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Buy to let Landlords beware - letting prevented by lease user restriction

Fri 14 Oct 2016

The Upper Tribunal has allowed an appeal following an earlier ruling that a landlord was not allowed to enforce a breach of covenant in the lease of a maisonette.

In the case of Roundlistic Limited v Jones and Seymour [2016] UKUT 325 (LC), a covenant restricted the maisonette's use to occupation by the tenant and their family.

This meant it could not be used for any other purpose and that the tenant was prevented from granting an underlease, despite the fact under-letting had not been explicitly banned.

Originally, a Fire-tier Tribunal ruled that the landlord was not entitled to enforce a breach of covenant.

However, the landlord took his case to the Upper Tribunal, which has since ruled in their favour and allowed an appeal.

Mark Vinall, a partner at Winckworth Sherwood who specialises in enfranchisement and conveyancing matters, commented: "The Upper Tribunal decision in Roundlistic Limited v Jones and Seymour [2016] UKUT 325 (LC) is a salutary lesson to buy-to-let investors to carefully review the terms of the flat lease before they acquire a buy to let property as they may find they are unable to let it out.

"A flat lease can contain various restrictions that play into this issue. It is not safe to look at the primary 'alienation' provisions alone. They control the way in which a flat owner or tenant can deal with the flat, i.e. by saying whether and on what terms they can sublet it. They will often prohibit dealing with parts separately for example by sharing occupation or letting out a room. 

"In this case, the alienation provisions in the lease did not prohibit sub-letting but another part of the lease contained a restriction as to use to which the flat could be put; it could only be used as a 'single private dwelling house in the occupation of the Lessee and his family'.
  
"Before the current flat owners purchased, the flat had been occupied by a friend of the seller so seemingly in breach of the user restriction. The buyer moved in and occupied the property as their residence but they then needed to move abroad with employment and at that stage they approached the landlord regarding a proposed sub-letting. 

"The landlord apparently eventually responded to this approach to say that the flat owner would lose the flat if they let without consent and that this would only be forthcoming in return for a 'substantial cash payment'.  

"There was then some negotiation which had broken off with the flat owners saying they had been advised that the lease did not preclude subletting. The freeholder responded that they would apply for possession, if the flat was sublet without their consent and notify their lender.  The flat owners held their line, saying they had obtained legal advice to that effect and by then had proceeded to sublet the flat. The landlord took the threatened enforcement action against the flat owners.

"The tribunal, in the first instance, found that while there was a breach of the covenant, the freeholder was estopped from relying on it or had waived the benefit of it and that even if that were wrong, the relevant clause constituted an 'unfair term' and so was not binding on the flat owners.  

"The freeholder appealed to the Upper Tribunal and this took place by way of review of the original decision. The flat owners did not seek to appeal the adverse element of the tribunal’s decision, but the Upper Tribunal considered it anyway.

"Unfortunately for the flat owners, it found in favour of the freeholder. So this type of user restriction does prohibit subletting.

"The estoppel argument failed at the hurdle of requiring the flat owners to have proceeded on an assumed state of fact or law that was either shared with the freeholder or acquiesced by them; the opposite was true here on the facts.  

"Nor could an estoppel be founded as at the time of purchase of the lease as there was no evidence that the freeholder knew that the flat had previously been occupied by a friend in breach and even if they had known, while that might have been sufficient to waive the right to forfeit the Lease over that breach, it was not sufficient to prevent the freeholder from relying on a breach of the user restriction in the future.  

"Nor was it relevant that the freeholder let out the upper flat that they held within the freehold title.  While there was an obligation if they let it on a long Lease to do so in certain terms, there was no requirement to never so let it and the freeholder’s obligations with regard to that maisonette in the meantime had not been breached.  Even if that were wrong, a breach by the freeholder of its obligation with regard to the upper maisonette would not protect the other flat owner from action by the freeholder for a breach of the same covenant in their lease.

"It was not noted that the circumstances might have provided a foundation for an application to modify or discharge the restriction under Section 84 of the Law of Property Act 1925 and that no application was made in that regard. Flat owners finding themselves in the same position will need to consider this.

"As regards potentially being an unfair contract term, the Upper Tribunal confirmed this can potentially apply as the freeholder was a property company that could properly be described as a 'seller or supplier'.  Unfortunately for the flat owner, the relevant regulations do not apply to contractual terms which reflect mandatory statutory provision and this lease had been granted pursuant to the statutory right to claim a new lease. 

"Absent that to potentially be an unfair term the restriction must not have been individually negotiated and 'contrary to the requirement of good faith it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer'.  
In this case, the original lease granted in 1978 was not one to which the regulations applied.  Only the renewal Lease potentially benefitted and it was found to be taken outside of that protection as a consequence of it having been a statutory lease extension with the tribunal commenting that the flat owner elected to require the grant of a new lease knowing that it would be on the same terms as the existing lease (including this restriction), bar the changes made in a statutory lease extension (to extend the term, reduce the ground rent and include the provisions regarding development and the ability of sub-lessees to claim new leases themselves).  

"As the Upper Tribunal put it, 'if there was a significant imbalance it already existed'. That said, it may be that in a future case this point is challenged on the basis that the restriction is brought into the renewal lease by reference as opposed to being a mandatory statutory provision in of itself (there are certain provisions that need to be stated in the renewal lease, but the terms of the existing lease do not need to be).  That said, it is hard to imagine the point about significant imbalance being overturned in future as the existing lease would have been negotiated at arm’s length in the market between the original landlord and tenant and it is up to the flat owner whether they want to require the landlord to grant them a new lease and they have the opportunity to seek changes to the existing lease terms (albeit on limited grounds) and the potential to contend for a reduction against the premium in respect of changes they cannot achieve in this way.

"The explosion in the number of flats acquired as buy-to-let investments may mean that there are number of flats that are subject to this form of restriction and so are being let in breach of the lease.  

"So landlords may wish to review sample leases from each of the buildings they hold reversions to see whether such a favourable user clause is present and, if so, whether they are able to take enforcement action in this regard that might produce added value to their reversionary interest by way of flat owners offering to pay a premium to vary the lease to allow sub-letting. 

"Tenants will need to consider the lease terms carefully before they acquire a flat as a buy-to-let investment and where necessary ensure that it is amended if that can be achieved. for flats they already own they need to review the terms of the lease to see if they are at risk in this regard and if so see if they can find any correspondence from the landlord that might help them."

 

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