Does a Use Clause Prevent Underletting and does such a Use Clause fall foul of the Unfair Terms in Consumer Contracts Regulations 1999 (Upper Tribunal (Lands Chamber))

1 Aug 2016

Neil Curbison of Colman Coyle had conduct of the successful appellant’s appeal in Roundlistic Limited v Jones & Another [2016] UKUT 325 (TCC) which was recently handed down by the Upper Tribunal (Lands Chamber).

Background

The case concerned a building divided into two maisonettes.  Our client is the freehold owner of the building.  The lower maisonette was let under a long lease dated 8th September 1978 but the upper maisonette was not let under a long lease.  The lower maisonette lease was renewed under the statutory renewal process in 2012.

The lease of the lower maisonette contained a use clause to the extent that the lower maisonette was not to be used for any purpose whatsoever other than as a single private dwelling house in the occupation of the Lessee and his family.

Our client sought a determination from the First Tier Tribunal (FTT) that the Lessee of the maisonette was in breach of the aforementioned use clause by virtue of the fact the Lessee had sub-let the maisonette under an Assured Shorthold Tenancy (AST) to persons not related to the Lessee.  Our client relied upon the FTT’s decision in Aaron William M Burchell v Raj Properties Limited [2013] UKUT 443 (LC) and warned the Lessee that any such sub-letting would be a breach for which a determination would be sought as a prelude to forfeiture.

The initial determination by the First Tier Tribunal (FTT) found that whilst the use covenant prohibited the tenant from using the maisonette other than as a single private dwelling house in the occupation of the tenant’s family, an estoppel by convention was deemed to have occurred preventing enforcement of the covenant by our client and also that the landlords conduct amounted to a waiver of its right to enforce the breach.

Secondly and in the alternative, the FTT determined that the use covenant amounted to an unfair contract term under the Unfair Terms in Consumer Contract Regulations (UTCCR) 1999.

Successful Appeal

On appeal, the Upper Tribunal (Lands Chamber) (UT) accepted that the FTT’s decision as to estoppel and waiver were flawed and accepted that our client had been acting consistently with its obligations and was not in breach and therefore no estoppel or waiver arose.

Lease Renewal Issues –UTCCR 1999

The determination regarding the application of UTCCR 1999 made by the UT in this matter is important for a variety of reasons and in particular when considering its application to lease renewals.

The original lease of the Respondent’s maisonette was extended under the Leasehold Reform, Housing and Urban Development Act (LRHUDA) 1993 following the service of a section 42 notice in 2012.

Under the LRHUDA 1993 lease renewal process, the terms of the new lease are to be the same as the original lease subject to very limited grounds for amendments.

At the date of the original lease, the UTCCR 1999 was not in existence and did not apply.

However, the FTT determined that at the time of the renewal, UTCCR 1999 did apply and that the clause was unfair and unenforceable.

It was successfully argued in the UT that Regulation 4(2) of the UTCCR 1999 prevented the regulations from applying to the lease as it expressly stated that UTCCR 1999 did not apply “to contractual terms that reflect – (a) mandatory statutory or regulatory provisions …”.  The renewal of the lease in 2012 was of course granted only because the tenant at the time had exercised their right under statute and our client landlord was then obliged to grant a new lease on the same or substantially similar terms.

The UT also accepted our arguments as to Regulation 5(1) of the UTCCR 1999 that the use clause was not unfair because it did not cause a significant imbalance between the parties.  The significant imbalance between the parties, if there had ever been one, was in existence before the lease renewal as it was a term of the original lease.  Any such imbalance therefore existed before the new lease was granted.  It could not, therefore, be said to have caused any imbalance.

Finally, the UT also accepted our argument that the covenant in the lease was not contrary to the requirement of good faith as specified in Regulation 5(1) of the UTCCR 1999.  The renewal lease was granted because the tenant at the time exercised their right to claim a new lease under LRHUDA 1993 and both the tenant at the time and the landlord were professionally represented during the course of the lease extension procedure and had taken advice on the terms of the lease at that time.

The UT decision serves as a warning to tenants to ensure their lease terms permit underletting.  More widely, the decision is a helpful and clear analysis of the effect of UTCCR 1999 in respect of lease renewals.

In the event that you have any property related disputes, you should not hesitate to contact Neil Curbison, a partner in the property litigation department at Colman Coyle on +44 (0)20 7354 3000.

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