Marchday Group Plc v British Telecommunications Plc

In this action the Claimant, Marchday Group Plc (“Marchday”), claims damages from British Telecommunications Plc (“BT”) in respect of the alleged breach of repairing, cleansing and decorating covenants contained in an underlease (“the Lease”) dated 26 November 1976. By the Lease Star Northern Developments Ltd. (“Star”) let to the Post Office the twelfth to seventeenth floors of a building in Middlesbrough at that time called Corporation House (“the Building”) for a term of 25 years from 25 March 1975. The demise included 16 car parking spaces. It seems that at the date of the Lease Star held the Building under the terms of a lease dated 22 November 1976 made between Pearl Assurance Co. Ltd., Star and English Property Corporation Ltd. However, on 23 May 1996 the reversion immediately expectant upon the determination of the Lease became vested in a company now called Limegrid Plc (“Limegrid”), but at that time called The Marchday Group Plc. That company remained entitled to the reversion immediately expectant upon the determination of the Lease as at 25 March 2000, when the term created by the Lease expired by effluxion of time. Subsequently, however, Limegrid assigned to Marchday all its causes of action arising out of the alleged breaches of the covenants in the Lease to which I have referred.

In this judgment I shall refer to the premises which were demised by the Lease as “the Demised Premises”. On or about 6 August 1984, upon the privatisation of the telecommunications business up to that time carried on by the Post Office, the residue of the term created by the Lease became vested in BT.

There is now no dispute that as at the date upon which the term created by the Lease expired by effluxion of time BT was in breach of the covenants to which I have referred. It has been agreed between surveyors acting on behalf of the parties that the cost of the works necessary to remedy the admitted breaches of covenant, together with appropriate professional fees, was £348,830.25. However, it was alleged on behalf of Marchday that losses in addition to the cost of remedial works had been sustained as a result of the admitted breaches of covenant on the part of BT, namely loss of rent, insurance rent and service charges in respect of the Demised Premises over a period of some 19 months between the date of expiry of the term created by the Lease and the end of the period which it is contended was reasonably necessary for the undertaking of the remedial works required to the Demised Premises and the subsequent re-letting of those premises. Those losses were put at a total of £808,319. The premise underlying the claim for those losses as put was that, but for the breaches of covenant on the part of BT, it would have been possible immediately to re-let the Demised Premises from 25 March 2000 at an annual rent of £390,500, and on terms that the incoming tenant pay a due proportion of the sum paid for insuring the Building, together with a due proportion of the service charges applicable to the Building. Various calculations of the net internal area of the Demised Premises were put in evidence, but they did not differ by much. The calculation of the expert valuer called on behalf of Marchday, Mr. Ian Battle, who is a partner in the firm of Storeys:ssp, resulted in a total of 52,070 square feet. If that calculation were correct, the level of rent which it was contended on behalf of Marchday the Demised Premises could have commanded as from 25 March 2000 amounted to £7.50 per square foot. The rent payable under the Lease at the time it came to an end was £300,000 per annum, equivalent, on Mr. Battle’s calculation, £5.76 per square foot, if no value were attributed to the 16 car parking spaces included within the demise. The figures for rent per square foot alter by a few pence downwards if any of the other suggested figures for the net internal area of the Demised Premises, respectively 52,220, 52,259 or 52,319 square feet, were correct. The position adopted on behalf of BT in relation to the alleged losses of rent, insurance rent and service charges was, essentially, that no loss had been suffered in relation to any of these elements because each depended upon the proposition that the Demised Premises could have been let earlier than in fact they were, and that proposition was incorrect.

A period of 19 months from 24 March 2000 would have come to an end on 24 October 2001. The Demised Premises were not in fact re-let as from October 2001. What actually happened was that a company called C. J. Garland & Co. Ltd. (“Garland”) in 2003 entered into four leases of various parts of the Demised Premises. By a lease dated 30 January 2003 the twelfth and thirteenth floors of the Building were let to Garland for a term of 13 years from 30 January 2003 at a rent of £164,854 per annum. The total area let under the lease was said to be 17,822 square feet, making the rent equivalent to £9.25 per square foot. By a lease dated 13 March 2003 the fourteenth floor of the Building was let to Garland for a term of 13 years from 13 March 2003 at a rent of £82,426 per annum. That rent was also equivalent to £9.25 per square foot. By a further lease of the same date the fifteenth floor of the Building was let to Garland for a similar term at an identical rent. Finally, by a lease dated 7 July 2003 the sixteenth floor of the Building was let to Garland for a term of 13 years from 7 July 2003 again at a rent of £82,426 per annum, equating to £9.25 per square foot. There was a suggestion in the evidence that Garland might be about to enter, or had just entered, into a lease of the seventeenth floor of the Building, but there was no firm material to support that suggestion. As at the date of this judgment it appears that the seventeenth floor remains unlet. Certainly no copy of a lease of the seventeenth floor to Garland was put in evidence.

