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Cautionary tale for investment landlords if a building has inherent defects

In Blue Manchester Ltd v North West Ground Rents Ltd [2019] EWHC 142 (TCC), the High Court upheld a tenant’s claim for specific performance against its landlord, requiring the landlord to repair an external glass façade in a tower block by replacing defective glazing panels.

Carillion Construction Ltd (Carillion) built the 47 floor Beetham Tower in 2006. 23 floors were let as a hotel, with the remaining floors above the hotel let as residential flats.

In 2010 the landlord purchased the freehold reversion for a sum of £400,000 from the original developer, and in doing so took on the landlord’s repair and maintenance responsibilities for the building.

The tower had fully glazed, external elevations which were integral to the ‘iconic’ design. In 2014 Carillion discovered that the sealant was failing in some of the glazing units and fitted temporary stitch plates to 1,350 glazed units pending investigation into a permanent solution. In January 2018, Carillion went into liquidation before a permanent solution had been agreed and implemented.

The hotel tenant had paid a £60 million premium for the 999 year lease at £20,000 per annum rent. Under the hotel lease, the landlord covenanted to keep the common parts, including the external facade, in good and substantial repair, but the cost of repairing inherent or design and construction-related defects could not be recouped through the service charge.  As a result the landlord wanted to retain the temporary solution while it pursued claims against Carillion’s insurers and the specialist sub-contractor who had designed and installed the defective glazed façade.

Even with the stitch plates in place, the court decided that the glazing units were in disrepair and the landlord was in breach of its repairing covenant. It ordered that like-for-like replacement of the existing glazing units should be carried out, unless investigation and analysis by a suitably qualified consultant showed that it was not reasonably practicable other than at a disproportionate cost. The tenant was also entitled to damages for the delay with the permanent repairs, disruption for unnecessary hoardings and water supply issues.

The key issues in respect of the disrepair claim turned on the interpretation of the repairing obligation and the relevant circumstances. The key issues noted by the court were

  1. The words “good and substantial” made it clear that the premises do not have to be kept in perfect repair or pristine condition.

  2. The general principle is that the standard of repair is assessed by reference to the circumstances at the date on which the lease was granted, having regard to the age of the premises at the relevant time.

  3. The inter-relationship between disrepair and functionality will depend on the facts of the particular case. However, disrepair need not be so serious as to make the property non-functional for the covenant to be breached.

  4. The use of stitch plates was contrary to the original design intent and could potentially cause breakage of the glass, performance issues with the aluminium frame and damage to the primary weather-seal.

  5. The stitch plates would need ongoing regular inspection and maintenance, causing disruption to the hotel, its guests and the occupiers of the residential flats. A remedial scheme which caused disruption and inconvenience to the tenant’s customers and operations was not, all other things being equal, acceptable given the building’s age, character and locality.

  6. The aesthetic consideration in terms of the original design of the glass façades which were an important aspect of the building’s overall design and original appearance. The stitch plates had “a significant adverse impact on the unitised appearance of the glass façades”. There would have to be “some compelling reason” (given the nature of the tenant and the tower) why this should be accepted other than as a temporary repair.

  7. The stitch plate system may require a planning application.

Was the tenant entitled to specific performance of the repairs or would damages suffice?

  1. The High Court was satisfied that damages would not be an adequate remedy in this case and noted that the landlord was required to:

  2. remove the existing stitch plates from the external façades.

  3. remove and reinstate or replace the glazing panels and their frames so that they are securely affixed to the structure of the building in such a way as provides substantially the same external appearance as was present as at the date of the lease and prior to June 2014.

However, the landlord may apply for a different remedial scheme if a like-for-like replacement was “revealed by investigation and analysis by a suitably qualified consultant to be not reasonably practicable other than at disproportionate cost”.

The High Court did not consider these terms to be uncertain or lack particularity. A detailed schedule of work was not necessary where the order required a clearly specified result and the defendant could be protected against the risk of unforeseen circumstances which made it impossible or impracticable to comply.

There was also a concern about the landlord’s ability to meet the costs of extensive remedial works, although the landlord did not argue that it would be impossible for it to comply, or that specific performance would cause it such serious and exceptional hardship to make it unjust.

The court’s provisional view was that 18 months was a reasonable time for the landlord to design and implement the works. However, the landlord could apply for an extension if there was unforeseen delay (which could not have been anticipated, guarded against or mitigated).

Comment

There are lessons to be learned from this case from both a landlord’s and tenant’s perspective.  When buying a property as investment, due diligence must be carried out in a very thorough way in terms of potential repairing liabilities and the ability to recover for the cost of these. In this case, inherent defects were not recoverable by way of service charge therefore the landlord was exposed to this risk, even if collateral warranties for the design and construction were assigned to it. The landlord’s pursuit of the contractor’s insurers was not timely enough to ensure that it might be able to recover the cost of repairs before being ordered to carry them out. Equally, if a tenant is taking a lease where the landlord is responsible for repairs to the exterior and common parts, take a surveyor’s advice on the condition and construction of the building, and check whether the lease excludes recovery of repairs and inherent defects from service charges.

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