Before granting permission for works and a change of user to commercial premises in a mixed-use building, it would be prudent for landlords to have regard to their contractual obligations vis-à-vis other tenants of the building.
In Dunward Properties Ltd v Issac [2022] EWHC 3276 the appellant was the freehold owner of a mixed-use building in Balham, London SW12. The building comprised commercial premises on the ground floor and residential flats above. The respondent was the tenant of one of the residential flats. In 2015, the tenant purchased his flat for the sum of £574,950. At the material time, the commercial premises was being used as an estate agency.
The tenant’s lease contained a number of “excepted rights” reserved to the landlord, which included the following rights in paragraphs 4 and 5 of the third schedule: “4… to carry out works to the structure of the building or any part or parts thereof other than the [tenant’s] flat so as… (c) to carry out development of whatever nature upon the building provided that such works do not lead to the diminution of value of the flat… 5. The right to carry out development of any other part of the building or the other flat provided that such works do not lead to the diminution of value of the flat.”
The “excepted rights were, therefore, subject to the proviso: “…that such works do not lead to the diminution of value of the flat.”
In 2016, the estate agency vacated the commercial premises. In 2017, planning permission was granted for a change of use of the commercial premises from Class A2 to Class A4 to permit the opening of a cocktail bar and restaurant. The works carried out to the commercial premises were both structural and non-structural in nature and the landlord was aware of the same.
Following the opening and operation of the bar and restaurant by the new lessees of the commercial premises, the tenant complained to the landlord of nuisance emanating from the bar. The tenant subsequently put his flat up for sale in May 2020 and sold it for £470,000. He issued a claim against his landlord in nuisance, breach of covenant of quiet enjoyment and derogation from grant. These claims did not succeed on the facts at first instance, but his claim against the landlord for breach of paragraphs 4 and 5 of the third schedule did. The court found that the works had led to a diminution in the value of flat. The tenant was awarded £105,000, being the diminution in value.
On appeal, the landlord challenged the effect of the proviso by arguing that it did no more than set a limit on the retained rights in a manner which was declaratory only, and which did not itself constitute a binding contractual obligation. The High Court disagreed. In construing the disputed contractual terms, one had to take paragraphs 4 and 5 of the third schedule as the starting point. They were in the nature of exceptions and in such circumstances it was natural to construe the proviso as a contractual promise not to exercise those existing rights in the manner set out if the result would be a diminution in the value of the flat.
The landlord’s further ground of appeal that the diminution in the value of the flat was caused by the change in use of the commercial premises, and not the actual physical works or development, which the proviso covered, was also rejected. The overall change made to the commercial premises by means of the works, given both their intended purpose and their actual effect, fell within the scope of paragraphs 4 and 5 of the third schedule.
Elizabeth Dwomoh is a barrister at Lamb Chambers
