Landlord and tenant – Excepted rights – Damages – Ground floor premises converted to bar/restaurant with knowledge of appellant landlord – Respondent leaseholder of first floor flat claiming damages in nuisance, breach of covenant of quiet enjoyment and derogation from grant resulting in diminution in value of flat – County court awarding damages for breach of covenant – Appellant appealing – Whether judge erring in law – Appeal dismissed – Cross-appeal dismissed
In August 2015, the respondent bought a long lease of a first floor flat in Balham, South London from the appellant freeholder. The third schedule to the lease provided for “excepted rights”, reserved to the appellant which included a right to “carry out works to the structure of the building or any part or parts thereof other than the flat… provided that such works do not lead to the diminution of value of the flat” (paragraph 4), and a separate right “to carry out development of any other part of the building or the other flat”… with the same proviso (paragraph 5).
On the ground floor was a firm of estate agents with another flat above. In 2016, the estate agency moved out. In May 2017, an application for planning permission by a prospective new tenant was approved to permit a change of use of the ground floor premises to a bar/restaurant.
The respondent sold his flat in May 2020 for £470,000. He claimed damages against the appellant landlord, alleging nuisance, breach of the express covenant of quiet enjoyment in his lease and derogation from grant. His case was that, had the ground floor remained as an estate agency or similar, his flat would have sold for £575,000.
The county court agreed that the appellant was in breach of paragraphs 4 and 5 of the third schedule which resulted in a diminution in the value of the flat but rejected the claims in nuisance, etc.
The judge awarded £105,000 in damages, representing the difference between the actual value of the respondent’s flat and the value if there had been no breach. However, he refused to award any sums for consequential losses. The appellant landlord appealed and the respondent cross-appealed.
Held: The appeal was dismissed. The cross-appeal was dismissed.
(1) The parties agreed that the matters covered in paragraphs 4 and 5 were in the nature of exceptions rather than reservations, meaning that the intended effect of paragraphs 4 and 5 was the retention by the respondent of pre-existing rights over the building/other flat.
Starting from the premise that paragraphs 4 and 5 (before the provisos) were in the nature of exceptions, it was natural to construe the provisos as contractual promises not to exercise those existing rights in the circumstances set out, ie, if the result would be a diminution in the value of the flat.
The case put forward, both in the pleadings and the evidence, depended on a combination of the physical changes carried out to the commercial premises, taken together with what those physical changes meant for its use, given their intended purpose and their actual effect, both of which were to develop the commercial premises for use as a bar/restaurant. The combination of factors gave rise to liability under the provisos to paragraphs 4 and 5, and in doing the judge correctly rejected the appellant’s case that only a diminution in value caused by physical works in the strict sense would engage liability.
(2) The provisos had the limited but important purpose of protecting the value of the investment made by the respondent as owner of the flat. That outcome represented a compromise between the competing interests of the commercial landlord, the appellant and the interests of the owner of the flat from time to time.
The appellant was a property investment company, and its interest was in maximising its return from the building in terms of profit. Given the location and nature of the building, with the commercial premises on the ground floor, it would obviously have wished to reserve to itself maximum flexibility to make a profit, including by changing the use to which the commercial premises were put. That must have included the possibility of the commercial premises being used (for example) as a bar, restaurant or convenience store, since those were typical uses made of commercial outlets in the area.
(3) For the judge, the need to retain flexibility explained the wide range of the excepted rights, including in particular for present purposes the right to carry out works to the structure of the building so as to carry out any development of whatever nature, and the right to carry out development of any other part of the building or the other flat.
That meant that the respondents might have to put up with a degree of disturbance from time to time, and accept that the status quo might change. There could be no complaint about change per se, because the appellant’s business was property development for profit and inherent in that was the risk of change as far as the owner of the flat was concerned. But the compromise struck was that the owner could complain if any change brought about a diminution in the value of the flat.
(4) In the language of the provisos, the pleadings referred to the development of the commercial premises. The idea of development was not used by the respondent simply to describe the net effect of the physical works without more, but instead was used to describe the fundamental change from estate agency to bar, of which the physical works were emblematic and which they effectively embodied.
That was an appropriate and correct construction of “development” as it was used in the provisos. It was clear from the context that development was intended to have a broad meaning, because paragraph 4 referred to any development of whatever nature, and there was no reason why the word development in paragraph 5 should be construed any more narrowly.
There was no reason why the idea of development in the context of the commercial premises should not in practice be capable of a wider meaning than in the context of the other flat: it was capable of development in a broader range of ways, including as to use. It made little sense to straitjacket the inherently flexible concept of development by reference to the limited available user of the other flat, when the potential user of the commercial premises was not so limited. In practice, the broad idea of development would be narrower in its application to the other flat than the commercial unit.
Nicholas Trompeter KC (instructed by Freedman & Hilmi LLP) appeared for the appellant; Gavin Bennison (instructed by Streathers Solicitors LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Dunward Properties Ltd v Isaac
