Whether the residential leaseholder, Leon di Marco, would be in breach of the terms of his lease by letting on short-term tenancies, and whether the freehold company, Morshead Mansions Ltd, is entitled to forfeit the lease.

Morshead Mansions Ltd v Leon di Marco [2014] EWCA Civ 96

Summary

Another very important case related to the fights for enforcement of lease covenants and application of equitable principles under property law is Morshead Mansions Ltd v Leon di Marco [2014] EWCA Civ 96. The case gave rise to the following question: whether the residential leaseholder, Leon di Marco, would be in breach of the terms of his lease by letting on short-term tenancies, and whether the freehold company, Morshead Mansions Ltd, is entitled to forfeit the lease.

Facts

Morshead Mansions Ltd is the freeholder of a residential mansion block. Mr Leon di Marco was a leaseholder in the block. His flat had been let to him under a long term lease and contained covenants, which expressly limited the use of the property. More particularly, the lease contained covenants: not to use the flat other than as a private residence; not to sublet the flat without the consent of the freeholder.

Di Marco began to let his flat on a short-term basis through agencies like Airbnb. This generated complaints from other residents concerning noise, security together with an accounting for increased wear and tear to common parts. Acting in response to the complaints and alleging that di Marco had been in breach of lease covenants, Morshead Mansions issued a notice and sought to forfeit the lease.

Issues

The following are the main issues that arose from this case:

1. Whether the short-term letting activities of di Marco amounted to breach of the lease covenants.

2. Whether the Morshead Mansions were entitled in law to forfeit the lease on the basis of the alleged breaches.

3. Whether equitable relief against forfeiture was available in the circumstances, having regard to the nature and extent of the breaches.

First Instance

The case was first heard in the County Court, and Morshead Mansions argued that di Marco's short-term letting clearly breached the conditions of the lease. The County Court also went against diMarco, holding that his activities were indeed in breach of the covenants requiring the flat to be used only as a private residence, and prohibiting any subletting without consent.

The County Court granted the possession order, in effect sanctioning Morshead Mansions to forfeit the lease. Di Marco applied for relief against forfeiture on the ground that the breaches were very technical in nature and that no substantial damage had been caused. In the process, and looking at the said breaches and that of his own conduct, the County Court refused to do so.

Decision on Appeal

Di Marco successfully applied to the Court of Appeal for relief against forfeiture on the ground that the County Court had erred in its refusal to do so. Before the Court of Appeal, the terms of the lease, the nature of the breaches, and the equitable principles relating to relief were all closely examined.

The Court of Appeal upheld the County Court's judgment that di Marco had breached the lease covenants. It held that from the circumstances a clear inference could be drawn that there had been a breach of the user covenant to occupy the flat as a private residence and a prohibition on subletting without consent by the short-term letting.

However, the Court of Appeal took an altogether different view on the issue of relief against forfeiture. In this regard, the Court of Appeal placed a heavy reliance on the principle of proportionality and with the equitable principles in relation to the remedy against forfeiture. The Court of Appeal found, though the breaches made by di Marco were grave, they were not irredeemable, as di Marco was willing to comply with the terms of the lease in the future.

The Court of Appeal gave di Marco relief against forfeiture on condition that he paid Morshead Mansions' costs and thenceforth obey the lease covenants to the letter. This case illustrates well the discretion given to the court to balance the gravity of the breach with the possibility given to the lessee for compliance .

Comments

The decision in Morshead Mansions Ltd v Leon di Marco offers helpful guidance on the approach that a court will take with respect to applications for equitable relief against forfeiture, and conversely, the enforcement of lease covenants. There are several general important lessons which can be taken out of the case at hand:

1. Strict Enforcement of Terms of Lease: What has been projected so far from this case is that any tenancy ought to be strictly adhered to. Any breach in the agreement by a lessee may mean he faces very serious consequences, even where the lessee considers such a breach minor. These include possibly the possibility of forfeiture.

2. Proportionality in Relief Against Forfeiture: The Court of Appeal's judgment emphasizes principles of proportionality and fairness in determining relief against forfeiture. On the proof of a breach, therefore, courts will still inquire whether forfeiture is proportionate to the breach and whether or not the lessee had acted bona fide to observe conditions of the lease.

3. Short-term Letting: The case epitomizes the rising challenges of short-term letting of residential properties, mainly in the urban areas, and calls for clarity on what is permitted by leases and rigorous enforcement to protect the character and security of residential blocks.

4. Legal Costs and Compliance: The Court of Appeal gives conditional relief, thus demonstrating the court's approach to enforcement versus fairness. Lessees are discharged but, more often than not, ordered to pay the freeholder's costs and directed to comply in the future.

5. Guidance for Future Disputes: The case hence sets a precedent for freeholders and leaseholders involved in similar controversies in the future. It would go on to underscore the fact that there needs to be openness, clarity of communication, adherence to the terms of the lease, and that equitable relief might well be available in cases of non-irremediable breaches.

As such, it comprises a leading case on Morshead Mansions Ltd v Leon di Marco to support principles relating to the enforcement of leases and equitable relief, which involves equilibrium in balancing freeholders' rights in covenant enforcement with equitable considerations that will save leaseholders from disproportionate consequences.

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