It is plain from considering the leases into which Garland has entered that the provision of car parking was an important element from its point of view. Under the lease dated 30 January 2003 the landlord, in fact a company called Marchday Holdings Ltd. (“Holdings”), granted Garland the right to use 12 spaces in the car park at the Building and agreed, by clause 4.3 of the lease, that:-

What the justification may be for taking the period of 19 months upon which the calculations made on behalf of Marchday have been based is a matter to which I shall have to return. Certainly the position adopted on behalf of BT was that the requisite remedial works to the Demised Premises did not in fact take 19 months, or anything like that long, and a period of 19 months would have been grossly excessive. Another matter to which I may have to return is what account, if any, should be taken in evaluating Marchday’s claim of the fact that the rate per square foot of the rent which Garland has agreed to pay exceeded by £1.75 the rate which it was contended Marchday would have been able to obtain in relation to lettings as from 25 March 2000.

What is necessary in order to evaluate the claims of Marchday which are in dispute is to make an assessment of the letting market for office property in Middlesbrough as at 25 March 2000 and thereafter. The evidence called before me in relation to that question was that of Mr. Battle and that of Mr. Richard Bullen, an Associate Director of DTZ Debenham Tie Leung, on behalf of BT. Mr. Battle prepared a report setting out the substance of his evidence in chief, which report was dated 3 September 2003. There were a number of annexures to his report, to some of which it will be necessary to refer. The substance of Mr. Bullen’s evidence in chief was set out in his report dated 10 October 2003. Again there were a number of annexures to his report, and again it will be necessary to refer to some of them.

Before coming to consider the letting market for commercial property in Middlesbrough from 25 March 2000 it is convenient to describe the Building as it was as at 25 March 2000 and as it is now. The Building has, since March 2000, had considerable works undertaken to it separate from those necessary to remedy the consequences of the breaches of covenant on the part of BT. In the light of those works the Building has been re-branded, or at any rate re-named, being given the modest title “Centre North East”.

The Building was constructed in the early 1970s. As originally constructed it comprised a basement, a ground floor adapted for retail use in a number of different units, a first floor intended for office use, a second floor providing some 43 car parking spaces, and third to seventeenth floors comprising office accommodation. The total net internal floor area of the Building was some 165,917 square feet. The Building is in a prominent site in Middlesbrough, being on the corner of Corporation Road and Albert Road, opposite the Town Hall and adjacent to The Cleveland Centre. It is apparently the tallest building in Middlesbrough, although views seem to differ as to whether this is an attractive attribute. The Cleveland Centre, as I understand it, is a retail development with on-site car parking. Access to the car park on the second floor of the Building is through the car park at The Cleveland Centre. It is because the car parking at The Cleveland Centre is required for shoppers during the day that spaces for Garland are only available after 5 p.m. There is a purpose-built reception area on the ground floor of the Building, with an entrance from Albert Road, through which access is obtained to the offices on the upper floors. There are five passenger lifts affording access to the upper floors. The lifts are in the central service core. On each floor there are lavatories and a tea making point. As originally constructed the office floors had concrete screed floors which were carpeted, suspended ceilings with surface mounted fluorescent lighting, plastered walls, perimeter heating and ventilation and an open plan layout. In other words, on the upper floors it was a typical 1970s office building.

As I have already indicated, the six upper floors of the Building – the Demised Premises – were let for a term of 25 years from 25 March 1975 to the Post Office. The third to eleventh floors of the Building were also let for a term of 25 years from 25 March 1975 to a single tenant. That tenant was the Government department which in due course became the Department of the Environment, Transport and the Regions (“DETR”). By 25 March 2000 both BT and DETR had ceased to occupy the entirety of the parts of the Building respectively demised to them. As at about November 1995 and thereafter the third, fifth, eighth, tenth, sixteenth and seventeenth floors seem simply not to have been occupied at all for much of the time, while DETR did not occupy parts of the fourth, sixth and ninth floors and had sub-let the entirety of the eleventh floor. When BT gave up occupation of the Demised Premises DETR also ceased to occupy any part of the accommodation previously let to it. In other words, practically all of the office accommodation in the Building became vacant from 25 March 2000.

