Princes House Ltd & Anor v Distinctive Clubs Ltd

This is an appeal from part of an order made on 25 September 2006 by Mr Jonathan Gaunt QC, sitting as a deputy judge in the High Court in the Chancery Division, in proceedings brought by the appellants, Princes House Ltd and Princes House Ltd (2) against Distinctive Clubs Ltd. Distinctive Clubs Ltd, to which I shall refer as “the tenant”, is tenant of basement premises at Princes House, 190-195 Piccadilly, London W1, under a lease dated 13 January 1998. The appellants were, from March 2001 until late 2005, the persons entitled to the reversion expectant on the determination of the lease; I shall refer to them (without distinguishing between them) as “the landlords”.

The claim in the proceedings was for arrears of service charge, payable on account under the terms of the lease. The sum claimed was some £425,000, together with £17,150 or thereabouts in respect of interest. Judgment was given on that claim in the amount of £201,043 including interest. There is no appeal against that part of the order.

The claim was met by a counterclaim under CPR part 20. Put shortly, it was said that the landlords’ covenants in the lease required the landlords to repair and maintain the roof of that part of the demised premises known as the “BAFTA block”; that the landlords were in breach of that covenant; and that by reason of that breach the tenants had suffered damage. The damage was said to be an amount equal to the sum payable by the tenant by way of contribution to the cost and expense of the work to the roof of the BAFTA block which was carried out, less the sums which the tenant would have had to pay had the landlords undertaken that work of repair at the time when they should have done.

In making that counterclaim the tenant relied on provisions for a cap on service charge contributions which are contained in paragraph 8.1 of the Fourth Schedule to the lease. That paragraph provided that, for the period ending on 24 December 2003, the total contribution of the tenant to the costs and expense incurred by the landlords in relation to repair and maintenance of the roof of the BAFTA block should not exceed an annual sum of £4,500 for the first year and thereafter £1,500 (with provision for indexation) in subsequent years. The judge awarded the sum of £237,809, including interest on the counterclaim. That sum was more than sufficient to extinguish the amount of the judgment on the claim. The judge ordered that the landlords pay to the tenant one half of the tenant’s costs of the claim and the counterclaim. It is from those parts of the order of 25 September 2006 that the landlords appeal to this court. They appeal with permission granted by the judge on terms which limited the issues which could be pursued.

The relevant terms of the lease, in the context of the issues raised on this appeal, are found in the Fourth Schedule, read in conjunction with clause 4.4 (by which the landlords’ obligations to repair are imposed) and clause 5.5.2 of the lease. Clause 4.4 of the lease is in these terms:

“Repair of building and provision of services.

Subject to the Tenant paying the Service rent, unless prevented by strikes knock-outs electrical breakdown or interruption works of repair or replacement or other causes beyond the Landlords’ control to use all reasonable endeavours to comply with the obligations in paragraph 2 of the Fourth Schedule so far as is consistent with the principles of good estate management.”

Paragraph 2 of the Fourth Schedule contains a covenant by the landlords to provide the services set out under paragraphs 3.1.1 to 3.1.17 in that schedule. Paragraph 3.1.7 of the Fourth Schedule is in these terms:

“Maintenance, repair and redecoration of Bafta block. The repair, including maintaining, renewing, replacing, rebuilding and decorating, external lighting and cleaning the foundations, roofs, outside walls, stonework and structural parts of the Bafta block and any plant machinery and equipment servicing the Bafta block and the service conduits and appliances therein.”

The BAFTA block is defined by reference to the plan to the lease.

The obligation under paragraph 2 of the Fourth Schedule refers back to the limitation in clause 4.4 of the lease which I have already read. That clause provides that the landlords’ obligations are subject to the tenant paying the service rent and are limited by the qualification “to use all reasonable endeavours so far as is consistent with the principles of good estate management”.

The Service Rent is defined in paragraph 1 of the Fourth Schedule. So far as material, it is a fraction based on net floor areas of the Service Costs. Service Costs are the total in any accounting year which the landlord reasonably and properly incurs in providing services set out under paragraphs 3.1.1 to 3.1.17 of the schedule, together with irrecoverable VAT and finance charges. But that must be read subject to paragraph 8.1 of the schedule, which limits the appellant’s contribution in relation to costs incurred by the landlord under paragraph 3.1.7 during the first few years of the lease and to which I have already referred. Clause 5.5.2 of the lease is in these terms:

“The Landlord will not be liable to the Tenant in respect of any failure by the Landlord to perform or provide the services referred to in the Fourth Schedule unless and until the Tenant has notified the Landlord of such failure and the Landlord has failed within a reasonable time to remedy the same.”

