30 September 2013

The Practicalities of Derogation from Grant and Quiet Enjoyment

Derogation from grant

The obligation not to derogate from grant is automatically implied into leases. It embodies the general legal principle that if one party agrees to give a benefit to another party those parties should not do anything that substantially deprives the other of the benefit. This covenant is typically relied upon by tenants to prevent landlords from doing something that renders the property materially less fit for the purposes for which the lease was granted and prevents the tenant from enjoying the property

Relevant factors to assess in relation to this covenant are: the term of the lease; the purposes contemplated by the parties at the time of grant and the circumstances that resulted in its grant. Usually a breach of this covenant occurs outside of the property demised to the tenant. For instance, where a landlord has either taken positive steps or has granted rights to a third party that render the property unfit for the purpose for which it was granted, the landlord has derogated from its grant.

It should be noted that derogation from grant does not offer the tenant protection for uses the landlord had not contemplated when the lease was granted or from actions that have an adverse economic effect on the tenant but do not physically affect the use of the property. The obligation not to derogate from grant cannot be excluded or limited by the inclusion of an express quiet enjoyment covenant (set out below).

An example of derogation from grant is demonstrated in Chartered Trust plc v Davies [1997] 2 EGLR 83, a landlord let a unit in a "high class" development to a pawnbroker. The clientele of the pawnbroker caused a nuisance to another tenant in the development. The landlord was held to have derogated from its grant.

Quiet Enjoyment

A large body of case law has been generated in considering the landlord’s obligations in relation to the covenant to give the tenant quiet enjoyment. A summary of the current position has been provided in the recent High Court decision in Shebelle Enterprises v Hampstead Garden Suburb Trust Ltd [2013] EWHC 948 (Ch); [2013] PLSCS 78. The claim in this case, though unsuccessful, demonstrates that breach of quiet enjoyment remains a fundamental issue that can be raised when the benefit of the demised property is impeded.

What is Quiet Enjoyment?

The covenant of quiet enjoyment gives the tenant the right of possession during their tenancy and is a covenant, expressed or implied (in the absence of an expressed covenant there is a common law obligation for quiet enjoyment), by the landlord not to interfere with the tenant’s exercise and use of the right of possession.

The covenant means that the tenant is entitled to enjoy the full benefit of the property free of interference. The covenant is qualified. Therefore, it is restricted to protecting the tenant against interference by either landlord or persons claiming to be under the landlord, this includes but is not limited to: agents, licensees, employees; tenants or successors. If there is breach of the quiet enjoyment covenant a tenant can either seek an injunction to restrain the interference or seek damages for losses caused by such interference.

Significantly, the inclusion of a quiet enjoyment covenant in a tenancy document will assist in determining whether the tenant has exclusive possession. Exclusive possession is a key factor in assessing whether parties intended to grant either a lease or a licence to occupy.

Where a Quiet Enjoyment Covenant is Expressed

An express covenant of quiet enjoyment will override the common law implied covenant. As such, a landlord and tenant can seek to restrict or modify the landlord’s obligations in relation to quiet enjoyment during the negotiation process of the lease. For example, the landlord could restrict the covenant to be conditional on the tenant paying rent. Conversely, the tenant may extend the covenant to title paramount, so that the covenant extends to parties with superior title to the landlord. The outcome of such negotiations will depend on the parties bargaining strengths in each transaction.

When can a landlord be held liable

The quiet enjoyment covenant gives the tenant freedom from interference and prevents substantial interference from the Landlord with the tenant's use of the property. This interference need not be a positive step taken by the Landlord but may result in the Landlord's failure to act. The question as to whether a substantial interference has occurred is a question of fact and degree. Case law has provided guidance on when the threshold is likely to be met. Please note that activities that occur prior to the grant of the lease will not amount to a substantial interference as the tenant is deemed to have taken the lease in the knowledge of interference.

Courts have held that breaches have occurred in the following scenarios:

  • flooding caused by water from the Landlord’s neighbouring property;
  • a significant obstruction of access to property, for example an obstruction caused by scaffolding; and
  • excessive noise, dust and dirt caused by work on the Landlord’s neighbouring property.

On the other hand, the courts have held that breaches will generally not occur in the following scenarios:

  • the landlord has let adjoining property to a competing business;
  • the landlord carried out lawful acts, which resulted in substantial interference, for example carrying out an inspection in accordance with the lease;
  • activities that took place outside the property and resulted in interference; and
  • interference was caused by unlawful acts of someone claiming under the landlord, unless authorised by the landlord.

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