After the expiry of the term created by the Lease considerable work, apparently costing some £3 million, has been undertaken to the Building in addition to anything necessary in the light of breaches of covenant on the part of BT or DETR. In particular a new reception area has been constructed, new suspended ceilings have been provided, there is new Category 2 lighting, new power circuits have been installed, air conditioning has been provided, raised flooring has been installed, and lavatories and lifts have been refurbished. Mr. Dudley Leigh, a director of Marchday, was called to give evidence and he said, at paragraph 10 of his witness statement, that at the time The Marchday Group Plc acquired the freehold interest in the Building it was recognised that in order to attract tenants it would be necessary to repair the accommodation fully, improve car parking provision, redecorate common parts attractively and imaginatively, and improve the image of the Building.

Mr. Bullen attached to his report a copy of an article in the 24 September 2003 edition of The Journal newspaper concerning the Building. While no doubt allowance must be made for the possibility of misunderstanding on the part of the author of the article, it was not suggested before me that what was reported was in substance inaccurate. One of those quoted in the article was Mr. Battle in his capacity as letting agent for the Building. He expressed no unhappiness concerning the correctness of the comments attributed to him. The text of the article was:-

As I understand it, consideration is currently being given to the conversion of the existing first floor office accommodation at the Building to provide additional on-site car parking.

Mr. Bullen drew attention in his report to a study commissioned by English Partnerships and Middlesbrough Borough Council (“MBC”) from a concern called EDAW in relation to options for the regeneration of the town centre of Middlesbrough. EDAW apparently led a multi-disciplinary team of consultants which comprised Chestertons, Ove Arup and Partners and Urban Cultures. The final report following the study, which was dated January 1998, included these passages:-

considerable restructuring within the financial services sector

local government reorganisation, leading to a considerably reduced office requirement from the public sector

a gradual shift towards out of centre locations offering a higher quality of environment and parking provision.

considerable restructuring within the financial services sector

local government reorganisation, leading to a considerably reduced office requirement from the public sector

a gradual shift towards out of centre locations offering a higher quality of environment and parking provision

The EDAW report dealt with the position in Middlesbrough as it was perceived to be in January 1998. Mr. Battle annexed to his expert report extracts from the results of research undertaken by Northern Property Analysis Service (“NPAS”) for the second quarter of 2000. That research covered the whole of the North East of England. It did not deal separately with Middlesbrough, but included Middlesbrough in the wider area of Teesside. The data as recorded in the report of the research parts of which were annexed to Mr. Battle’s report was expressed, so far as areas were concerned, in square metres. One square metre equals 10.764 square feet. Mr. Battle’s summary and assessment of material set out in an NPAS report relating to the first quarter of 2000, no part of which was put before me, was set out in section 6 of his report as follows:-

An interesting comment in the NPAS material in fact annexed by Mr. Battle to his report, at paragraph 3.13, was that,

At paragraph 6.16 of his report Mr. Battle stated that:-

Mr. Bullen in his report took a different view. In paragraph 9.5 c) of his report he emphasised what in his view were the peculiarities of the office letting market in Middlesbrough, as opposed to other locations:-

At paragraph 9.3 a) of his report Mr. Bullen set out his assessment of the office letting market in Middlesbrough and the attractiveness of the Building as it was, or would, if repaired, have been, in early 2000:-

A major factor in the office letting market in Middlesbrough since 31 March 1996, according to the evidence of Mr. Bullen, which was not challenged on this point, has been the availability on the market of office accommodation previously occupied by the now defunct Cleveland County Council (“CCC”). CCC was abolished as from 31 March 1996. It used to occupy, amongst other premises, Gurney House, an office block comprising some 72,468 square feet and with 30 on-site car parking spaces. Gurney House was let to CCC under a lease for a term of 20 years from 24 June 1988. The current rent is £362,500, equivalent to £5 per square foot of the office space with no addition for the car parking spaces. The block has been vacant since 1996 and has been available since then. Thus anyone who wanted 72, 500 square feet of office space in Middlesbrough at any time since 1996 would have been able to acquire it at a cost of £5 per square foot by the simple expedient of taking an assignment of CCC’s lease. Another building formerly occupied by CCC, but vacant since 31 March 1996, is Teesside House, amounting to some 50,000 square feet and with 25 car parking spaces. Teesside House lies within 250 yards of the Building. Since 31 March 1996 it has been immediately available for letting. Martin House was also formerly occupied by CCC. It was vacated in 1993 and renamed Jupiter House. It comprised some 50,000 square feet. It failed to let at an asking rent of £2.50 per square foot and was subsequently demolished.

