Homes under the Hammer - are they always the bargain they seem?

Posted: 04/04/2019

Now in its 23rd series, the BBC programme Homes under the Hammer features professional and amateur investors finding the inevitable bargain at auction - often in need of complete refurbishment - renovating it, and then being congratulated on their prowess as developers as they bank a substantial profit. Often the investor won't have looked at the legal pack although by some miracle very rarely runs into difficulties as a result.

Perhaps, however, a recent decision by the Court of Appeal may make investors think twice.  

Beware absolute prohibition

Duval v 11-13 Randolph Crescent Limited [2018] EWCA 2298, published in October 2018, concerned whether a landlord of a block is entitled, without being in breach of covenant, to grant a licence to a lessee to carry out work, which would otherwise breach an absolute covenant preventing any form of alterations.

Such a provision is sometimes found in a residential lease, although the usual (and default) wording is to allow for alterations with the landlord's consent. If the lease doesn't say anything else then the Landlord and Tenant Act 1927 section 19 (2) implies a term that the landlord's consent cannot be unreasonably withheld. Most leases expressly say this as well. It's for this reason that investors aren't too worried about not getting landlord's consent when they buy a dilapidated apartment at auction. They know the landlord can't refuse if an application is made to them, supported by a proper specification, plans and an undertaking to pay the landlord's reasonable costs

What though, if the covenant is an absolute prohibition? The consequences of this are severe. Any attempt by the lessee to carry out alterations will be a breach of covenant, thereby giving rise to proceedings to restrain the lessee and ultimately forfeiture of the lease!

Can the landlord charge a premium to give consent?

Often a landlord will wish to profit from this situation by demanding a premium to give consent notwithstanding the strict wording of the lease. This can be a very substantial sum which the hapless lessee will be forced to pay in order to get the landlord's licence and carry out the works. Sometimes the lessee isn't hapless and has deliberately bought the apartment knowing that he/she will have to pay a premium but is happy to do  so as the potential profit once the apartment is developed is still great enough to make a decent return.

From the landlord's perspective, they will have received an unexpected windfall from the premium.

The landlord's mutual covenant to enforce

The Duval case changes all of this. The lease contained a qualified covenant, thereby allowing the lessee to make certain alterations with the landlord's consent and an absolute prohibition against making other sorts of alterations. The wording of the absolute covenant said:

“Not to commit or permit or suffer any waste spoil or destruction in or upon the Demised Premises nor cut maim or injure or suffer to be cut maimed or injured any roof wall or ceiling within or enclosing the Demised Premises or any sewers drains pipes radiators ventilators wires and cables therein…”

The lessee, Mrs Winfield, wanted to carry out works to her flat, which included the removal of a load-bearing wall at basement level. One of the other lessees in the building, Dr Duval objected, even though the landlord was willing to grant consent and relied upon the absolute covenant preventing alterations, and what is known as the landlord's mutual covenant to enforce. 

This is a clause normally found in a residential lease saying that the landlord will ensure that all of the leases in the building will be granted on similar terms as the lessee's and subject to payment of its costs will at the request of another lessee in the building enforce any covenants which another lessee in the building will have entered into.

Without such a clause one lessee in the building will not be able to take action against another as there is no contractual arrangement between them and would have to rely upon the law of nuisance or negligence to do so depending on the harm suffered.

The landlord's solicitor in the case argued that a landlord was free to do what it liked with its own land and if it wanted to give consent notwithstanding the strict wording then it could.

The Court of Appeal disagreed and said that the landlord couldn't give consent when this would place it in breach of its obligation to enforce breaches committed by other lessees in the building under the landlord's mutual covenant to enforce. The landlord would also be in breach of the covenant to only grant new leases with similar terms as the one under discussion.

Consequences of the judgement and the future

The court said that although a landlord can still give consent to allow alterations when there is an absolute prohibition, it places itself in breach of the other covenants and another lessee within the building can seek damages or even an injunction restraining the landlord from giving consent.

Consequently, that bargain picked up at auction may no longer be the shrewd purchase it once seemed. Landlords won’t be able to receive premiums for consent. Lessees won’t be able to alter tired, outdated apartments. The price paid for the apartment may no longer be correct if works cannot be carried out.

Although it may still be possible to carry out works if the landlord and all the tenants are happy to do so, obtaining such consent from all parties may be a logistical problem and the question will arise as to on what terms everybody will be prepared to give such consent. 

Sometimes enfranchisement claims are brought by lessees to obtain control of the building so they can grant themselves new leases with new terms, getting rid of onerous terms. Unless everyone participates, then due to the decision in Duval, that will no longer be possible. 

The result of the case has caused great concern to landlords and lessees and it is now being appealed to the Supreme Court. We wait to see the outcome of that appeal.

Investors at auction will need to be extra vigilant and at the very least, should read the lease to be sure that they don't buy trouble!

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