Dunward Properties Limited v Richard Alexander Isaac

Where a lease reserves rights to carry out works or development subject to a proviso protecting the flat’s value, the proviso may operate as a contractual promise, rather than merely defining the scope of the reserved rights. “Development” may include physical works undertaken for, and embodying, a change in commercial use. The relevant question is whether the combined works, purpose and effect led to a diminution in value. Liability does not require proof of nuisance or another independent cause of action. Consequential losses remain recoverable only if the claimant proves that they were caused by the contractual breach, rather than by a separate and unsuccessful claim. A market-value loss and failure to establish nuisance are not necessarily inconsistent.

The respondent leased a flat above commercial premises. After the premises were converted from an estate agency into a bar and restaurant, he sold the flat at a lower value and sued the freeholder. The County Court found breach of express lease terms reserving rights to carry out works and development, subject to the proviso that they did not diminish the flat’s value, and awarded £105,000. It dismissed claims in nuisance, breach of quiet enjoyment and derogation from grant, and rejected consequential losses.

The freeholder appealed the liability and diminution award. The respondent cross-appealed the refusal of consequential losses. The central issues were whether the provisos created contractual promises, whether the relevant diminution was caused by the works or development, and whether the evidence established causation of the consequential losses.

1. Appeal and cross-appeal dismissed. The County Court’s determinations stood, subject to consequential directions on costs.
2. The provisions in paragraphs 4 and 5 of the Third Schedule were exceptions retaining pre-existing rights. Their provisos were naturally construed as contractual promises not to exercise those rights where the result would be a diminution in the value of the flat. The construction was consistent with the commercial purpose of protecting the leaseholder’s investment.
3. “Development” had a broad meaning. The relevant activity was not confined to the isolated physical effect of the works. The court had to consider the combination of the physical works, their intended purpose and their actual effect. Here the works were undertaken to convert the commercial premises into a bar and restaurant and immediately enabled that use. They therefore led to the diminution in value.
4. The County Court had addressed the question fairly raised by the pleadings. It was not procedurally unfair to reject the landlord’s contention that only diminution caused solely by physical works could trigger liability. The valuation evidence assessed the effect of the development as pleaded, rather than a change of use divorced from the works.
5. The contractual claim was not inconsistent with dismissal of the nuisance, quiet-enjoyment and derogation claims. The contractual provisos required proof of diminution in value, not proof of an actionable nuisance or of the elements of those separate causes of action.
6. For consequential loss, the claimant had to prove that the loss flowed from the contractual breach, namely the diminution caused by the development, rather than from the alleged nuisance. The evidence concerning the lodger’s departure and the respondent’s decision to sell was equivocal and was more consistent with the matters underlying the failed nuisance claim. The refusal of consequential losses was therefore open to the County Court. It was unnecessary to resolve the precise majority status of the reasoning in The Achilleas.

• Central London County Court: HH Judge Mark Raeside QC found breach of the lease and awarded £105,000 for diminution in value. Claims in nuisance, breach of quiet enjoyment and derogation from grant, and claims for consequential losses, were dismissed.
• High Court (Chancery Division): The appeal and cross-appeal were dismissed. The County Court’s determinations stood.