Other substantial office accommodation which, on the unchallenged evidence of Mr. Bullen, was available in the market for letting in Middlesbrough in 2000 included Church House, comprising some 68,115 square feet and offering 30 car parking spaces. It failed to sell at auction in February 2000 and continues to be vacant. Rede House, formerly occupied by the Inland Revenue, became vacant in March 2000. That property has subsequently been redeveloped. Apparently the redevelopment was prompted by, or at any rate involved, Hyder Business Services Group Ltd. (“Hyder”). According to the information available to Mr. Bullen, when MBC decided to seek to put out to tender the provision of various services theretofore provided by it for the residents of the district for which it was responsible, Hyder was interested in tendering. Hyder sought to sharpen the competitiveness of its bid by indicating a preparedness to procure the redevelopment of Rede House, if it were successful, as it has proved to be.

In the light of the material to which I have referred Mr. Bullen, at paragraph 9.4 of his report, expressed the view that:-

Before concluding my consideration of whether, on the evidence led before me, the Demised Premises or any part of them would, if in good repair as at 25 March 2000, have been let immediately or at some other time earlier than they actually were, it is necessary to consider the lettings of parts of the Building other than the Demised Premises since March 2000.

By a lease dated 9 May 2000 and made between Limegrid and Middlesbrough Town Centre Co. Ltd. (“MTCC”) Limegrid demised to MTCC some 2,443 square feet of space on the eleventh floor of the Building for a term of 5 years from 25 March 2000 at an annual rent of £12,500, equivalent to £5.12 per square foot.

By a lease dated 5 June 2000 and made between Limegrid and P.W. & Co, a service company associated with the well-known accountancy firm PricewaterhouseCoopers, Limegrid demised to P.W. & Co some 5,410 square feet of space also on the eleventh floor of the Building, and two car parking spaces, for a term of 5 years from 25 March 2000 at an annual rent of £31,355, equivalent to £5.80 per square foot, if one ignores the car parking spaces. Mr. Battle seemed from Appendix 4 to his report to value the car parking spaces at £800 per annum per space. On that basis the rent per square foot of the office space is equivalent to £5.50.

By a lease dated 12 January 2001 and made between Holdings and Trillium (Prime) Property GP Ltd. (“Trillium”) Holdings demised to Trillium some 3,250 square feet of office space on the third floor of the Building, together with two car parking spaces, for a term commencing on 10 November 2000 and expiring on 31 March 2019 at an annual rent of £19,475. Ignoring the car parking spaces, the rent is equivalent to a rent of £5.99 per square foot. However, from Appendix 4 to Mr. Battle’s report he seems to value the car parking spaces to be occupied by Trillium at £3,225 per annum, for he recorded the equivalent rent per square foot of the office space as £5.

By a lease dated 24 May 2001 and made between Holdings and Hyder Holdings demised to Hyder the whole of the fourth floor of the Building, amounting to some 8,891 square feet, for a term commencing on 24 May 2001 and expiring on 23 November 2002 at a rent of £80,200 per annum, equivalent to £9.02 per square foot.

Each of the lettings of space within the Building which did not originally form part of the Demised Premises to which I have referred had some unusual feature, as Mr. Battle made plain in his report. He said:-

It appears that the need of Hyder for nearly 9,000 square feet of accommodation for only 18 months arose out of the requirement to have office space pending the completion of the redevelopment of Rede House. That seems to have prompted Hyder to pay a rent substantially greater than those agreed to be paid by other occupants of parts of the Building not previously included within the Demised Premises. Leaving aside the special case of Hyder, the other occupants required small amounts of space for which they were prepared to pay relatively low rents. The analysis of the rent per square foot which Garland agreed to pay which I have undertaken earlier in this judgment left out of account completely the car parking spaces which Holdings agreed to make available or use its best efforts to procure. If each of those spaces were valued at £800 per annum the effect would be to reduce the rate per square foot paid by Garland for the office space to £6.47. The valuation of each of the spaces in the Zetland Car Park, at £800 is undoubtedly unrealistic. At various places in the material put before the Court figures in the range £250 to £350 per annum were suggested as the value of spaces in the Zetland car park. In the end both Mr. Battle and Mr. Bullen seemed to come to rest at a valuation of spaces in the Zetland car park at £300 per annum each. If that were the correct allowance to make for car parking spaces in the Zetland car park, the equivalent rate per square foot paid by Garland for the office space which it occupies would be £7.87.

