Implied covenant of quiet enjoyment and non-derogation from grant
A tenant failed in its bid to rely on implied covenants of quiet enjoyment and non-derogation from grant when it could not obtain a fire safety certificate required for its operations.
The case highlights risks for tenants:
- Failing to undertake sufficient due diligence.
- Relying on implied covenants rather than negotiating express provisions.
- Accepting the exclusion of warranties.
Overseas Union Enterprise (OUE) leased to Three Sixty Degree PTE (Three Sixty) the 39th floor of a wing of the Mandarin Orchard, Singapore (Property) for the operation of a bar/lounge.
Problems arose due to the access arrangements: the passenger lift stopped at the 38th Floor and access to the Property was gained by an internal staircase up from the 38th Floor. The Singapore Civil Defence Force (SCDF) (being the fire safety authority) considered the 38th Floor and the Property to be one unit due to the open staircase. It would only grant the necessary fire safety certificate on the condition that the combined occupancy of the 38th Floor and the Property did not exceed 120 people. Three Sixty and OUE did not agree the apportionment of the occupancy limit between the two floors and, after what might be called a permitting fiasco, Three Sixty abandoned its plan to operate the bar from the Property. It remained in possession and defaulted in rent and other sums due under the Lease.
OUE terminated the Lease demanding vacant possession, payment of arrears, interest and damages for failure to commence trading on the agreed trading date and to obtain the relevant licences required to operate the bar.
Three Sixty counter-claimed for damages arguing:
- OUE had breached its implied covenant of quiet enjoyment because of physical defects in the Property;
- OUE had breached its implied covenant against derogation from grant by failing to give the necessary assistance to obtain the fire safety certificate and refusing to allocate the entire occupancy load imposed by the SCDF to the Property.
Two covenants are implied in all leases:
- The landlord cannot derogate from its grant – this prevents a landlord from taking steps or granting rights with regard to his adjoining property that would render the leased property unfit for the purposes for which it was particularly leased.
- The landlord must allow the tenant quiet enjoyment of the leased property – this requires the landlord to give possession of the leased property without interference from the landlord or anyone claiming under the landlord (for example, a tenant or licensee or the landlord’s assignee). This could be a legal claim (eg the right of another tenant to possession) or physical interference.
There is considerable overlap between the two principles but they are similar in that there cannot be substantial interference with the tenant’s reasonable use of the leased property. However, non-derogation from grant has distinguishing features:
- The covenant is implied into all contracts whereas quiet enjoyment is confined to property related documents.
- Where a landlord has reserved rights under the lease, a tenant’s covenant against derogation from grant could be implied and enforced by a landlord where the tenant is impeding a reserved right.
- The principle may give rise to proprietary rights in certain circumstances (for example implied easements).
The court set out the following five principles derived from case law as guidance in the analysis of potential breaches of the two implied covenants:
- The covenant against non-derogation from grant does not amount to an implied obligation on the landlord to underwrite the profitability of the tenant’s business. Even if the landlord does something on his land that makes the tenant’s occupation of the leased property more expensive or less profitable, there will be no derogation from grant if the land is still capable of reasonable use.
- A landlord has no obligation to take measures outside the reasonable contemplation of the parties with regard to the leased property unless they were specifically bargained for in the lease. The obligation not to derogate from grant does not extend to special aspects of the tenant’s business which call for extraordinary protection.
- Non-physical interference can constitute substantial interference with the ordinary enjoyment of the property in respect of both covenants. An example is acting so that an existing licence required for the business is forfeited due to conditions on the adjoining land.
- The existing use of the adjoining property is a material consideration when determining whether either implied covenant has been breached. The tenant is taken to be aware of existing and reasonably contemplatable uses on the adjoining property.
- Both covenants are prospective in nature and do not apply to acts of the landlord before the grant of the lease even if they have continuing consequences for the tenant after the grant.
The court held there was no breach of either of the implied covenants:
- OUE’s insistence on apportioning the occupancy load between the two floors did not substantially interfere with the use of the Property; it was still reasonably possible to operate the bar even if Three Sixty’s profitability was adversely affected. In addition, Three Sixty had visited the Property before signing the Lease and should have negotiated express protections in relation to access rather than rely on implied covenants once the disputes arose.
- OUE was not responsible for Three Sixty’s failure to obtain a fire safety certificate. It had provided all the relevant information to Three Sixty as well as reasonable assistance with the application.
- There was no implied covenant that the Property would be fit for use; on the contrary, there was an express exclusion of a warranty that the Property was fit for any business to be carried on there and all implied terms were agreed to be excluded. These provisions meant what they said. The prevailing principle is “caveat lessee”.
- There was no evidence that the claimed defects had substantially interfered with the use of the Property.
- Tenants should carry out full investigations as to regulatory requirements before signing a lease.
- If there are conditions to the tenant’s continued occupation, they should be expressly included in the lease.
- Enquiries should be made as to the current and future uses of adjoining premises.
- If the tenant is relying on a warranty from the landlord it must be carved out from the usual exclusion of representations and warranties.