Breach of Covenant: Claim for disgorgement damages where property is sublet without landlord’s consent (Almacantar Centre Point Nominee No.1 Ltd & another v CID Investments Ltd & others – 2021)

The County Court considered whether a request for an order for disgorgement damages could succeed in a claim where a residential property had been sublet and sub-sub-let without landlord’s consent.

The background

Almacantar Centre Point Nominee No.1 Ltd & another v CID Investments Ltd & others [2021] concerned a residential apartment property of which the claimant companies were landlord and the defendant company was the tenant under a long lease. The tenant had appointed an agent to manage the property.

The lease contained a covenant on the part of the tenant not to sublet the property without landlord’s consent. The agent sublet the apartment without consent, and the subtenant then granted a further sub-sub-tenancy. These subsequent tenancies were granted with payments greater than the original lease between landlord and tenant, but the terms of the lease had been breached as landlord’s consent was not sought to any subletting. The landlord made an application for damages, seeking an award for the profits gained from the sublettings in an order known as ‘disgorgement’. Alternatively, the landlord sought damages in the amount it would have negotiated with the defendant parties as ‘negotiating damages’.

The decision

The County Court found that the landlord’s claims for disgorgement and negotiating damages failed.

In considering the claim for disgorgement, the court stated that there must be exceptional circumstances in a breach of covenant case to justify a disgorgement claim. Further, the claimant must demonstrate a legitimate interest in preventing the defendant’s unauthorised profit-making activity. The court found that the long lease was unexceptional, containing standard covenants and creating no fiduciary relationship between claimant and defendant.

Consent to subletting by the landlord would only be given where the subletting’s terms allowed the tenant to break even and cover its own rent, service charge liability and costs and expenses of letting. The tenant was able to profit from such a subletting, and no covenant was given by the tenant not to sublet at profit. Had the tenant complied with the terms of the lease, it would have received consent from the landlord to sublet at a profit; there was no legitimate interest or aim by the landlord in preventing a profit being made by the tenant. As a result, there were no exceptional circumstances about the breach of covenant claim arising as a result of subletting residential premises without landlord’s consent.

Negotiating damages are assessed when considering how much a defendant would have paid to the claimant for a licence to perform the breach of covenant. For this to apply, the breach must have caused a loss of, or damage to, a valuable asset. Theoretically, the claimant could have waived its rights in respect of the covenant knowing that possible or actual damage could be caused to an asset, receiving a fee to compensate for that damage. The claimant landlord’s claim required assessment of what a reasonable landlord may have charged as a fee for a situation where the property was sublet and sub-sublet to unattractive tenants. It was considered unlikely by the court that any reasonable landlord would have negotiated on these terms, and could not therefore assess damages. Although the principal of negotiating damages was available to the court, it was not considered a realistic prospect in this case and the claim failed. No loss or damage had been evidenced.

Advice and action for landlords and management companies

This case provides useful guidance in the application of disgorgement and negotiating damages in the context of a breach of covenant claim. The judgment is clear in its findings that both claims failed, as subletting at a profit was not prevented by the terms of the lease and it was considered unlikely that, hypothetically, any reasonable landlord would have entered into negotiation regarding the grant of a licence for the defendants to enter into a chain of unattractive tenancies.

Nothing exceptional was presented by subletting without landlord’s consent sufficient to justify disgorgement, damages for which are defined as the repayment of profits received illegally or unethically by the defendant tenant(s) at the expense of the claimant landlord.