The matters relied upon by the tenant to support its claim that the landlords were in breach of paragraph 3.1.7 of the Fourth Schedule to the lease are pleaded in paragraphs 23 and 24 to the amended counterclaim. Paragraph 23 asserts that, in breach of the covenant, the claimants failed to repair, maintain, renew, replace and rebuild the roofs of the BAFTA block prior to 24 December 2003. Paragraph 24 then sets out evidence on which the defendant would rely in order to establish that breach. I need refer only to two of the matters under that paragraph. First, there is a letter dated 11 June 2002 from the landlords’ agents to the tenant; and second there is a letter from the landlords’ agents dated 20 December 2002. The letter of 20 December 2002 was in these terms, so far as material:

“Please find attached the expenditure budget for the year ending 31 December 2003.

Of particular note, you will see that your landlord proposes to replace Bafta’s roof next year which is scheduled to take place in the summer. Preliminary advice includes a cost in the order of £500,000. There is currently £100,000 in the sinking fund which can be applied towards the cost, leaving a balance of £400,000 which needs to be collected under the budget for 2003 to pay for the work.

Under the terms of your lease you are required to contribute towards the cost of the work. Your percentage contribution is 28.07%. Based on the above percentage, your proportion of the cost of the work will be £116,490.50. If the total cost of the work is more or less than the budget figure an adjustment will be made and an appropriate debit or credit will be raised.”

The tenant replied to that letter on 23 January 2003, requesting confirmation that the existing roof structure had served its useful economic life and that replacement remained the most economical basis of repair, requesting an explanation as to the basis of the contribution put at 28.07 per cent of the total costs and drawing attention to paragraph 8.1 of the Fourth Schedule -- which limited the tenant’s obligations to contribute to the costs and expenses in relation to the repair of the roof of the BAFTA block until the expiration of the accounting year in which the fifth anniversary of the commencement of the date should fall (which, as the writer pointed out, was 24 December 2003).

The landlords’ response to the pleading was contained in paragraph 9 of the defence to counterclaim dated 6 September 2005. It was pleaded that, as to paragraphs 23 and 24 of the counterclaim: (a) the covenant which bound the landlords was the covenant at clause 4.4 of the lease; (b) the obligation to repair was qualified by reference to principles of estate management; and (c) the matters referred to at paragraph 24 of the counterclaim were not evidence that works to the roofs of the BAFTA block should have been contracted for by the end of December 2003. I note that the allegation was not that they should have been contracted for by the end of December 2003 but that they should have been completed by that date.

The judge summarised that response at paragraphs 99 and 100 of his judgment. He said this:

“99.

Mr Wonnacott [counsel for the landlords] conceded that, had there been a simple covenant to repair the roof, the Claimants would have been in breach of it from the moment that they acquired the reversion on 6^th March 2001 but, he said, the obligation was qualified.”

100.

Secondly, the Claimants invoke clause 5.5.2 and rely on the fact that the Defendant had never notified them of any failure to perform their repairing obligation as a complete defence to any claim for consequential loss.”

He then quoted from the closing submissions made on behalf of the landlords. I need read only three paragraphs of that quotation:

“99.

C’s obligation, from the moment it acquired the reversion, was ‘to use all reasonable endeavours to comply with the obligations in paragraph 2 of the Fourth Schedule so far as consistent with the principles of good estate management’.

…

“103.

In fact, what C did, using ‘reasonable endeavours’ and ‘in accordance with the principles of good estate management,’ was to continue patching the roof, whilst it got up a scheme for the complete replacement of the roof, which it then implemented at a time and in a way that was least inconvenient for the tenant who would be most affected by the works.

“104.

That, as Mr Shaw [an expert witness] explained, was not unreasonable: it would have been unreasonable to decide not to replace the roof at all; but is perfectly consistent with the principles of good estate management to decide to delay the implementation of a major capital project, provided that it is actually done in the end.”

The judge decided each of the points identified at paragraphs 99 and 100 against the landlords. He was satisfied that works of repair to the BAFTA roof ought to have been completed by the end of 2003. If they had been so completed, then the tenant would have been able to rely on the cap imposed by paragraph 8.1 of the Fourth Schedule.

The judge addressed, first, the contention that, in the absence of a notice given by the tenant to the landlords of the landlords’ failure to replace or repair the roof of the BAFTA block, the tenant was precluded by the provisions of clause 5.5.2 of the lease from claiming damages for breach of the obligation under paragraph 2, read with paragraph 3.1.7 of the Fourth Schedule. He said this at paragraph 100 of his judgment, following the passage that I have just read:

“100.