At paragraph 9.3 a) of his report Mr. Bullen, as to whose source of information I do not speculate, said this about the Zetland Car Park:-

In his cross-examination Mr. Battle did accept as a general proposition that one would ordinarily expect that a tenant would pay a lower rent per square foot per annum the larger the area which he agreed to take. In the light of the lettings of space to MTCC and P.W. & Co as from 25 March 2000 at rents of the equivalent of £5.12 per square foot and £5.50 per square foot, respectively, one might expect that the rent which could be expected for the Demised Premises as from 25 March 2000, if it had been possible to let them, would have been rather less than the lower of those figures. In one document to which my attention was drawn Mr. Battle himself suggested that a discount of the order of 10% from the rent per square foot for a smaller area might be appropriate for a letting of an area comprising the bulk of the Demised Premises. However, when he was cross-examined about this point Mr. Battle contended that each of the lettings to MTCC, P.W. & Co and Trillium had some special feature about it which meant that the general rule should not be considered as applicable. He asserted that the levels of rent agreed to be paid by MTCC and P.W. & Co, admittedly for accommodation of a higher specification than that which the Demised Premises would have met if delivered up in repair by BT, were concessionary, intended to attract particularly desirable tenants. The letting to Trillium was at a rent which reflected that Trillium would have to fit out the area let.

As I have already indicated, one of the matters upon which Mr. Battle sought to rely in support of his opinion that four floors of the Demised Premises could have been re-let as from 25 March 2000 if only the Demised Premises had been in good condition at that time was the interest expressed in the Building by prospective tenants who did not in the event become tenants. Mr. Battle seemed to feel that the only likely tenant for substantial areas of the Building would have been a call centre operator, and was encouraged by interest shown by a company called Merchants Group Ltd. (“Merchants”) and by a company called Tradezone International Ltd. (“Tradezone”). What Mr. Battle said in his report about these companies was this:-

What a consideration of the circumstances in which a letting to Merchants did not proceed as set out in the report of Mr. Battle shows quite clearly is that Merchants was not prepared to proceed without the accommodation which it was to occupy being refurbished in just the way that the Building now has been. In other words, it would not have been prepared to go into occupation of the Demised Premises or some part thereof if only the Demised Premises were in proper repair as at 25 March 2000. Moreover, it is plain from the account given by Mr. Leigh at paragraph 33 of his witness statement that Merchants, unlike Marchday or Limegrid or Holdings, was not prepared to commit itself to anything in terms of taking occupation of some part of the Building until it had obtained a contract from its prospective customer for call centre services, One2One. What Mr. Leigh said was:-

Absolutely no evidence of an existing, unsatisfied demand for any, still less substantial, office accommodation in Middlesbrough in March 2000 or at any time thereafter before 2003 was put before me. On the contrary, all the evidence led before me, the material parts of which I have summarised earlier in this judgment, showed conclusively, as it seems to me, that in March 2000 and at all times thereafter Middlesbrough was vastly oversupplied with relatively poor quality office accommodation for which there was no demand. In part the amount of accommodation available was a consequence of the abolition of CCC and the resultant cessation of need for the office accommodation which it had previously occupied. A major factor in the lack of demand for the accommodation which was available was that new accommodation to modern standards was being built at Teesdale, only some 3 miles from Middlesbrough. As long as new accommodation was available at Teesdale or elsewhere in the vicinity of Middlesbrough it was unlikely that there would be any demand for the existing accommodation available in Middlesbrough itself. Car parking seems to be a matter of great concern in the local office letting market, and the need for car parking was being met on the new developments. Prospective tenants would only return their gaze towards the centre of Middlesbrough if the amount of accommodation which they required was not available in the new developments.

Once a prospective tenant had turned its gaze upon the centre of Middlesbrough, what was there to attract it to the Building particularly? Until the Building was refurbished as it has now been, and the issue of providing car parking was addressed, as it has now been (even if one retains concerns for the female staff of the tenants), the answer was nothing. The Building was just a 1970s office block without distinguishing features, save that it may have been convenient for the shops in The Cleveland Centre, in a city with plenty of other 1970s office blocks which offered substantial amounts of accommodation and were vacant.

The only realistic conclusion, in my judgment, is that the Demised Premises were unlettable until they, and the rest of the Building, were refurbished and the flow onto the market of new accommodation at Teesdale had abated. Once the Demised Premises were refurbished and there ceased to be significant competition in Teesdale for tenants requiring large amounts of office accommodation the Demised Premises were able to attract a major tenant, Garland. There is no reason whatever to suppose that the Demised Premises were capable in the real world of being re-let any earlier than they have been, even if delivered up by BT fully repaired. The claims of Marchday which are still in dispute therefore fail.

