How does the quiet enjoyment covenant affect a landlord's right to build?

28th July 2016

The interrelationship between a landlord’s right to undertake works to its retained land and the tenant’s rights under its lease have been considered in two recent cases. In Timothy Taylor Ltd v Mayfair House Corporation & Another the court considered how to reconcile the competing interests of a landlord’s exercising its express right to rebuild and the tenant’s allegation that this breached the covenant for quiet enjoyment.  A similar conflict between the landlord’s right to undertake building works and the tenant’s rights were also considered in the case of Iceland Foods Ltd v Aldi Stores Ltd.

Background

The principle of quiet enjoyment ensures that a tenant is free from disturbance as a result of the exercise of adverse rights over the property it occupies. Whilst an obligation on the landlord to ensure that there is no interference with the tenant’s possession and enjoyment of the premises arises by implication, generally a lease contains an express covenant for quiet enjoyment.  The covenant for quiet enjoyment overlaps with a second obligation which prevents a landlord from derogating from its grant.  This second principle stems from the rule of common honesty; a person cannot give with one hand and take away with another.

These two covenants seem fundamentally opposed to rights that are often reserved to landlords to enable them to repair their reversionary interest and undertake building works however it has been held that these competing interests can be reconciled by requiring landlords to take all reasonable precautions to minimise disruption to the tenant when carrying out such works [1] and the recent cases of Timothy Taylor Ltd v Mayfair Housing Corporation & Another [2] and  Iceland Foods Ltd v Aldi Stores Ltd [3] have provided some useful commentary on the subject.

Timothy Taylor Ltd v Mayfair House Corporation & Another

Facts and the claim

In the first of the two cases concerning these principles the tenant ran a high-class art gallery in Mayfair under a lease reserving a substantial rent of over £500,000 per annum.  The lease contained an express covenant by the landlord permitting the tenant to peaceably and quietly enjoy the premises without any interruption or disturbance.  The following two rights were also reserved to the landlord:

• A right to erect new buildings in such a manner as the landlord thought fit even if doing so may obstruct, affect or 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 affected the premises or their use and enjoyment; and
• To temporarily erect scaffolding provided that it did not materially adversely restrict access to or the use and enjoyment of the premises (and the landlord agreed to use all reasonable endeavours to minimise the period for which scaffolding was erected).

In 2013 the landlord commenced substantial works to develop the upper floors of the building in which the gallery was situated. The landlord had originally presented to the tenant a design for the scaffolding which would facilitate its development works which the gallery owner considered acceptable as the gallery could be seen from the street as being open for business.  The scaffolding which was ultimately erected however almost completely enveloped the building, leaving the gallery practically invisible and giving the impression that it was closed. This, together with the high levels of noise generated by the works led the tenant to bring a claim for damages for past breaches of its right to quiet enjoyment and an injunction requiring the dismantling of the scaffolding (with permission for the original design to be erected) and imposing noise limits.

The court’s decision

The court confirmed a number of principles from prior case law, in particular that a landlord’s reservation of a right to build in a way which, in the absence of that reservation, would constitute a breach of the covenant for quiet enjoyment or a derogation from grant is to be construed as a right for the landlord to do the work provided that it takes all reasonable steps to minimise the disturbance to the tenant. The court confirmed that when considering the work that can reasonably be carried out the knowledge or notice that the tenant had of the intended works at the commencement of the lease is a relevant factor as is any offer of financial compensation made by the landlord to the tenant for the disturbance caused by the works.  Whilst the landlord was not obliged to offer the tenant any form of discount for the works, an offer of a rental discount could affect the reasonableness of the landlord’s works.  A point blank refusal of any form of compensation, as was the case here, increased the level of reasonableness required of the landlord.

Additionally, the court considered that whether the works were being carried out pursuant to the landlord’s repairing covenant and would therefore benefit the tenant or whether they were being carried out for the landlord’s sole benefit would be relevant as would the nature of the property concerned.

Taking all of this into account the court confirmed that the landlord had not acted reasonably in exercising its right to build combined with its scaffolding rights in this manner. The way that the scaffolding was designed and erected paid little regard to the interests of the tenant and was entirely unreasonable.  There was no liaison with the tenant as to the likely duration of the works, the levels of noise and how the impact of the noise could be mitigated.   The court awarded the tenant damages equal to 20% of the rent payable under the lease from the date the scaffolding  was erected to the date of judgment to represent the loss of use and enjoyment of the premises.  The court considered that an injunction to dismantle the scaffolding would be disproportionate on the basis that to do so would take almost as long as it would for the landlord to complete the works.  Attempting to restrict the noise levels by way of an injunction would be unworkable as setting precise limits as to what constituted noisy works would be very difficult.  The better course of action would be to award damages in lieu for future breaches which were also assessed at 20% of the rent, this time from the date of judgment until completion of the works, assuming that the landlord did not increase the amount of disturbance caused (and the tenant was at liberty to come back to the court and invite it to revisit the basis on which damages were to be assessed if the level of disturbance increased).