It seems to me that this last point is lacking in both merit and realism in a situation where:

(a)

the failure in question is to look after a part of the building to which the tenant does not have access; and

(b)

the landlord had himself told the tenant that the roof needed replacing, that his building surveyor had so advised and that he had scheduled to do remedial work for the next year (2003)”

The judge rejected the first of those points; that is, that the provisions of clause 5.5.2 did not apply in a case where the failure was to look after the part of the building to which the tenant did not have access. But he went on to say this in relation to the second of the two points: namely, that the provisions of that clause could not be relied on if the landlord had himself told the tenant that the roof needed to be repaired and that he was proposing to repair it. He said this, at paragraph 101:

“I am, however, inclined to agree that the exclusion in clause 5.5.2 could not have been intended to apply to (a) a failure that could not of its nature be known to the tenant (except fortuitously) and/or (b) a situation where the landlord already knew of the state of affairs constituting the failure and had himself told the tenant of it and stated that he was intending to attend to it within a time scale that was reasonable. Had the troublesome officious bystander asked the contracting parties whether they were really requiring the tenant to give the landlord notice of the landlord’s failure in these circumstances, both parties would surely have dismissed the suggestion contemptuously.”

The judge then went on to consider whether the landlord had used all reasonable endeavours to repair the roof. He accepted, at paragraph 102 of his judgment, that a landlord could fulfil the repairing obligation by patching and doing ad hoc repairs while working up a scheme of replacement; and he accepted, at paragraph 103 of his judgment, that it was perfectly reasonable for a landlord to consult the convenience of his tenants. In particular, it was reasonable to have regard to the convenience of the immediately subjacent tenant; and it was only sensible to cooperate with such a tenant. But he went on to say, in the final sentence of paragraph 103, that:

“Nevertheless, it appears from the correspondence that had matters got underway soon enough, BAFTA would have been perfectly happy for the work to have taken place in the summer of 2003 rather than the summer of 2004.”

BAFTA were, in that context, the immediately subjacent tenant -- in that the works to the roof of the BAFTA block would have immediate effect on their occupation.

The judge asked himself whether, if the landlord had used all reasonable endeavours, the landlord could have completed the works of repair by the end of 2003. He concluded, for the reasons set out in paragraphs 104 and 105 of his judgment, that the landlord could have achieved that result. In particular he said this, in the final sentence of paragraph 105:

“The interests of BAFTA to have major works co-ordinated with their Summer shut down could have been accommodated in 2003 if the Claimants had started earlier or moved with more urgency and not allowed themselves to have become side tracked by other plans and aspirations.”

So he held that the tenant was entitled to succeed on its counterclaim.

Permission to appeal was granted by the judge on three points. Those included (i) the construction of clause 5.5.2 of the lease and (ii) the finding that, by failing to repair the roof by the end of 2003, the landlord was in breach of the covenant to use all reasonable endeavours to provide the services specified in paragraph 3.1.7 of the Fourth Schedule. The grounds annexed to the landlords’ appellants’ notice are succinct. Ground one: the judge misconstrued clause 5.5.2 of the lease. Ground two: the judge should have decided the counterclaim on the issues as they were pleaded and argued; alternatively, he should have assessed the damages as if the claimant had performed the covenant by patching until 2004.

I begin, therefore, by addressing the question whether -- in the circumstances of this case and in the absence of notice given by the tenant of the failure to repair -- clause 5.5.2 of the lease had the effect of precluding the tenant from making a claim for damages for breach of the repairing covenant.

It is important to appreciate that the landlords’ obligation to repair is not imposed by clause 5.5.2 of the lease. The obligation is imposed by clause 4.4 of the lease, read with paragraphs 2 and 3.1.7 of the Fourth Schedule. The breach of the covenant to repair exists, or does not exist, independently of any notice which the tenant may or may not give under clause 5.5.2. The breach of covenant occurs when the landlord fails to provide the services described in paragraph 3.1.7 of the Fourth Schedule; that is to say, when the roof of the BAFTA block is out of repair and the landlord fails to carry out the works to put the roof into repair. Clause 5.5.2 is included for the protection of the landlord. Absent such a provision, the landlord’s liability to the tenant would arise as soon as the roof were out of repair, whether or not the landlord was aware of it -- see the decision of this court in British Telecommunications PLC v Sun Life Assurance Society PLC [1996] Ch 69 and the editorial comment at paragraphs 8-15 of Lewisons’ Drafted Business Leases, seventh edition, 2007 at 278.