Mr. Battle in his report expressed the view that the rental value of the Demised Premises if they had been delivered up in repair would have been £7.50 per square foot. It was also his view that in the condition in which they were actually delivered up they were worth £4.50 per square foot. The process of reasoning which led to the conclusion that the rental value of the Demised Premises if in good repair as at 25 March 2000 was £7.50 per square foot was not clearly explained in Mr. Battle’s report or in his cross-examination. He began the relevant section of his report, Section 5, by identifying four categories of letting, namely lettings of high specification accommodation at Teesdale, lettings of poorer specification accommodation at Teesdale, lettings in Middlesbrough town centre and the lettings in the Building itself. His initial comments on each of these categories, in a part of Section 5 entitled “Rental Values Generally”, were:-

In a part of Section 5 of his report entitled “Rental Values Assuming the Actual Condition of the Premises as at 25 March 2000” Mr. Battle made some further comments upon the lettings in the town centre of Middlesbrough:-

Mr. Battle only considered lettings of properties in the centre of Middlesbrough and in the Building itself, in passages quoted earlier in this judgment, in the context of his assessment of the letting value of the Demised Premises in their actual condition as at 25 March 2000. In particular, he only took into account other lettings in the Building for the purpose of eliminating them. He did not seem to consider those lettings to be relevant at all to his consideration of the letting value of the Demised Premises as at 25 March 2000 if in repair. He did not explain in his report why he did not consider those lettings relevant for that purpose, although in cross-examination he did identify more precisely the factors which caused him to treat all of the lettings as special for one reason or another. As I have already remarked, at paragraph 5.19 of his report he expressed the view that the Demised Premises would, as at 25 March 2000, have been attractive to operators of call centres. He did not identify any unmet demand as at that date from operators of call centres for premises in the centre of Middlesbrough. While Mr. Battle did refer, in the context of the rental value of the Demised Premises if delivered up in repair, to rentals agreed in respect of design and build projects, in excess of £10 per square foot, and to the rental of £12 per square foot agreed for Rede House, his justification in his report for his figure of £7.50 per square foot seemed to lie in these paragraphs of his report:-

In his cross-examination Mr. Battle also relied heavily upon the rentals discussed between him and Mr. Tim Young of Messrs. Fletcher King, the estate agent acting on behalf of Merchants, in December 2000 for the twelfth to sixteenth floors inclusive of the Building as justifying the view that the Demised Premises if in repair as at 25 March 2000 would have been able to command a rent of £7.50 per square foot. The material put before me in relation to those discussions did not justify the conclusion which Mr. Battle sought to draw. Draft Heads of Terms sent to Mr. Battle by Mr. Young under cover of a letter dated 7 December 2000 made an offer to pay a total of £323,857 per annum for a total of 44,455 square feet, 25 car parking spaces at the Building and 75 car parking spaces in the Zetland car park. In a note to Mr. Leigh also dated 7 December 2000 Mr. Battle analysed that offer as amounting to 25 car parking spaces at the Building at £800 per annum each, 75 car parking spaces at the Zetland car park at £300 per annum each, and 44,455 square feet at £6.33 per annum. In a discussion with Mr. Young on 13 December 2000, of which he made notes which were put in evidence what was said about rent, according to the notes, was:-

In Appendix 1 to Mr. Battle’s report were details of just three lettings of high specification offices at Teesdale. Two of these lettings were in Dunedin House and one was in Churchill House. The Dunedin House lettings were of 8,700 sq ft for 10 years from 29 September 1999 at an initial rent equivalent to £11.50 per square foot per annum and of 17,103 for 10 years from 1 July 2000 at an initial rent equivalent to £10.25 per square foot per annum. The reduction in the rate per square foot between the two lettings suggests either the application of the general principle that a lower rate per square foot is accepted for a letting of a larger area, or a declining market, or both. The Churchill House letting was of 32,740 square feet for 10 years from 1 February 1999 at an initial rent, after a rent-free year, of the equivalent of £11.75 per square foot per annum.

The details given in Appendix 2 to Mr. Battle’s report again related to lettings in just two buildings, this time Robert House and Victoria House. The four lettings in Robert House were of small areas – between 1,636 and 3,312 square feet – from dates in 1997 at rents equivalent to £7.60 to £8 per square foot per annum, with the letting of the smallest area being at the highest rate per square foot. The eight lettings in Victoria House were again of small areas - between 1,844 and 3,500 square feet - from dates in 1998 at rents equivalent to £4.77 to £11 per square foot per annum. The rents at either end of that bracket were in each case by some margin outside the range of the other rents, which, with the exception of one at £9.10, fell in the bracket £7.20 to £8.25 per square foot.

The four lettings details of which were contained in Appendix 3 to Mr. Battle’s report were those which he specifically mentioned in the body of his report in the passage which I have quoted. The lettings of parts of 16/26 Albert Road were of 3,024 square feet and 4,962 square feet, respectively, for 6 years from 26 May 1999 at rents equivalent to £5 per square foot per annum. The lettings of parts of 139 Albert Road were of 4,856 square feet for 10 years from 13 April 2000 at a rent equivalent to £5 per square foot per annum, and of 5,040 square feet for 25 years from 1 June 2000 at a rent equivalent to £4.46 per square foot per annum.

