Assethold Limited v Interface Properties Limited

A covenant that a tenant will comply with legal obligations is not implied into every lease by the landlord-and-tenant relationship. A term implied into a particular lease must satisfy the strict requirements of necessity or obviousness, assessed by reference to the express terms and the circumstances known when the contract was made. The fact that a term is commonly included in similar leases may indicate that it is not obvious and that its omission was deliberate. An indemnity against liability for legal obligations does not necessarily imply a direct covenant to comply with those obligations. An implied covenant cannot add consequences which the parties have expressly addressed or contradict their allocation of risk.

Assethold Limited held a 999-year headlease of the upper floors and roof space of a building. The headlease contained an indemnity against all liability in respect of legal obligations and an exclusion of any warranty that the building could lawfully be used for a particular purpose, but no express covenant requiring the tenant to comply with legal obligations.

The First-tier Tribunal determined under section 168 of the Commonhold and Leasehold Reform Act 2002 that such a covenant was implied. It found that the covenant had been breached by unauthorised conversion works and continued residential use contrary to a planning enforcement notice. Assethold appealed, challenging the implication of the term, the breach findings and the refusal of costs-protection orders. The central issue was whether the headlease required implication of a direct covenant to comply with legal obligations.

1. Appeal allowed. The headlease contained no implied covenant requiring the tenant to comply with legal obligations. The finding that Assethold had breached such a covenant by carrying out the conversion works was also wrong because the works pre-dated Assethold’s acquisition of the lease and responsibility for them was not part of the respondent’s application.
2. A covenant not to use premises for an illegal purpose is not implied into every lease as an incident of the landlord-and-tenant relationship. The issue concerned a term implied into this particular contract, assessed by reference to its express provisions, commercial common sense and the circumstances known when it was made.
3. The strict conditions identified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13 applied. The proposed term had to be reasonable and equitable, necessary to give business efficacy, so obvious as to go without saying, capable of clear expression and consistent with the express terms. The requirement of necessity means that a contract which works without the term does not receive it.
4. The FTT’s reliance on the fact that compliance covenants are usual in other leases was misplaced. Their routine inclusion suggested that the term was not so obvious that it went without saying. The unusual 999-year term, peppercorn rent, absence of a premium and unusual forfeiture provision also required attention.
5. The indemnity in clause 3.7 protected the landlord against loss resulting from liability in respect of legal obligations. It did not establish a causal connection with a direct covenant by the tenant, enforceable whether or not the landlord suffered loss. Clause 7.3 further allocated the risk of unlawful use to the tenant and made the proposed covenant inconsistent with the parties’ express bargain.
6. It was unnecessary to determine the remaining breach grounds. An order was made under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 in respect of the FTT and appeal costs.

• Upper Tribunal (Lands Chamber): The appeal from the First-tier Tribunal was allowed on the implication of terms issue. The finding of breach was set aside, and costs protection was ordered under paragraph 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002.
• First-tier Tribunal (Property Chamber): On 6 September 2023, the FTT determined under section 168 of the Commonhold and Leasehold Reform Act 2002 that the headlease contained an implied covenant to comply with legal obligations and that the covenant had been breached.