UK: Development – The Clash Of Covenants

Last Updated: 2 June 2016
Article by Bryan Johnston, Emma Broad, Emma Frost and Katie Paul

The recent High Court decision in Timothy Taylor Ltd v. Mayfair House Corporation and another [2016] EWHC 1075 (Ch) illustrates a point made in our recent article " Upward development – the extra layer", that landlords undertaking works to a let building need to carefully consider the interplay between the exercise of any reservations in the letting documents and the covenant for quiet enjoyment. 

Background

In 2007 the tenant (Timothy Taylor Limited) took a lease of ground floor and basement premises in Mayfair for use as a high-class modern art gallery. In 2013 the landlord (Mayfair House) commenced redevelopment works to the upper floors of the building (of which the premises formed part) with the intention of creating a number of residential flats.

To facilitate the works, scaffolding was erected around the building. While there had been an earlier suggestion that the scaffolding would be erected on the basis of pillars (to help preserve the external appearance of the gallery) it was in fact put up so as to envelop the whole building. This gave the unfortunate impression that the gallery was part and parcel of the development site. As one witness commented, the effect was to turn the gallery into a "coffin-like enclave".

In addition, the main hoist for lifting materials on to the site was positioned so that delivery lorries would have to pull up immediately in front of the entrance to the gallery – thereby adding to the impression that it was closed to business.

Inevitably the works also generated considerable noise albeit "no more than one gets on any building site". The tenant complained that this was having a negative effect not only on its business but also on the health of its employees.

The terms of the lease 

The lease to the tenant contained an express covenant for quiet enjoyment from the landlord.

The lease also contained the following express reservations in favour of the landlord:

  • "Full right and liberty at any time:

    1. to alter, raise the height of, or rebuild the Building or any other building; and 
    2. to erect any new buildings of any height on any adjoining property of the Landlord

      in such manner as the Landlord thinks fit even if doing so may obstruct, affect of interfere with the amenity of or access to the Premises or the passage of light and air to the Premises, and even if they materially affect the Premises or their use and enjoyment ..."; and
  • "... to erect scaffolding for any purpose connected with or related to the Building and Premises provided it does not materially adversely restrict access to or the use and enjoyment of the Premises ...".

The issue

With some discrete exceptions, the parties accepted that the landlord was entitled, by virtue of the express reservation in the lease, to undertake the redevelopment works. The issue turned on how the right to build fitted with the express and unqualified covenant for quiet enjoyment as neither provision automatically "trumped" the other.

The High Court distilled the following proposition from the relevant case law: "the landlord's reservation of a right to build in a way which, but for that reservation, would constitute either a breach of the covenant for quiet enjoyment or a breach of the implied covenant not to derogate from grant should be construed as entitling the landlord to do the work contemplated by the reservation provided that in doing the work the landlord has taken all reasonable steps to minimise the disturbance to the tenant caused thereby ... ". This was so even though the reservation to build was expressed in "wide and untrammelled terms". 

Accordingly, the issue was whether or not the landlord had failed to take all reasonable steps to minimise the impact of the works on the tenant.

The decision

On a review of the facts, the High Court found the landlord had not acted reasonably in exercising the rights reserved to it under the lease and was therefore in breach of the express covenant for quiet enjoyment. For example:

  • both the scaffolding and the hoists could have been designed and erected in a better way to minimise the impact on the tenant; and
  • the judge commented that in relation to the noise what was "strikingly missing" was "any real liaison with the Tenant" from before the start of the works to "inform the Tenant as to the likely duration of the works, the noise levels likely to be experienced and to discuss with the tenants the means of being able to mitigate the impact of the noise on the use of the gallery".

The tenant was awarded damages equivalent to a rebate of 20 per cent of the rent paid since the scaffolding went up and going forward the High Court awarded damages based on 20 per cent of the rent for the premises from the date of judgment until completion of the works.

The High Court's conclusion was reached notwithstanding the fact that the landlord asserted (among other things):

  • it had engaged a contractor that was part of the Considerate Contractor Scheme and had included in the tender documents a number of express provisions requiring the contractor to have regard to the requirements of the gallery and to minimise interference with the tenant's use and enjoyment of its premises; and 
  • its project managers had sought to liaise with the tenant to accommodate the reasonable requests of the gallery (for example, ceasing noisy work at times when the gallery had notified the landlord it required quiet for a particular event), however such discussion occurred only after the works commenced.

Advice for landlords looking to undertake works

Any landlord looking to undertake works, whether of repair or redevelopment, to buildings which are let should first check the terms of the relevant leases to ensure that they reserve all rights required by the landlord to do the works being proposed. If sufficient rights are not reserved the landlord will not be entitled to undertake the works and there will be no need to consider the covenant for quiet enjoyment. 

If sufficient rights have been reserved, then landlords need to be aware that, no matter how widely worded those reservations may be, they will still be qualified by the covenant for quiet enjoyment (whether express or implied). Landlords seeking to exercise such rights must therefore ensure that they take all reasonable steps to mitigate the impact of the works on their tenants. While what is reasonable will turn on the facts of each individual case, landlords would be well advised to:

  • share details of the works:

How much the tenant knew of the proposed works when it originally took the lease will be a relevant factor. Accordingly, if you are letting premises that you know are going to be subject to works you should ensure that the new tenant is made fully aware of the same and that this is properly documented;

  • be proactive:

Landlords must not wait until they receive complaints from their tenants before opening a dialogue with them about the works. Landlords should begin liaising with their tenants as soon as possible (and in any event before the works commence – something the landlord did not do in this case) and should continue liaising with them until the works have completed. At the very least, tenants should be informed as to what is proposed, when the works will start and how long the works will last. Tenants should also be consulted on how best to minimise the impact of the works on them and their businesses;

  • consider financial compensation:

Any rent reduction or other financial compensation offered by landlords to affected tenants is likely to be taken into account in judging the overall reasonableness of the steps the landlord has taken. In this case the landlord's refusal to discuss a rental discount was something that "raises the bar as to what reasonableness requires" therefore landlords are advised to be open-minded and to at least give their tenants the chance to make representations;

  • be mindful of the context:

The use and rental level for the premises concerned may also be relevant. In this case the High Court commented that the fact the premises were let as a high-class art gallery at a high rent meant that "the right to build should be exercised with a particular regard";

  • consider who benefits from the works:

If the works are for the benefit of the landlord and confer little or no benefit on the tenants then this is likely to be a factor taken into account in judging reasonableness. As such the steps required of a landlord undertaking essential repairs to a building may be different from those required of a landlord undertaking a redevelopment exercise to increase the value of its reversion.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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