On the assumption, contrary to his view, that the Demised Premises were capable of being let as from 25 March 2000 if delivered up in repair, Mr. Bullen’s conclusion as to rent which could have been secured was stated at the end of section 9.7 e) of his report in this way:-

The principal reason which Mr. Bullen gave for his conclusion was that on rent reviews of the parts of the Building occupied by DETR in 1995, of 100 Russell Street, Middlesbrough in 1996 and 2001, and Fountain Court, Middlesbrough in 2000 the rent in each case was not increased above that fixed in 1990 or 1991. He said that he drew little assistance from lettings negotiated in the Building itself. His conclusion concerning those lettings was:-

Insurance rent in respect of the Demised Premises from 25 March 2000 for 19 months would only be payable on the assumption that the Demised Premises could have been let during that period. As I have found that they could not have been I need not give much attention to the evidence as to what insurance rent might have been charged. Mr. Stephen Gilroy of Storeys:ssp, which firm is the managing agent of the Building as well as the letting agent, was called to give evidence as to the insurance premiums paid for the period 1 March 2000 to 28 February 2001 and produced copies of the relevant renewal notices. The renewal notices showed that the premiums paid were £12,157.99 for building insurance, £871.15 for terrorism insurance and £1,344.90 for engineering inspection insurance. I accept the evidence of Mr. Gilroy that in the past, at least, insurance premiums had been recovered from tenants of the Building in the proportion that the area a tenant occupied represented of the total area which had the benefit of the relevant insurance. I also accept his evidence that the Demised Premises amounted to 35.87% of the total floor area of offices in the Building, but 31.74% of the total floor area of the let parts of the Building when the retail areas were taken into account. I further accept the evidence of Mr. Gilroy that the building insurance and terrorism insurance relate to the whole of the Building, while the engineering inspection insurance only relates to the offices. The consequence is that the amount of the insurance premiums which I have found was paid in respect of the period 1 March 2000 to 28 February 2001 which related to the Demised Premises was £4,616, being 31.74% of the building and terrorism insurance premiums (£13,028) and 35.87% of the engineering inspection insurance premium (£1,344.90). No evidence was led as to the amounts of insurance premiums paid for any period other than 1 March 2000 to 28 February 2001.

Again, the question of the loss of the ability to recover service charges as a result of breaches of covenant on the part of BT would only arise if I had found that the Demised Premises, or some part thereof, would otherwise have been let earlier than it in fact was.

It was not in dispute that the actual expenditure upon services for the Building in the period 1 April 2000 to 31 December 2000 was £151,668. 31.74% of that figure, arithmetically, is £48,142.63. Further, it was not in dispute that the management charge made by Storeys:ssp in respect of the same period was £14,250. 31.74% of that figure is £4,522.95. The service charges incurred in the period now under consideration also included an element in respect of fire alarm equipment maintenance. Mr. Gilroy told me that that element of expenditure was shared between only those parts of the Building which had the benefit of the fire alarm, which was the offices and part of the ground floor. Of the area served by the fire alarm the Demised Premises constituted, according to Mr. Gilroy, some 34.98%. I accept that evidence. The expenditure upon fire alarm equipment maintenance in the period 1 April 2000 to 31 December 2000 I find was £3,204.65, as Mr. Gilroy said in his evidence. 34.98% of that figure is £1,120.99.

The alleged expenditure upon provision of services in the calendar year 2001 was said to be £343,762.14 upon matters other than the fire alarm equipment maintenance and management charges. Expenditure upon fire alarm equipment maintenance was said to be £3,221.82 and expenditure upon management charges was said to be £19,000. I accept the alleged expenditure upon fire alarm maintenance and management charges. The annual rate of the management charges was the same as in the previous year, and the fire alarm maintenance cost was essentially similar to that in the previous year. No attempt was made to support in detail any of the other alleged items of expenditure. By comparison with the figures which were not challenged in the statement of expenditure for the nine month period 1 April 2000 to 31 December 2000, I accept as accurate the following elements of alleged expenditure in 2001:-

In the result, had it been necessary to find what amount of service charges incurred in 2001 should have formed the basis of a calculation of damages payable by BT for breaches of covenant I should have found that, apart from charges for fire alarm maintenance and management charges, the figure was £253,651.84.

