Assethold Limited v Interface Properties Limited [2024] UKUT 371 (LC)
The facts
The key issue in the appeal was whether, in circumstances when a lease includes a covenant by the tenant to indemnify the landlord against any liability in respect of legal obligations, but does not include an express covenant by the tenant that it will comply with all legal obligations pertaining to the property, was such a covenant to be implied into the lease?
The appellant was the tenant under a headlease granted in 2006 for a term of 999 years of the upper floors of a building in Barking Road. The respondent was the freeholder owner of the building. The appellant had taken an assignment of the headlease in 2017, by which time the first and second floors of the building had long since been divided into four flats demised by a long sub-lease in 2007. The respondent acquired the freehold in 2018.
The four flats were created without the benefit of planning consent. In 2010 the local planning authority began enforcement action. The enforcement notices had not been 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 basis of the application was an allegation that, by failing to comply with the enforcement notice, the appellant had breached an implied term in the headlease.
The FTT determined that the headlease included an implied covenant by the tenant that it would at all times comply with "legal obligations" meaning "any obligation from time to time created by any Enactment or Authority which relates to the Property or their use..." The FTT also determined that the implied term had been breached by the appellant.
The appeal
The Upper Tribunal held that the FTT's conclusion that the headlease included the implied term was unsustainable. The bedrock of the FTT's reasoning was that the inclusion of a covenant requiring the tenant to comply with relevant legal obligations was "normal". It noted the express inclusion of such a covenant in the occupational subleases describing it 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".
The Upper Tribunal reject this reasoning. It held that the fact that a particular form of obligation is usually found in a contract of a particular type is of questionable relevance when it comes to the implication of terms; if anything, the absence of a covenant which would ordinarily be expected to be included in a lease is an indication that the parties did not intend it to be part of their arrangement. Its omission suggests a conscious decision to leave it out, not a confident consensus that it is unnecessary to include it. The Upper Tribunal further held that the FTT's reference to what might routinely be included in commercial leases paid no regard to the unusual features of this particular agreement. The FTT did not mention that the headlease was for a term of 999 years, nor that the rent was a peppercorn yet no premium was paid, nor that it included a forfeiture clause which could be invoked only when the terms of the lease had been broken "perpetually". These are not the terms of a typical commercial lease.
The second strand of the FTT's reasoning was that because the tenant had agreed to indemnify the landlord against "its breaches of legal obligations" it must be implicit that the tenant would comply with the same obligations "in order to prevent incurring liability under the indemnity clause". But the indemnity was not an indemnity against breaches of "its", i.e. the tenant's, legal obligations, it was 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. The Judge held that it did not follow at all that the tenant would therefore be prepared or expected additionally to covenant that it would not breach a legal obligation.
The Judge went on to hold that the suggested implied term did not satisfy any of the conditions for an implied term and the appeal was therefore allowed.
Lesson learnt
The courts/tribunals are slow to imply terms into leases. The absence of a "standard term" which one would normally expect to find in a particular lease is not a ground upon which such term will be implied. On the contrary, as stressed by the Upper Tribunal, the absence of a "standard term" militates against it being implied.
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