Shebelle Enterprises Ltd v The Hampstead Garden Suburb Trust Ltd

This is an appeal against the judgment of Henderson J dated 22 April 2013 and his consequential order whereby he dismissed the application of the appellant company (“Shebelle”) for an interim injunction to restrain the respondent charity (“the Trust”) from granting consent for a development of a property in the Hampstead Garden Suburb (“the Suburb”) and whereby, upon the cross application of the Trust, he dismissed Shebelle’s claim in its entirety.

Shebelle owns a neighbouring property under the terms of a lease from the Trust which contains a covenant for quiet enjoyment. It fears that the development will cause substantial damage to its property and contends that by granting consent for the development the Trust will be acting in breach of that covenant. In broad outline, the Trust responds that its powers of control over the contested development are derived from a statutory scheme and that their proper exercise for the public good cannot constitute a breach of the covenant. The judge agreed with the Trust and, for reasons I shall explain in this judgment, I believe he was right to have done so.

The Suburb is recognised across the world as a fine example of English twentieth century domestic architecture and planning. It extends over 800 acres and contains some 5,000 properties.

The Suburb was originally developed through the vehicle of the Hampstead Garden Suburb Trust Ltd (“the Old Trust”) but, with the coming into force of the Leasehold Reform Act 1967 (“the 1967 Act”), the Old Trust was wound up and, in 1968, the Trust, a company limited by guarantee and registered as a charity, was incorporated in its place. The Trust has members who must be Suburb residents and its principal object is:

The Trust is governed by a Council which is made up of four trustees who are elected from Trust members who have been resident in the Suburb for at least three years, and four other trustees, one appointed by each of the Royal Institute of British Architects, the Royal Town Planning Institute, the Law Society and the Victorian Society.

In 1974 the Trust sought and obtained the approval of the High Court for a Scheme of Management (“the Scheme”). The purpose of the Scheme emerges clearly from clause 1:

Under the Scheme, the owner of any enfranchised property must comply with the terms of the Scheme Schedule which read, so far as relevant:

Since 1974, many of the tenants occupying houses in the Suburb under long leases have exercised their right to purchase the freeholds of their properties and thus they fall within the Scheme. Others have not and so the Trust continues to hold the freeholds of a number of leasehold properties. It is the powers of control available to the Trust under the Scheme and its obligations under these leases which lie at the heart of the current dispute.

Shebelle owns the house and land at No.3 Green Close, London NW11 under the terms of a 999 year lease dated 16 January 1931 (“the Lease”). It has sub-let the property to Sir Victor and Lady Blank under a sub-lease dated 1 April 2011 for a term of ten years from that date. The property is occupied by Sir Victor and Lady Blank and their family and it lies in the heart of the Suburb.

The Trust is the freehold owner of No.3 Green Close and lessor under the Lease. Clause 15 of the Lease contains a covenant that Shebelle may quietly hold and enjoy the premises during the term of the Lease without any lawful interruption or disturbance from the Trust. It is in conventional form and reads:

No.3 Green Close lies at the foot of a hill. At the top of the hill, and beside No.3 Green Close, lies another property known as No.2 Green Close. This is an enfranchised property and its freeholders are Mr and Mrs Franklin.

On 29 June 2011 Mr and Mrs Franklin made an application to the Trust for consent to undertake substantial works to No.2 Green Close including the creation of a single storey basement which, so it is proposed, will house a play room, a wine cellar, a small plant room and an underground swimming pool. The basement will extend beyond the existing footprint of the house and a significant distance down the garden. If it proceeds, this development will alter the appearance of No.2 Green Close because it will include skylights opening onto the garden.

Notice of the application was served upon Sir Victor and Lady Blank, as neighbours of Mr and Mrs Franklin, and they objected, fearing that the proposed development might affect the flow of groundwater and have an adverse effect upon the structure of their home. The Trust was not sure whether any impact that the development might have upon the movement of groundwater was something that it was entitled to take into account at all in considering Mr and Mrs Franklin’s application. It considered that it was at least arguable that its powers under the Scheme related to the protection of visual amenity and that only a clear demonstration that the appearance of the Suburb would be harmed would enable the Trust reasonably to withhold consent. Nevertheless it gave both Sir Victor and Lady Blank and Mr and Mrs Franklin an opportunity to make representations on the issues raised by the objection.