Iceland Foods Ltd v Aldi Stores Ltd

Facts and the claim

Unlike the previous case, where the tenant accepted that the landlord had a right to undertake its development, in this case the main issue was whether the landlord actually had the right to carry out building works. The parties occupied adjoining buildings in Cambridge.  The lease under which Aldi held its interest included a covenant not to build, construct or place any new or additional building on the premises. Aldi underlet one of its units to Iceland and in that underlease covenanted to observe the head lease.

Aldi decided that it wished to extend its building and partitioned off areas around its store with hoarding and then erected a safety scaffolding platform over the entrance to the Iceland store. Iceland bought a claim seeking to prevent Aldi from undertaking its works on the basis that they were neither permitted on a true construction of the lease nor on the implication into the lease of a term to that effect.

Iceland relied on the contractual significance of the Aldi building being described in the underlease as being delineated in blue. This, they believed demonstrated that the description would continue to apply at all times during the lease, with the effect that the footprint of the building could not be extended. Furthermore, if that construction was incorrect, Iceland submitted that such a term was to be implied. It contended that a combination of the covenant in its underlease that obliged Aldi to observe the covenants in its headlease and the prohibition in the headlease of erecting new buildings meant that the prohibition was incorporated into the underlease so that Iceland could enforce it to prevent the extension.

The court’s decision

The court disagreed with Iceland’s submissions with regard to construction of the underlease. The purpose of describing the relevant area in the underlease as being the land edged blue was merely to describe the land in respect of which rights had been granted.  It had not imported an indication that Aldi’s building was always to remain the same and it would not frustrate the grant of rights to Iceland if the Aldi building was extended.

Iceland’s attempt to construe a restriction in the lease was not sustainable. There was no provision in the underlease to Iceland which could amount to an express prohibition on the extension and the attempt at implying such a term failed all of the tests set out in prior case law [4].

Iceland put forward a number of other arguments which were rejected by the court including that unless there was implied a restriction on Aldi extending into the car park it would be open to Aldi to reduce the area over which Iceland had car parking rights. If the area of Aldi’s building was extended so as to amount to an interference with car parking rights then that infringement was restrained.  But not every part of the extension would infringe those rights. A combination of the rights granted to Iceland to allow its customers to park and the obligation not to derogate from grant would provide Iceland’s correct remedies.  An absolute prohibition on extending Aldi’s building could not have been within the intention of the parties.

WM Comment

The fact that a landlord has reserved a right to carry out substantial building works, even if, as in the Timothy Taylor case, that right is expressed to permit them to materially affect either their tenant’s premises or the use and enjoyment of it does not mean that the landlord can disregard the tenant’s rights. When proposing building works the landlord should always keep in mind that it is under an obligation to give the tenant quiet enjoyment and not to derogate from its grant.  Reasonable precautions must be taken by a landlord to minimise disruption and disturbance to the tenant.

As much information as possible should be given to the tenant about proposed works, ideally before the lease is granted. The tenant should be informed and kept updated as to how long works are likely to last and the landlord ought to meet with the tenant and discuss how disturbance can be minimised and ensure that any specific requirements of the tenant are passed on to the landlord’s contractors. Scaffolding should be designed to protect the appearance of the tenant’s premises and prevent access being obstructed so far as reasonably practicable.  It should be agreed between the parties what constitutes noisy works and agreement should be reached as to how to minimise disturbance.

The landlord should bear in mind that the standard of reasonableness required of it will be more stringent where the works are being carried out for its own benefit rather than the tenant’s. This may also be the case if no offer of financial compensation is made or the premises are high value.

The most important thing a landlord should do however is to maintain communication with their tenant as to its plans, rather than just carrying on regardless.

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[1] Lechouritis v Goldmile Properties [2003] EWCA Civ 49
[2] Timothy Taylor Ltd v Mayfair House Corporation & Another [2016] EWHC 1075 (Ch)
[3] Iceland Foods Ltd v Aldi Stores Ltd [2016] EWHC 1134 (Ch)
[4] The correct test for implying terms into a contract to reflect the parties’ intentions has been developed in a long line of case law, most recently in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Another [2015] UKSC 72