Breach of User Clause Decision

The case of Roundlistic Ltd v Jones and another [2016] UKUT 325 (TCC) is a recent breach of user clause decision that you may find interesting. 

The case involved a maisonette and a covenant prohibiting the tenant from using the property for anything other than as a single private dwelling in occupation of the tenant and his family. The property was originally let under a long lease and subsequently a new lease extension was granted to the original tenant under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) procedure. The original tenant sold the lease and the new tenant contacted the Landlord about the possibility of granting a short term underlease for the property which the Landlord argued would breach the covenant. After attempts at negotiation the tenant ultimately let the property out under a 12 month Assured Shorthold Tenancy. The Landlord in turn sought a declaration under S.168 (4) of the CLRA 2002 that the tenants were in breach of the covenant.  

The covenant in question stated the following:

“Not to use the premises hereby demised or permit the same to be used for any purpose whatsoever other than as a single private dwelling house in the occupation of the Lessee and his family.”

The First-tier Tribunal (FTT) having considered the facts of the case had decided that although the covenant prevented the tenant from underletting despite there being no express restriction on an underlease being granted, the Landlord was nevertheless prevented from enforcing the breach.

The reason provided by the FTT was that the Landlord’s behaviour had led to an estoppel by convention so that the covenant would not be enforced, i.e. both parties to the transaction having acted on an assumed state of facts or law so that the Landlord could not deny the truth as it would be unjust or unconscionable to allow the Landlord to do so. Alternatively the FTT held that the Landlord’s conduct had amounted to a waiver of the right to enforce the breach. Further the FTT had held that the covenant was unenforceable as it was held to be an unfair term under the Unfair terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (UTCCR 1999) which has now been revoked and replaced by the Consumer Rights Act 2015 as of 1^st October 2015. 

Regulation 5 (1) of the Unfair UTCCR 1999 provided:

"A contractual term which has not been individually negotiated shall be regarded as unfair if, 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."

The Landlord appealed to the Upper Tribunal (Lands Chamber) (UT) whom has allowed the appeal against the FTT decision. Although the tenants had not sought to appeal the FTT’s decision regarding the effect of the covenant the UT upheld the FTT’s findings that the covenant prohibited underletting to anyone not within the class of occupiers contained within the covenant.

Although the decision primarily turned on the specific facts, the UT held that in order for the tenants to succeed on the estoppel argument, they would need to show a point at which the estoppel by convention arose. The UT considered the facts through the duration of both leases and did not find any course of conduct that would lead to an estoppel by convention. The UT further found that the FTT had provided no reasoning for why it found that the Landlord had waived its right to enforce and concluded that the decision must have been on the same arguments put forward regarding the estoppel and so the UT overturned the FTT’s decision that the Landlord’s right to enforce had been waved. 

Additionally, it was held by the UT that while it was accepted that UTCCR 1999 applied to the leases; it did not apply to a lease granted under the procedure for lease extension under LRHUDA 1999 and that there had not been any significant imbalance in the rights and obligations arising under the lease and finally that the inclusion of the covenant was not contrary to the requirement of good faith.

Therefore it is important to note that a Landlord may be able to prevent underletting by relying on lease covenants, in spite of there being no express bar on an underlease as set out in the lease.  

I hope that the above update has been useful and please do not hesitate to contact Nitika Singh on 0208 290 7347 or email nsingh@judge-priestley.co.uk should you have any enquiries or need further information.