Sir Victor instructed solicitors to act on his behalf and they engaged an eminent geologist, Dr Haycock, and an expert hydrologist, Dr de Freitas. These experts advised Sir Victor that the proposed development lay in a geologically sensitive area and that the diversion of groundwater might have consequences for neighbouring properties; that a number of properties near by had already experienced subsidence as a result of apparently minor changes in groundwater hydrology; and that a particular investigation known as a Basement Impact Assessment should be carried out in order to identify the issues to which the development might give rise and provide an opportunity to incorporate into the development appropriate mitigation measures.

For their part, Mr and Mrs Franklin also engaged experts and in due course they were advised by Geotechnical and Environmental Associates Ltd, experts in geotechnical engineering, that any groundwater was likely to be present at a shallow depth and flowing relatively slowly and further, that it would follow a pathway around the new basement and that its flow would not be affected by the development to any significant extent. They were also advised by Chord Environmental Ltd, experts in hydrogeology, that any changes in groundwater levels around the development would remain highly localised and so there would be no effect upon No.3 Green Close or any other neighbouring properties in any event.

Mr McSweeney, a consulting engineer retained by Mr and Mrs Franklin, reviewed these various opinions and by letter of 26 October 2012 to Mr Tappin, a consulting engineer engaged by the Trust, expressed the view that mitigation measures would not be required but that should groundwater be encountered during the course of construction then this could readily be routed around or under the new basement through granular drainage routes.

By letter of 15 November 2012, Mr Tappin advised the Trust that Mr McSweeney’s approach seemed reasonable. In light of that advice Mr Davidson, the Trust’s architectural advisor, notified Sir Victor by email on 29 November 2012 that the Trust had received advice from its consultant engineer that the development could be built safely and without detriment to adjoining properties, so far as he could tell. Further, the character of the Suburb would not be harmed. He therefore anticipated recommending to the Trust that the application should be approved at its forthcoming council meeting on 4 December 2012.

By email dated 30 November 2012, Sir Victor’s solicitors notified Mr Davidson that they were instructed to seek an injunction unless they received confirmation that the application would not be considered by the Trust at its forthcoming meeting or thereafter until discussions had taken place, proper testing had been agreed and the necessary safeguards put in place to protect Sir Victor’s property from the risks posed by the development. The Trust refused to provide the undertaking sought and accordingly, on 3 December 2012, Shebelle issued these proceedings and applied for an interim injunction to restrain the Trust from granting consent unless:

it was in receipt of a Basement Impact Assessment in relation to the proposed development;

it was also in receipt of adequate and effective engineering or other proposals to address all parts of that assessment which raised concerns as to the effect of the proposed works on No.3 Green Close; and

it attached to any consent granted to Mr and Mrs Franklin conditions requiring the implementation of such proposals.

In response, the Trust applied for summary judgment. Both of those applications duly came on for hearing before Henderson J on 20 January 2013.

There is one other matter I should mention at this stage. We were told during the course of the appeal that the application by Mr and Mrs Franklin for planning permission had progressed to the appeal stage, it having been deemed to have been refused by the local authority. Further, the planning appeal hearing was underway; that one of the issues in the appeal was the impact the proposed development might have on neighbouring properties; that the Inspector had heard oral evidence, including evidence from Dr De Freitas; and that final written submissions were due to be filed in the course of the following few days.

Shebelle’s application to Henderson J was based only upon the contention that the grant by the Trust of consent to Mr and Mrs Franklin to carry out the proposed works at No.2 Green Close would potentially breach the covenant for quiet enjoyment in clause 15 of the Lease.

Founding itself upon the well known authorities of Sanderson v Berwick-upon-Tweed Corpn (1884) 13 QBD 547 and Matania v National Provincial Bank Ltd [1935] All ER 923, (reversed by the Court of Appeal on other grounds: [1936] 2 All ER 633), Shebelle developed its argument as follows. The covenant for quiet enjoyment operates to secure the tenant not merely in the possession but also in the ordinary and lawful enjoyment of the demised premises. The covenant is broken if the landlord does anything which substantially interferes with that right. However, the landlord’s responsibility also extends to others over whom he is able to exercise control. So, for example, a landlord who has demised two neighbouring properties to different tenants will be liable for breach of the covenant if he authorises one tenant to act in way which will interfere with the lawful enjoyment of the neighbouring property by the other tenant. Applying these principles in the present case, the Trust had and retains control over Mr and Mrs Franklin under the Scheme and by consenting to their proposed development without considering a Basement Impact Assessment, it would be acting in breach of clause 15 of the Lease.