The protection under clause 5.5.2 of this lease takes two forms. First, the landlords’ liability for failure to repair does not arise until the tenant has notified the landlord of that failure. Second, the landlords’ liability for failure to repair does not arise until the landlord has failed within a reasonable time to remedy that failure. But although those two conditions are cumulative -- in the sense that both must be satisfied before the landlord is liable to the tenant for breach of covenant -- there is no basis for a construction which links the determination of what is a reasonable time to the giving of notice by the tenant. What is a reasonable time depends on all the circumstances: including the fact, if it be so, that the landlord has known of the need for repair before and independently of any notice given by a tenant.

As I have said, clause 5.5.2 is included for the protection of the landlord. So, as with other contractual provisions included for the protection of one party, that party can waive the benefit of the provision unilaterally. If authority be needed for that proposition, it can be found in the cases noted in footnote 24 at paragraph 23-044 of Chitty on Contracts (28^th edition 1999 at page 1161). That, as it seems to me, is what has happened in this case. The landlords’ agents gave notice to the tenant in the letter of 20 December 2002 of an intention to replace the BAFTA roof in the summer of 2003. In that letter, there was reference to the sinking fund. The sinking fund was a reserve fund set up under the terms of the lease. In fact, notice had been given earlier -- in a letter of 11 June 2002 to which reference was made in paragraph 24 of the amended counterclaim -- of a need to call on that fund. The letter of 11 June 2002 was sent by the landlord to all tenants at Princes House. It was headed “Princes House Reserve Fund”. It explained how the fund had been invested; and it contained a paragraph headed “Calls on the Reserve Fund” in these terms:

“There have been no calls on the Fund to date. Based on our internal projections the first call on the Fund is likely to be in early 2003.”

With that letter the tenants were sent a spreadsheet setting out projected expenditure to be recovered from the fund, which included an item, in 2003, of £767,000 to replace the roof of 190-196 Piccadilly. So it is clear that, in June 2002, the landlords, through their agents, were telling the tenant that the works to the BAFTA roof were to be carried out in 2003.

In those circumstances, I would hold that it was no longer open to the landlord to rely on the protection afforded by the first limb of clause 5.5.2 of the lease. As the judge put it, at paragraph 100 of his judgment, the contention that a landlord who has informed the tenant that it proposes to carry out works of repair to the roof which it knows to be out of repair can then raise, as a defence to a claim based on its failure to do so within reasonable time, the objection that the tenant has not given notice of that lack of repair lacks both merit and realism. In my view, what has happened in this case is that the landlord has indicated to the tenant that it does not intend to rely upon the need for notice under clause 5.5.2 before carrying out its obligations under paragraph 2 and 3.1.7 of the Fourth Schedule.

The question, then, is whether the landlord can rely on the second limb in clause 5.5.2. Liability to the tenant does not arise unless and until the landlord has failed to repair the BAFTA roof within a reasonable time. The judge held that, had the landlord used all reasonable endeavours to comply with the obligations in paragraphs 2 and 3.1.7 of the Fourth Schedule -- as it was required to do by the covenant in clause 4.4 of the lease, the work could have been completed by the end of 2003.

In my view, there was ample material on which the judge could make that finding: including, in particular, the letter of 20 December 2002 and the earlier letter and schedule of June 2002 on which the tenant relied in its amended counterclaim. In those letters the landlord informed the tenant that the work was scheduled to commence in the summer of 2003. The judge reviewed that evidence at paragraphs 29 to 35 of his judgment. It is, I think, sufficient to note what he said in paragraph 35:

“FOM [who were the project managers -- Fyans Oliver Mills] pressed ahead with the project during February 2003. They pressed BAFTA for information about their plant requirements and prepared a feasibility report with costings which estimated the costs at just under £668,000 plus VAT. They prepared a program in the form of a bar chart which showed the plant being relocated during July, the new roof works taking place in August and September and the site being cleared by the end of October 2003. They held a meeting with the planners.”

The judge went on, in paragraph 36, to explain that -- on 11 March 2003 in the course of a meeting about moving the plant -- BAFTA suggested that the plant relocation should take place during 2003 and the works to the roof fabric during summer 2004. It is clear, therefore, that the judge’s finding was that up to March 2003 matters were progressing on the basis that the work would be done in the summer of 2003 and completed by the end of October 2003. The suggestion that the work would not be, or might not be, done and completed by October 2003 was not made until March 2003. At paragraph 37 of his judgment, the judge noted that, by June 2003, it appeared that the proposal to do any significant work in 2003 had been abandoned. The project managers then produced a revised program providing for the relocation of the plant between January and April 2004 and the roof works between May and October 2004.

