Nuisance & Breach of Covenant: Whether a landlord’s breach resulted in a nuisance that diminished leaseholder’s property value (Dunward Properties v Isaac – 2023)

Where a landlord granted a lease which changed the use of adjacent premises to cause a nuisance to a residential leaseholder above, was the landlord liable for the diminution in value of the leaseholder’s flat?

The background

In Dunward Properties v Isaac [2023], the respondent leaseholder bought a long lease of a residential flat in London in 2015. The building comprised ground floor commercial premises with residential flats above. When the leaseholder bought the flat, an estate agency was in the commercial unit below.

The lease to the respondent reserved rights to the freeholder, including rights to carry out structural works provided that development did not diminish the value of the leaseholder’s flat. Having been vacated by the estate agency in 2016, the landlord carried out works to the commercial unit which was then let as a bar/restaurant. The leaseholder complained of noise and fumes arising from the change of use.

The leaseholder sold the flat for £470,000 in 2020, following which he brought a claim for breach of lease by the landlord in permitting the bar/restaurant to open, together with claims in nuisance, breach of the lease’s quiet enjoyment covenant and derogation from grant. The leaseholder claimed that the flat could have sold for £575,000 if the commercial unit had not been used for the bar/restaurant.

The County Court agreed that the landlord had breached the lease by permitting the opening of the bar/restaurant, but rejected the leaseholder’s other claims. Damages of £105,000 were awarded to represent the difference between the sale value achieved and the likely value of the property without the change of use, but no further consequential losses were awarded. The landlord appealed against the award. The leaseholder cross-appealed, seeking additional damages for consequential losses.

The decision

The High Court dismissed both the landlord’s appeal and the leaseholder’s cross-appeal, agreeing with the County Court judge that the original award of damages representing the difference in sale value, but no further award of consequential damages, was correct.

Considering each point in turn:

1. The lease terms did constitute a covenant by the landlord not to exercise its rights to carry out structural works where this resulted in a diminution in value of the leaseholder’s flat.

Other heads of loss, such as nuisance, may be pursued in circumstances where provisos contained in the lease applied, but the compensation offered by these remedies is less direct than an award representing diminution in value.

2. The leaseholder’s claim was presented by a combination of evidence including the physical changes made to the premises, the change of use and the effect of such changes, being to turn the unit into a bar/restaurant.

The landlord’s case was that diminution in value had to be caused by physical works only to evidence liability under the terms of the lease, but the court disagreed. Breach of contract could be evidenced by the combination of factors, which together gave rise to liability.

3. The High Court assessed whether the County Court had asked itself the right question. The County Court had considered whether the landlord was right to claim that liability only arose where diminution in value is caused by physical works alone, or whether the leaseholder was correct in stating that liability arose from a combination of factors.

The High Court found this to have been the correct approach by the County Court judge.

4. The County Court had been right to find that the works undertaken by the landlord had resulted in the diminution in value of the leaseholder’s flat. After the works had been carried out, the former estate agency was let as a bar/restaurant, and the leaseholder’s flat was worth less than it had been otherwise.
5. In assessing whether the County Court had been consistent in accepting the breach of contract claim but in its dismissal of the claims for nuisance, breach of quiet enjoyment covenant and derogation from grant.

The High Court concluded that claims comprised different elements. Because the value of the flat had diminished as a result of the works, the breach of contract claim could succeed. It did not require further evidence of an actionable nuisance, breach of quiet enjoyment or derogation from grant to support the claim.

6. The County Court judge had been right to conclude that the leaseholder’s claims for consequential losses did not succeed.

The leaseholder argued that the judge had been wrong to rely on the difference between the ‘investment value’ and the ‘amenity value’ of the flat. The judge’s conclusion addressed causation and loss principles, and reached the correct decision to dismiss the claims for consequential losses.

Advice and action for landlords

This decision is worthy of note for both landlords and leaseholders. The landlord did not succeed in appealing the award of substantial damages for breach of its lease obligations, but neither did the leaseholder succeed in an award of damages for consequential losses.

The essence of the test is clear: did the landlord carry out the works to the commercial unit – which may comprise a number of factors as well as the physical works themselves – and did those works lead to a diminution in value of the leaseholder’s flat, whereby it was worth less than it had been before the works were undertaken?

Landlords are advised to proceed with caution when undertaking works to commercial units in buildings where residential units are owned by long leaseholders. The change of use in this case from an office to a public bar/restaurant, leading to creation of fumes, noise, use outside of normal business hours and so on, led to an award of a significant sum. Of note is the fact that the difference in value was not disputed between the parties.