In its defence, the Trust took two preliminary points, either of which would, if correct, provide a complete answer to the claim. The first was that the object of clauses 1 and 2 of the Schedule to the Scheme was to enable the Trust to control the appearance of the enfranchised properties. Accordingly, it was only entitled to withhold consent under those provisions for reasons associated with the visual appearance of the Suburb, or at least that part of it in which the particular property in issue was located.

The judge rejected this argument. He recognised that a requirement for the Trust’s consent would only be triggered if one or more of the clauses in the Schedule to the Scheme were engaged. Once that happened, however, he considered it was then the duty of the Trust to consider the application in the light of the wider purposes stated in clause 1 of the Scheme, and not to confine its attention to issues which related solely to the use, appearance and maintenance of the relevant enfranchised property. This wider focus did enable the Trust, in an appropriate case, to consider the effect of the proposed works on the character and amenities of other parts of the Suburb. There has been no appeal against this aspect of the decision.

The second preliminary point was that clause 15 of the Lease was incapable of providing Shebelle (or indeed any other leaseholder holding under a similar lease) with a cause of action arising from the proper determination by the Trust under the Scheme of an application for consent to alterations to an enfranchised property, and that was so because the parties to the Lease cannot have contemplated that the covenant for quiet enjoyment could be used to interfere with the proper performance by the landlord of a role under a statutory scheme under which it owed a duty to act in the public interest.

In considering the merit of this submission the judge referred to a number of cases to which I must return later in this judgment, including, most notably, Zenios v Hampstead Garden Suburb Trust Ltd [2011] EWCA Civ 1645; Commissioners of Crown Lands v Page [1960] 2 QB 274; Molton Builders Ltd v City of Westminster LBC [1975] 30 P&CR 182 and Manchester, Sheffield and Lincolnshire Railway Co v Anderson [1898] 2 Ch 394, and then he expressed his conclusions in these terms:

He therefore found that the second preliminary point was sound in law and that the claim was bound to fail and must be dismissed.

The parties have been represented before this court as they were before the judge, with Mr Jonathan Seitler QC appearing on behalf of Shebelle, and Mr Weekes on behalf of the Trust. Mr Seitler developed the following four main arguments in support of the appeal.

First, the judge fell into error in construing the Lease by reference to later legislation, namely the 1967 Act. It is, he said, axiomatic that an agreement must be construed as of the date it is made. Further, in 1931 the parties to the Lease cannot reasonably have envisaged that the freehold reversion would ever become vested in a public body which had public duties to perform. Moreover, there was never any basis for concluding that the 1967 Act or any other enfranchisement legislation was meant to dilute the value of the quiet enjoyment covenants in leases which remained outside its scope. In these circumstances, it was illegitimate for the judge to override or circumscribe Shebelle’s rights on the basis of the adoption by the Trust of a supposed public role many decades later.

Second, the judge fell into error in treating the Trust as if it were a public body or a statutory authority. It is, in fact, a private company and is not subject to the responsibilities of public institutions.

Third, and having wrongly treated the Trust as a public body, the judge fell into further error in concluding that this status meant that Shebelle’s covenant for quiet enjoyment was effectively overridden. The judge ought instead to have implied into the Lease an obligation on the Trust to act fairly, rationally and consistently with public law principles, and that it had not done.

Finally, the judge was wrong to accept the Trust’s alternative case that it had a defence of statutory duty to the claim. The 1967 Act contains no defence relevant to the claim and it does not confer some general authority to override or circumscribe the private legal rights enjoyed by Shebelle under the Lease.

Mr Weekes responded that the judge approached the matter correctly and came to the right conclusion. In broad summary, he argued that Shebelle is not entitled to regulate how the Trust approaches and decides the application made to it by Mr and Mrs Franklin; that a covenant for quiet enjoyment is not breached by a landlord performing duties under a statutory scheme in the public interest; that the claim constitutes an attempt by Shebelle to subvert the proper functioning of the Scheme; and finally, and so far as necessary, the proper performance by the Trust of its duties under the Scheme does indeed provide it with a defence of statutory authority.

