Landlord and tenant – Breach of covenant – Implied term – Section 168 of Commonhold and Leasehold Reform Act 2002 – Appellant acquiring headlease of building converted into flats without planning consent – FTT determining headlease including implied covenant that appellant as tenant would comply with legal obligations – Appellant appealing – Whether decision to imply term obviously wrong and contrary to authority – Appeal allowed
The appellant was the tenant under a headlease for a term of 999 years of the upper floors of a building in Barking Road, Plaistow. The respondent owned the freehold of the building and was the appellant’s landlord. Neither of the parties was an original party to the headlease, which was granted in 2006. The appellant acquired the unexpired term in 2017 when the first and second floors of the building had been divided into four flats, each demised by a long sublease in 2007. Each of the subleases had subsequently been assigned. The respondent acquired the freehold in 2018.
The flats were created without planning consent. In 2010, the local planning authority served enforcement notices on all those with interests in the building requiring that the use of the upper floors as four separate dwellings cease and the upper floors be returned to a single flat. The notices were never complied with.
In October 2022, the respondent applied to the FTT for a determination under section 168 of the Commonhold and Leasehold Reform Act 2002 that there had been a breach of covenant. The FTT determined that the headlease included an implied covenant by the tenant that it would at all times comply with “legal obligations” as defined in the headlease. The FTT also determined that the implied term had been breached by the appellant carrying out unauthorised conversion works and permitting the upper floors to be used in breach of the enforcement notice. The appellant appealed.
Held: The appeal was allowed.
(1) The FTT’s conclusion that the headlease included the suggested implied term was unsustainable. The FTT reasoned that the inclusion of a covenant requiring the tenant to comply with relevant legal obligations was normal. It described the express inclusion of such a covenant in the occupational subleases as normal, usual, and rarely omitted. It considered an express tenant’s covenant to comply with legal obligations to be normal and acceptable in current commercial leases and regarded its absence from the headlease as highly unusual.
However, the fact that a particular form of obligation was usually found in a contract of a particular type was of questionable relevance when it came to the implication of terms; the absence of a covenant which would ordinarily be expected to be included in a lease was an indication that the parties did not intend it to be part of their arrangement. The routine inclusion of a particular term in other leases demonstrated that the term was not so obvious that it went without saying, and its omission suggested a conscious decision to leave it out, not a confident consensus that it was unnecessary to include it.
(2) Clause 3.7 stated: “The Tenant shall indemnify and keep indemnified the landlord against all liability in respect of legal obligations.” However, that indemnity was not against breaches of the tenant’s legal obligations, but an indemnity against “all liability” in respect of legal obligations. If the landlord sustained loss as a result of a breach by any person of any statutory or regulatory obligation, the tenant was obliged to indemnify it against that loss. It did not follow that the tenant would therefore be prepared or expected additionally to covenant that it would not breach a legal obligation.
For an appropriate term to be implied, it had to: (i) be reasonable and equitable; (ii) be necessary to give business efficacy to the contract, so that no term would be implied if the contract was effective without it; (iii) be so obvious that “it goes without saying”; (iv) be capable of clear expression; and (v) not contradict any express term of the contract. The suggested implied term satisfied none of those conditions: BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13; (1977) 180 CLR 266 applied.
(3) One important difference between an obligation to indemnify such as the parties expressly agreed, and the covenant to comply with legal obligations which the FTT implied, was that the landlord would have a cause of action for breach of the implied covenant whenever a breach occurred, whether or not it had sustained any loss as a result. The inclusion of an indemnity as a protection for a freeholder which had disposed of its entire interest in the upper floors of the building while retaining the ground floor was understandable. But it was equally understandable why the intermediate tenant, who would not be in occupation, would not wish to assume an obligation to the freeholder which might require it to take action for the benefit of the freeholder, whether or not it wished to do so in its own interests. There was no causal connection between the agreement of one form of protection and the suggested inevitability that the parties intended the unspoken inclusion of the other.
(4) The implied term was inconsistent with the express terms of the agreement in which the parties considered the consequences of a breach of legal obligations. The agreed consequence stated in clause 3.7 (that the tenant would indemnify the landlord for loss which it suffered) had to be understood as the limit of the consequences which the parties intended. They could not be taken additionally to have contemplated that the tenant would be liable to the landlord in damages, or be at risk of an injunction or forfeiture, even if no loss was sustained by the landlord. The risk that its intentions for the property might not be lawful was left with the tenant alone; it would vary the parties’ bargain if, in addition to assuming that risk, the tenant was taken additionally to have covenanted to comply with legal obligations. The FTT’s decision was wrong and the headlease included no such implied term.
(5) It was no part of the respondent’s application that the appellant had been responsible for the division of the property into four flats. It was therefore common ground that the FTT’s finding, that the implied term had patently been broken by the appellant carrying out unauthorised conversion works, was wrong in any event. The appellant did not acquire the headlease until more than ten years after the conversion works were completed.
Sam Madge-Wyld (instructed by Scott Cohen Solicitors) appeared for the appellant; James Sandham (instructed by Lester Dominic Solicitors) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Assethold Ltd v Interface Properties Ltd
