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Dunwood Properties Ltd v Isaac [2022] EWHC 3276 (Ch)

Judgment was handed down on 20 December 2022 in Dunwood Properties Ltd v Isaac [2022] EWHC 3276 (Ch), an appeal heard by Adam Johnson J against the first instance judgment of HHJ Raeside KC, which followed a three-day trial in the County Court in Central London.

The case concerned a flat in a mixed-use building close to Clapham South tube station. There were commercial premises on the ground floor and two residential flats above.

In 2013, the freeholder of the building refurbished the ground floor premises and let them for use as an estate agents, under Use Class A2. Around the same time, the freeholder renovated the first and second floor flats and let them on long residential leases to an associated company

The lease contained a set of “Excepted Rights”, reserved to the lessor, in Schedule 3. Those rights included a right for the lessor to “carry out works to the structure of the Building or any part or parts thereof other than the Flat so as… to carry out development of whatever nature upon the Building Provided that such works do not lead to the diminution of value of the Flat” (paragraph 4), and a separate right “to carry out development of any other part of the Building or the Other Flat provided that such works do not lead to the diminution of value of the Flat” (paragraph 5).

The “Proviso” – “provided that such works do not lead to the diminution of value of the Flat” – was inserted into the lease at the drafting stage at the request of the lessee’s mortgagee.

In 2015, the lease of the first floor flat was assigned to the claimant. In 2016, the estate agents vacated the commercial premises. The landlord then let the commercial premises to a tenant that had obtained planning permission to carry out a set of works (what became known as “the Works”) to the unit to convert it into a late-night drinking establishment, under Use Class A4. Those works, which comprised a mix of structural and non-structural alterations, were undertaken in July-August 2017, following which the drinking establishment opened.

The claimant alleged that the new premises were intolerably noisy, produced unpleasant odours, and greatly diminished the amenity of the flat. He brought a claim alleging breach of the landlord’s obligation in paragraphs 4 and 5 of Schedule 3 to his lease not to carry out “works” or a “development” of part of the building which led to a diminution in value of the flat. The claim was brought as a claim for breach of an express covenant, alternatively of an implied term. He also brought a claim in nuisance, quiet enjoyment and derogation from grant in respect of the noise and odours produced by the drinking establishment below.

The principal basis of the claim succeeded at first instance. The trial judge, HHJ Raeside KC, held that what had occurred in 2017 constituted a “development” of the ground floor premises which had diminished the value of the flat by £105,000 by the date that it was sold in 2020. The judge rejected the landlord’s argument that the works undertaken to the commercial premises were not, or did not form part of, a “development” for the purposes of paragraphs 4 and 5 of the lease. He also rejected the argument that, because the Proviso formed part of a set of rights excepted and reserved in the landlord’s favour, there was no cause of action for “breach” of the Proviso: it served a declaratory purpose only, simply setting out a sphere of activity (acts within the Proviso) which the landlord could be certain would not give rise to liability under common law causes of action, such as trespass or nuisance. The nuisance, derogation from grant and quiet enjoyment claims failed, principally because on the facts the freeholder could not be taken to have authorised or permitted the nuisance that had occurred.

On the appeal before Adam Johnson J, the freeholder again argued that the Proviso did no more than set a limit on the scope of the lessor’s retained rights, was declaratory only, and did not in itself constitute a binding contractual obligation. There was, perhaps surprisingly, no direct authority on this issue. Nonetheless, the Judge had little difficulty accepting the tenant’s submission that the clause simply fell to be construed using the ordinary principles of contractual interpretation. The landlord’s argument was, in the Judge’s view, “quite artificial”, and it was “entirely natural to construe the provisos as contractual promises not to exercise [the landlord’s] existing rights in the circumstances set out i.e. if the result would be a diminution in the value of the flat”. The judgment therefore provides a welcome – and commercially sensible – point of clarification as to the effect of a not-uncommon form of drafting which has not so far received judicial attention.

Much of the remainder of the judgment addresses the landlord’s other grounds of appeal, and the tenant’s cross-appeal against the trial judge’s dismissal of his claim for consequential losses, both of which were also dismissed. It makes interesting reading nonetheless, demonstrating the court’s unwillingness to accept an overly literal or granular interpretation of the words of a residential lease (the parties’ submissions on this point were said to reach “levels of abstraction which were almost metaphysical in their subtlety”). It also affirms the importance of statements of case in defining the matters in issue clearly and specifically, and of phrasing instructions to expert witnesses equally precisely, so that the evidence that is then obtained clearly and squarely addresses the matters which it needs to address. Because this was done by the claimant at trial, the landlord’s attempt on appeal to challenge the trial judge’s acceptance of the expert evidence failed.

Gavin Bennison, instructed by at Streathers Solicitors LLP, acted for the successful respondent lessee, both at first instance and on appeal. A copy of the judgment can be found here. 

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