In assessing these rival submissions I think it important to begin by saying a little about the nature and scope of a covenant for quiet enjoyment. It is a covenant that the tenant’s lawful possession of the property will not be substantially interfered with by the acts of the lessor or those lawfully claiming under him. It is prospective in nature and its scope falls to be determined in accordance with ordinary contractual principles of interpretation. As Lord Millett explained in Southwark LBC v Mills; Baxter v Camden LBC (No 2); sub nom. Southwark LBC v Tanner [2001] 1 AC 1 at page 23:

In carrying out that exercise of interpretation it may be helpful to consider what obligations on the part of the lessor can fairly be regarded as necessarily implicit in the grant. Nicholls LJ (as he then was) put it this way in the context of non derogation from grant in Johnston & Sons Ltd v Holland [1988] 1 EGLR 264 at 267J:

Now it is of course entirely true to say that an agreement must be interpreted in the light of the circumstances pertaining at the time it was made. But that does not mean that if the parties did not anticipate a particular factual situation which subsequently arises, the agreement does not apply to it. In such a case the question to be considered is what reasonable parties should be taken to have intended by the words used in the agreement in relation to the event which they did not foresee. As Chadwick LJ explained in Bromarin BV v IMD Investments Ltd [1999] STG 301 (at page 310):

I come then to consider the application of these general principles in this case and in doing so believe the following matters are of some importance. First, it is clear from the terms of the Scheme recited at [6] and [7] above that it is operated by the Trust for the purpose of maintaining and preserving the character and amenities of the Suburb, and not for the purpose of furthering any private interest. This public function of the Trust was recognised by this court in a different context in Zenios v Hampstead Garden Suburb Trust Ltd [2011] EWCA Civ 1645 which concerned an appeal against a decision and order of the President of the Lands Chamber of the Upper Tribunal dismissing an application made under s.84(1) of the Law of Property Act 1925 for the modification of a restriction contained in a transfer of the freehold interest in a property in the Suburb, and also in the Scheme. The purpose of the application was to allow the owners of the property to construct a first floor extension over their garage. In upholding the decision of the President and dismissing the application, Laws LJ (with whom Toulson LJ (as he then was) and Black LJ agreed) summarised the Trust’s duty in these terms at [34]:

This public function of the Trust has its foundation in the statutory scheme embodied in s.19 of the 1967 Act. Under s.19(1) an application could be made to the High Court for approval of a scheme of management where the Minister for Housing and Local Government had given his certificate that:

The Minister, in considering whether to grant such a certificate, and the High Court, in considering whether to approve a scheme, were required by s.19(3) to have regard:

The second matter concerns the conduct of the Trust. Here it seems to me to be of some importance that it has never formed part of Shebelle’s pleaded case that, when determining the application of Mr and Mrs Franklin, the Trust has failed to perform its duties and discharge its obligations under the Scheme in a proper, bona fide and reasonable way. Nor do the particulars of claim contain an allegation that, in dealing with Mr and Mrs Franklin’s application under the Scheme in the way that it has, the Trust has failed to act fairly, rationally or consistently with other public law principles. As the judge himself said in a passage in his judgment which has not been challenged upon this appeal:

That brings me to what I believe to be the central issue on this appeal, namely whether the proper and bona fide performance by the Trust of its duties and obligations under the Scheme can amount to a breach of the covenant for quiet enjoyment in the Lease. This in turn depends on the proper interpretation of the covenant. I do not, of course, suggest that in 1931 the parties to the Lease anticipated for one moment the coming into force of the 1967 Act and the various rights it conferred but, as I have sought to explain, that does not mean that the operation of the covenant must be considered without regard to it. As Chadwick LJ explained, the question is this: what should reasonable parties be taken to have intended by the words used, in the circumstances as they were, in relation to this event which they did not foresee?

I think the answer to this question is tolerably clear. I do not think that reasonable parties would have thought that the proper and bona fide performance by the Trust of its duties under an arrangement such as the Scheme could amount to a breach of the covenant for quiet enjoyment. In arriving at his conclusion it seems to me that the following points are particularly relevant. First, the 1967 Act conferred on Mr and Mrs Franklin the right to enfranchise their property, and that was a right they chose to exercise. Such rights that the Trust or, more accurately, its predecessor, the Old Trust, enjoyed as lessor of that property to control the activities of Mr and Mrs Franklin thereupon came to an end.

Second, the Trust nevertheless sought the approval of the High Court for the Scheme. It did so, not for the purpose of preserving or pursuing any private interest, but for the purpose securing certain powers to maintain and preserve the character and amenities of the Suburb for the benefit of the public. That Scheme was sanctioned by the High Court and from that point the Trust was under a duty to consider and act in the public interest and for the benefit of the Suburb as a whole, and Shebelle has never alleged it has failed to do so.

