duties to the freeholder and the other leaseholder from their own aims and objectives.

To a degree this is what has happened in the case of Duval v 11-13 Randolph Crescent Ltd. The Appellant company owns the freehold of a building with nine flats in it. The Respondent owns leasehold estates in two of those flats and a Mrs Winfield owns a leasehold in a third flat.

All of the leases are essentially the same and contain clauses that are common to many flat leases. They contain clauses:

  • Preventing alterations, improvement, or additions to the flats without prior written consent from the landlord;
  • Preventing leaseholders from committing waste and specifically prohibiting cutting into any roofs, walls, ceilings or service media; and
  • Requiring the freeholder to enforce covenants, including the above ones, against other leaseholders.

In 2015, Mrs Winfield sought permission from the Appellant to carry out works to her flat including the removal of a substantial part of a load bearing wall. Permission was refused, in which the Respondent was substantially involved. However, after further representations for Mrs Winfiled the Appellant decided to give permission as long as Mrs Winfield obtained a suitable indemnity insurance policy. The Respondent did not agree with this and asked the Appellant to obtain an undertaking that she would not act in breach of her lease and then ultimately issued proceedings against the landlord. In these proceedings the Respondent sought a declaration that the Appellant did not possess the power to permit Mrs Winfield to act in breach of her lease. At first instance the County Court held that the Appellant had no power to waive any of the covenants in the lease without the prior consent of all of the lessees of the flats in the building. This then proceeded to the Supreme Court via further appeals.

The ultimate argument that came before the Supreme Court was the balance between clauses prohibiting specific actions and the landlord’s power to allow those actions to happen anyway. For the Appellant, if there was no ability for the landlord to permit breaches then the arrangement is unworkable, was not the one contemplated by the parties, and creates total chaos and endless conflict as landlords are essentially powerless. For the Respondent, if the landlord had a power to permit any breach then there was little point in prohibiting anything at all and little purpose in requiring a landlord to enforce breaches as they could always avoid an obligation to enforce a breach by simply permitting it. Therefore there was little meeting of minds and as Lord Kitchin put it the “parties ... disagree fundamentally about the proper interpretation of the terms in [their respective] leases”. The Supreme Court therefore approached the situation by seeking to construe those terms in context on the basis of how a reasonable person would view them.

The Supreme Court started with four basic premises:

  1. A lease is a long-term and valuable contract;
  2. It must have been clear to all parties that over such a long contract works would be needed in each flat;
  3. Routine improvement works which would need landlord consent would not normally be a problem for other flats and it would be sensible for a landlord to agree to them;
  4. The parties must have understood the need for the landlord to maintain overall control of the common areas and the building structure.

The Supreme Court also drew a distinction between the lease clause which prohibited improvements without consent and the lease clause which blanket prohibited waste and cutting into walls and service media. These two clauses conflicted with one another. Improvements of any but the most trivial sort would be almost impossible without cutting into walls and service media. For example, re-wiring would need extensive cutting into walls and service media to complete. It could not have been the intention of the parties that this would not be permissible in any circumstances. The court resolved this distinction by holding the clause prohibiting cutting into walls and service media was characterised by its initial prohibition of waste. Therefore its prohibitions were not blanket but were more properly directed at cutting into walls and service media in a manner that would cause damage to the building. Therefore the correct construction of the lease was that routine improvements were permitted and cutting into walls etc where it was incidental to those improvements was similarly permitted provided the landlord elected to consent to it. However, more substantial works which might damage the building were forbidden.

The court then turned to the issue of consent. The leases stated that every one of them would be similar. The Appellant pointed out that this did not mean that every lease had to be the same and so limited variations were permitted. The court acknowledged this but did not give it much weight finding that similarity would mean that similar obligations would arise for every leaseholder and what was being contemplated here would be beyond that. The question then was whether a landlord could in fact consent to a specific prohibition against cutting into walls and service which went beyond incidental improvements. This was analysed by the Supreme Court as an implied obligation rather than something express in the lease. However, they did find that such an implied obligation existed. If such an implication did not exist then the clause prohibiting such action would be robbed of all effect and the promise made by the landlord to give everyone a similar lease could not then be kept. The Appellant then sought to argue that it was not obliged to enforce a breach until it was asked to do so and provided with security for its costs as the lease required. However, this argument was also rejected as if it was allowed then a landlord would still be able to break its promises by simply giving permission quickly or waiving the breach before anyone objected.

For all these reasons the appeal was dismissed. The landlord was not permitted to vary the lease to permit something that was absolutely forbidden.

This is a really important decision for freeholders and leaseholders. It is increasingly common for flat owners to create a company to buy the leasehold. This can work well but it can also create problems if a group band together to force through things that others might not want or if one person comes to control the freehold company and abuses it for their own benefit. The decision today puts limits on the powers of freeholders which effectively stop them from doing things that the lease does not permit and from allowing leaseholders to breach the lease terms.​​​​​​

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David Smith is a Partner located in Londonin our Commercial Litigation department

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