Landlord and tenant – Breach of covenant – Appellant landlord applying for determination that respondent tenants in breach of covenant by subletting maisonette – Whether subletting prohibited by user covenant in lease – Whether appellant precluded by estoppel or waiver from relying on breach – Whether user covenant an “unfair term” within Unfair Terms in Consumer Contract Regulations 1999 – Appeal allowed
In 2013, the respondents purchased a leasehold interest in a maisonette on the lower floors of a building in London SW13. The maisonette was held on a long lease granted by the appellant landlord in 2012 pursuant to the provisions of the Leasehold Reform, Housing and Urban Development Act 1993, as an extension to a 125-year lease originally granted in 1978. It contained the same covenants as the 1978 lease, which did not include any express covenant against subletting but did contain a covenant by the lessee “Not to use the premises hereby demised or permit the same to be used for any purpose whatsoever other than as a single private dwelling house in the occupation of the Lessee and his family”.
The 1978 lease, as supplemented by a deed executed in 1980, indicated that the building contained two maisonettes and provided for the letting of the upper maisonette on similar terms to the lower maisonette, and subject to the same covenants and stipulations. The 1980 deed contained a covenant by the landlord to maintain and repair the upper maisonette until it was so let and to enforce the relevant restrictions and stipulations against the occupier if so required by the lessee of the lower maisonette. In practice, no long lease had ever been granted in respect of the upper maisonette and it had been occupied either by officers of the lessor or on short-term lets to tenants, including assured shorthold tenancies.
In April 2015, the respondents sublet the lower maisonette on an assured shorthold tenancy, contrary to the appellant’s expressed view that such a subletting would be a breach of the user covenant. The appellant applied to the first-tier tribunal (FTT), under section 168(4) of the Commonhold and Leasehold Reform Act 2002, for a determination that the respondents were in breach of covenant.
Dismissing the application, the FTT held that: (i) properly construed, the user covenant did preclude subletting; (ii) the appellant was, however, estopped from relying on the user covenant, or had waived any breach of it, since its conduct in relation to the upper maisonette had given rise to a common understanding between the parties that subletting would be allowed; and (iii) furthermore, the user covenant was an “unfair term” within the provisions of the Unfair Terms in Consumer Contract Regulations 1999, since it caused a significant imbalance in the parties’ rights and obligations contrary to the requirement of good faith, by imposing more onerous terms on the lessee, as consumer, in relation to the lower maisonette than applied to the lessor in respect of the upper maisonette. The appellant appealed.
Held: The appeal was allowed.
(1) On its proper construction, the user covenant in the lease prevented the respondents from subletting the lower maisonette. The covenant was a clear statement that the permitted use was use as a single private dwelling-house in the occupation of the lessees and their family. The expression “The Lessee” in the 1978 lease included successors in title where the context so admitted but did not include subtenants. Accordingly, the user covenant was breached if the lessees sublet the lower maisonette to a third party so that the maisonette was in the occupation of that third party rather than the lessees and their family: Burchell v Raj Properties Ltd [2013] UKUT 443 (LC); [2013] 3 EGLR 62; [2013] EGILR 33 applied.
(2) No estoppel by convention had arisen prior to the subletting so as to prevent the appellant from relying on the user covenant against the respondents. For such an estoppel to be established, it was necessary that a party to a transaction had acted on an assumed state of facts or law, the assumption being either shared between them both or made by one and acquiesced in by the other. No estoppel could have arisen by reason of the dealings between the parties immediately before the 2015 subletting, since the appellant had made it clear that it considered that the user covenant was enforceable and would prevent a subletting. No estoppel had arisen earlier, on the occasion of the respondents’ purchase of the lease, since they had not, by reason of any representation or encouragement by the appellant, purchased on the assumption that the user covenant could no longer be relied on against them.
No estoppel on which the respondents were entitled to rely had arisen at any earlier date. While the 1978 lease contemplated that there would soon be granted a long lease of the upper maisonette in similar terms to the lease of the lower maisonette, the lessor had given no specific covenant that it would grant such a long lease by any particular date and the lessor was not in breach of its obligations in that regard. The position was made even clearer by the 1980 deed, which had been executed in circumstances where no long lease of the upper maisonette had yet been granted, and which expressly contemplated that there might, in the future, not be such a grant and made provisions to operate in those circumstances. The deed did not release the lessee of the lower maisonette from any of the covenants in the lease. It therefore recognised that the lessor might not grant a long lease of the upper maisonette, that this would not be a breach by the lessor of any obligation and that the terms of the lease, including the user covenant, would continue in force so far as concerned the lessee. In 2012, the new lease had been granted on terms that included the user covenant. No estoppel by convention had arisen either before or after the grant of the 2012 lease; nor, for similar reasons, had there been any waiver of the user covenant.
(3) It was possible for the 1999 Regulations to apply to the terms of a lease: R (on the application of Khatun) v Newham London Borough Council v [2004] EWCA Civ 55; [2004] PLSCS 73 applied. However, by virtue of regulation 4(2), the 1999 Regulations did not apply to contractual terms that reflected mandatory statutory provisions. The appellant was statutorily obliged to grant the 2012 lease on the terms provided for in sections 56 and 57 of the 1993 Act, with the starting point being that the new lease was to be on the same terms as those in the existing lease, subject to certain limited modifications. In those circumstances, regulation 4(2) applied and the 1999 Regulations did not apply to the contractual terms of the new lease.
Moreover, the relevant contractual term did not cause significant imbalance in the parties’ rights and obligations contrary to regulation 5. Had the lessee not chosen to require the grant of a new lease, then the existing lease would have continued to regulate the parties’ rights for many years. Immediately after the grant of the new lease, the position of the lessee was exactly the same as it had been before and would have continued to be for a further period of more than 80 years under the existing lease. In those circumstances, the user covenant in the 2012 lease could not be said to “cause” a significant imbalance. Further, given that the new lease was granted pursuant to an obligation under the 1993 Act, the user covenant that it contained could not be said to be contrary to the requirement of good faith.
Henry Webb (instructed by Colman Coyle LLP) appeared for the appellant; the first respondent appeared in person for the respondents.
Sally Dobson, barrister
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