Third, and returning to the covenant in issue, that is to say the covenant for quiet enjoyment in the Lease, I do not believe that the proper performance by the Trust of its public duties under the Scheme amounts in some way to taking away with one hand what has been given to Shebelle with the other. Nor does it amount to a substantial derogation from the grant or a substantial interference with Shebelle’s rights under the Lease. Put another way, I do not believe it to have been implicit in the bargain embodied in the Lease that the Trust should not be able properly to perform it duties under the Scheme. To the contrary, it amounts to the performance in the public interest of its duty, sanctioned by the High Court under a statutory scheme, to preserve the character and amenities of the Suburb, and as such is entirely consistent with the agreement embodied in the Lease.

Finally, if Shebelle were right, it would fetter the exercise by the Trust of its powers under the Scheme, for it would permit a leaseholder (but not a freeholder) to contend that a particular development would substantially interfere with the quiet enjoyment of his property irrespective of whether that development was in the wider public interest.

This conclusion seems to me to derive support from a number of authorities. In Manchester, Sheffield and Lincolnshire Railway Co v Anderson [1898] 2 Ch 394 the claimant railway company was empowered by statute to build a railway and to acquire property for that purpose. It duly acquired the reversion to the defendant’s home and shortly afterwards began to build the railway on adjoining land. In this action it claimed rent under the lease and was met with a defence and counterclaim that the noise and disturbance occasioned by the construction of the railway amounted to a breach of the covenant for quiet enjoyment contained in the lease. In rejecting the defence and counterclaim, Lindley MR (with whom Chitty LJ and Collins LJ agreed) said (at pages 400-401):

Chitty LJ added (at page 403):

Here then it was recognised that the proper exercise by the railway company of the powers conferred upon it by statute could not amount to a breach of the covenant for quiet enjoyment. I acknowledge that powers of the Trust are not conferred upon it directly by statute. However, as Henderson J rightly observed, the Scheme was made with statutory authority.

There is a further important aspect to the present case, however, and that is that the powers of the Trust under the Scheme are exercised for the public good. Commissioners of Crown Lands v Page [1960] 2 QB 274 concerned the exercise in 1945 by a Minister of a statutory power to requisition and take possession of premises demised by the Commissioners in 1937 for a term of 25 years, in return for which the lessee was entitled to compensation. Some 10 years later the premises were derequisitioned but in the meantime the lessee paid no rent. The Commissioners thereupon brought proceedings claiming the arrears, to which the lessee responded that he had been evicted by the requisitioning and that the obligation to pay rent had thereby been suspended. Lord Evershed MR, with whom Ormerod LJ agreed, held that the requisitioning of the premises did not amount to an eviction but rather to the acquisition of a right of occupation in return for which the occupier was bound to pay to the lessee an appropriate and fair rent. Moreover no covenant for quiet enjoyment could be implied which would limit the Crown’s future proper exercise of its powers and duties under statute.

Devlin LJ approached the matter in a rather different way and by reference to what he identified as a general limitation affecting all contracts or covenants entered into by the Crown or any other person entrusted by the prerogative or by statute with discretionary powers to be exercised for the public good. As he said (at page 291):

Although the covenant in that case was said to be implied, Devlin LJ went on to explain (at page 292) that he would have reached the same conclusion had it been express:

This approach was also recognised in Molton Builders Ltd v City of Westminster LBC [1975] 30 P&CR 182 which concerned a block flats let by the Crown Estate Commissioners. The lease contained a user covenant which permitted the use of the flats as offices. Many years later the underlessee of one of the flats, which up to that point had been used for residential purposes, permitted a licensee to use it as an office. The planning authority thought that this change of use was a breach of planning control, but as it was Crown land they could not serve an enforcement notice without the consent of the Commissioners, which they gave. After service of the notice, the underlessee, Molton Builders, began these proceedings seeking a declaration that the enforcement notice was of no effect because the consent given by the Commissioners amounted a derogation from their grant. The action was dismissed by Willis J and this court dismissed Molton Builders’ appeal, holding that a tenant could not pray in aid the doctrine of derogation from grant to enable him to do something that was unlawful. Lord Denning MR went further, however, saying (at page 188):

Drawing these threads together in the context of the present case, the Trust is not a public body but it is exercising powers which have been approved by the High Court under a statutory scheme, and it is doing so for the public good. I do not believe that reasonable parties to the Lease should be taken to have intended by the words of the covenant that it could be applied to prevent or fetter the proper and bona fide exercise by the Trust of its powers under the Scheme.

I therefore believe that Henderson J was right to refuse the application for an injunction and dismiss the claim, and I would dismiss this appeal.

I agree.

I also agree.