It seems to have been common ground between the parties at the trial that the reason why the works did not proceed in 2003, as had been planned, was that the delay suited BAFTA. We were taken to a fax letter of 30 July 2003 from the landlords to the chief executive of BAFTA:

“Thank you for your letter of 25^th July 2003. As you are aware we are carrying out the tender process as it is part of the programme of works which will enable us to carry out the roof works next year to fit in with your refurbishment programme and closure.”

That letter was described in the defendant’s skeleton prepared for use at the trial as “the single most important document at the trial”. But that letter must be read in the context of a later minute of a meeting between BAFTA and the landlords held on 5 November 2003 to which the judge referred at paragraph 39 of his judgment. The judge observed that there was a minute of that meeting at which Mr Price of BAFTA had asked for an assurance that the work would, after all, be done in 2004 and had protested:

“‘BAFTA had to plan ahead and after making arrangements for the work to be done last year, they did not want the same thing to happen this year as it cost them money’.”

The judge observed that that minute confirmed that, at least initially, BAFTA would have been happy for the work to have been done in the summer of 2003.

The judge went on, at paragraph 40, to say this:

“I have had to reconstruct the events of 2003 as best I can from the documents included in the trial bundles. It is a curious feature of this case that, although it was part of the Defendant’s pleaded case that the Landlords should have repaired the roof in 2003 and that this failure gave the Defendant a complete defence to the claim, none of the Claimant’s witnesses in their witness statements gave any account at all of what was happening during 2003 or why roof repairs, which had been identified as being needed in 2001 and 2002 and had been scheduled to be done in 2003, were not carried out then.”

The judge came back to that point at paragraph 103 and 104 of his judgment where he said, in the passage to which I have already referred, that it appeared from the correspondence that had matters got under way soon enough BAFTA would have been perfectly happy for the work to have taken place in the summer of 2003 rather than the summer of 2004. He observed:

“As I have already commentated, the Claimant’s witnesses ‘ducked’ giving a coherent explanation of the events of 2003 in their witness statements. Moreover, no witness was called on behalf of the Claimants to explain why nothing happened between March 2001 and the end of 2002.”

The second ground of appeal in the appellant’s notice is a complaint that the judge should have decided the counterclaim on the issues as they were pleaded and argued. But it is plain that the issue as pleaded before the judge was whether, in compliance with the obligations imposed by clause 4.4 of the lease, the works of repair to the BAFTA roof should have been completed by the end of 2003. The judge had to decide whether, had the landlords used all reasonable endeavours, they could have completed the works by that time: was that a reasonable time within which to do the works? The judge held, on the evidence, that the answer to those questions was “yes”: the works could have been completed, using all reasonable endeavours, by the end of 2003.

The point taken by the landlord was that it was reasonable to delay doing the works in order to accommodate the wishes of BAFTA. But those wishes were not made known until the late spring or early summer of 2003. And, as the judge pointed out, BAFTA would have been quite happy for the works to have been completed during 2003, if the landlords had progressed with their plans as they had originally intended, and had told the tenants that they would.

In those circumstances, it seems to me there is no substance in the assertion that the judge failed to decide the counterclaim on the pleaded issues; and no substance in the assertion that he was misled by the arguments. The only matter that was accepted by the tenant, as it seems to me, was that the fact that the works were not done in 2003 was to be explained by the letter of 30 July 2003. But that is a quite different point from the point which the judge decided, namely whether the works could have been done in 2003 in circumstances which would have met BAFTA’s reasonable requirements; and, I may add, would also have met the reasonable requirements of the tenant that the works should be done in 2003 if they could be.

The other element in ground two of the grounds of appeal is that the judge should have assessed the damages as if the landlords had performed the covenant by patching until 2004. But there is nothing in that point. The landlords’ obligation, which the judge identified, would have been met by patching until they had got up a scheme for replacement. By the end of 2002 they had got up a scheme for replacement. The advice which the landlords received was that replacement was going to be necessary. Thereafter, continued patching was not an option consistent with the landlords’ obligations under the covenant.

For those reasons I take the view that the judge was right to make the award of damages which he did on the counterclaim and I would dismiss the appeal against that part of his order. In those circumstances, as I understand it, there is no separate point on costs.

I agree.

I also agree.