DEROGATION FROM GRANT & CLADDING COSTS
I have been writing about derogation from grant in relation to escalating ground rents and the second part of a two-part article on that topic is coming out in the New Law Journal shortly – part 1 was in the 8th March 2019 edition – but it may have a bearing on the much publicised concerns about leaseholders being forced to bear the costs of replacing Grenfell-type cladding costs.
The service charge legislation contained in the Landlord & Tenant Act 1985 is not much help to leaseholders because sums only need to be reasonably expended to be recovered as service charges and the cost of replacing defective – and potentially lethal – cladding is likely to be held to be reasonably expended provided the cost is contractually recoverable under the terms of the lease.
It occurred to me that the initial defective cladding works might, however, have amounted to a breach of covenant for quiet enjoyment giving rise to a cause of action, so that, while a landlord’s right to recover such costs as service charges may not be challengeable, leaseholders might, I thought, have had a damages claim arising out of the original installation of the cladding to enable them to recoup the cost under the service charge back from the landlord.
Woodfall: Landlord and Tenant, however, addresses the relationship between Covenants for Quiet Enjoyment and the “implied covenant not to derogate from grant” at 11.301, which starts by observing that “the implied obligation not to derogate from grant applies where a grantor demises part of his land and retains part and … is limited to this: that the grantor is not liable under the implied obligation except where the demised part is let for a particular purpose and the grantor causes the retained part to be used in a manner rendering the demised part unfit or materially less fit for that purpose.”
Woodfall suggests the distinction “would seem to be that the obligation not to derogate from the grant is concerned with use of the retained part which makes the demised premises less fit for the purpose for which they were let whereas the covenant for quiet enjoyment is concerned with the enjoyment of the premises.” Defective cladding on external common parts would thus appear to be actionable more naturally as a derogation from grant rather than as a breach of covenant for quiet enjoyment. It may be therefore that leaseholders would have a cause of action which enabled them to get back as damages, sums extracted by landlords as service charges. It may well be that the process would have to be as clumsy as taking separate proceedings to recover the charges because the common law right of set-off can be (and commonly is) excluded by express words. A covenant to pay the rent “without any deduction or set off whatsoever” was held to exclude the right of set-off in Electricity Supply Nominees Ltd v IAF Group Ltd  2 E.G.L.R. 95 and Star Rider v Inntrepreneur Pub Co.  1 E.G.L.R. 53 – see Urban Splash Work Ltd v Ridgway  UKUT 32 (LC) a case on the recoupment of costs of repairs carried out by the tenant in which the Deputy President said:
“That does not mean that the [tenants] are not entitled to recover the costs they incurred from the [landlord], only that they may not do so by set off. It also means that the issue of the [tenants’] entitlement to recoup the costs incurred in repairing the roof is one for the County Court to consider; it is not for the FTT, which is limited to determining the amount of the service charge (which, in the absence of a right of set off, is not reduced by the [tenants’] expenditure)”
The application of the Limitation Act 1980 to a claim founded upon derogation from grant is potentially interesting and without direct authority. It is something about which I intend to write further.
I ought to add one further observation by way of postscript, which is that in referring to the “implied covenant not to derogate from grant” Woodfall is slightly putting the cart before the horse; derogation from grant is a freestanding rule of law which, among other things, can give rise to an implied covenant; it does not arise from the implied covenant. This is something explained in more detail in part 2 of my New Law Journal article.