In the appeal of Assethold Limited v Interface Properties Limited [2024] UKUT 371 (LC), the Upper Tribunal's decision serves as a reminder of the strict conditions a party needs to satisfy to rely on an implied term in a lease.
Background
The appellant was a tenant of a 999-year headlease, granted in 2006 over two upper floors in a building. The respondent landlord owned the freehold of the building. The headlease reserved a peppercorn rent and a contribution towards insurance and maintenance costs but no rights over the demised property were reserved in the landlord's favour.
At some point during the term of the lease, the demised property had been converted into four separate residential flats, without planning consent. The unauthorised conversion led to an enforcement notice being issued by the local planning authority and the notice was served against all parties with an interest in the property, including the freeholder. The freeholder then sought a declaration from the First Tier Tribunal (FTT) pursuant to s168 Commonhold Reform Act 2002 that there had been a breach of covenant by the tenant as a necessary precursor for forfeiture of a long lease of a dwelling.
The lease contained a tenant covenant to keep the landlord indemnified against all liability in respect of 'Legal Obligations'. These were defined as any obligations created by any enactment or authority which related to the property or its use. However, there was no express covenant in the lease which required the tenant to comply with those Legal Obligations.
At first instance, the FTT decided an implied covenant should be read into the lease requiring the tenant to comply with Legal Obligations. The FTT considered that because this is a typical covenant one would expect to see in a commercial lease, and the fact there was an indemnity against liability in respect of those Legal Obligations, it must have been intended by the parties for the lease to contain an implied covenant that the tenant would comply with Legal Obligations.
The test for implied terms
The Upper Tribunal referred to the test set out in the BP Refinery case, which requires (amongst other things) an implied term to be:
- necessary to give business efficacy to the contract (i.e. be necessary to make the contract work); and
- so obvious as to 'go without saying'.
These requirements create a high bar and on hearing the appeal the Upper Tribunal decided the landlord had not satisfied either of the above conditions. The inclusion of an implied term requiring the tenant to comply with Legal Obligations was not necessary to make the lease work. The indemnity already provided the landlord with financial protection from all losses incurred as a result of liabilities arising from Legal Obligations. The Upper Tribunal found this worked as a standalone indemnity and it was not necessary for there to be a separate remedy of forfeiture as well. The argument that it is standard practice to have that type of covenant in similar types of leases was held to be of limited relevance.
As the implied covenant was not necessary to make the lease work, and it was not obviously intended, the Upper Tribunal allowed the tenant's appeal, dismissing the landlord's attempt to insert the implied covenant and claim a breach of lease.
The courts continue to be reluctant to imply terms into leases, highlighting the importance of drafting which accurately and expressly captures the parties' intentions.