The work which was in fact undertaken in the Building following the termination of the lease on 25 March 2000 fell into five broad categories, namely remedying of wants of repair in the Demised Premises, upgrading the Demised Premises to modern office standards, remedying wants of repair in the parts of the Building previously let to DETR, upgrading the parts of the Building previously let to DETR to modern office standards, and renovating the landlord’s parts of the Building to increase its overall attractiveness. Only work in the first of these categories was rendered necessary as a result of the breaches of covenant on the part of BT which have given rise to this action. The totality of the work in all five categories, save for some work to lavatories with which I need not be concerned, was not completed until 27 April 2001, some 13 months after the expiry of the Lease. Marchday’s case was that it was entitled, on the assumption, which I have rejected, that it would have been able to re-let at least substantial parts of the Demised Premises immediately from 25 March 2000 if they had been delivered up in repair, to compensation for loss of rent, insurance rent and service charges for the entire period until the completion of the totality of the works to the Building, plus a period of six months to allow for marketing after that date. BT’s case was that it could only be liable at worst for loss of rent for the period reasonably necessary to enable works to remedy the wants of repair in the Demised Premises to be undertaken.

The evidence of Mr. Leigh, to some of which I have referred, was principally concerned with demonstrating how reasonable the approach adopted to the undertaking of works at the Building had been. That was no doubt so from the point of view of Marchday. However, the question which could arise if I had found that any part of the Demised Premises could have been re-let any earlier than it in fact was, would be whether BT was liable to compensate Marchday not only in respect of the consequences of its own breaches of covenant, but also in respect of the consequences of the breaches of covenant of DETR and in respect of the consequences of the decisions of Marchday to upgrade the Building. The answer is obviously negative. No evidence was called on behalf of Marchday in relation to the issues how long the work of remedying the breaches of covenant on the part of BT in fact took or how long it ought reasonably to have taken, although Mr. Reginald Busby, whose knowledge of the relevant matters was limited, was cross-examined about them. However, Mr. Kevin Mullis, a building surveyor, was called as an expert on behalf of BT. By analysis of various records of the progress of the works Mr. Mullis concluded that the works in the Demised Premises, not only those necessary to remedy breaches of covenant, but also the upgrading works, in fact took 31.4 weeks. He reached that conclusion by considering programmes of work prepared by W. S. Atkins Consultants Ltd., which company was engaged as project manager in respect of the relevant works. He eliminated from the activities shown in those programmes periods indicated as occupied in works in the part of the Building occupied by DETR and a period during which the works required were re-tendered following a decision on the part of Marchday to have work to the third floor of the Building added to that originally intended. He assessed the additional time taken to undertake the upgrading works in the Demised Premises at the same time as the remedial works at 3 weeks. However, his view was that the upgrading works in the Demised Premises, if undertaken separately, would have taken 23.4 weeks. Thus his conclusion was that the undertaking of the remedial works actually only delayed the time when the Demised Premises would have been available for letting by 5 weeks. I accept Mr. Mullis’s evidence. Had it been necessary to assess the period by which the need to undertake works to remedy breaches of covenant on the part of BT delayed the ability of Marchday to accommodate a new occupier of the Demised Premises, I should have found that period to be 5 weeks. Both Mr. Leigh and Mr. Battle accepted that upgrading works to the Demised Premises were necessary before they could be re-let.

Mr. Mullis also noted that there had been a delay between 25 March 2000 and 1 May 2000 in the commencement of the activity of preparing a specification and tender documents. He did not consider that delay to have been justified, and I agree with him. It was suggested that the cause of the delay was the need to prepare a schedule of dilapidations before a specification could be prepared. Mr. Mullis did not accept that the preparation of a schedule of dilapidations was a necessary preliminary to the preparation of a schedule of work and I do not either. The explanation offered is probably untrue in any event, because the first schedule of dilapidations produced in respect of the Demised Premises after 25 March 2000 seems to have been dated September 2000.

As I have indicated, Marchday’s case was that it was entitled to compensation for being deprived of the opportunity to let the Demised Premises during the period in which works to the whole of the Building were in fact being undertaken, those works being completed on 27 April 2001, plus a period of six months in which to market the Demised Premises. The logic underlying this formulation of claim eludes me. I could understand a claim put on the basis that as a result of breaches of repairing covenants a property was unable to be let from the date of the expiry of the relevant term until a letting was in fact achieved, but I cannot see any justification in law or logic for a claim based on a period for alleged repairs plus a “marketing period”, unless it was accepted by the claimant that it ought to have achieved a letting by the end of the period in respect of which a claim was made but had failed, by reason of its own deficiencies, to do so. There was no element of mea culpa in how Marchday put its claim.

It was common ground that I should award interest pursuant to the provisions of Supreme Court Act 1981 s. 35A to Marchday on whatever sum I found to be due as compensation in respect of the admitted breaches of covenant on the part of BT. The position adopted on behalf of Marchday was that I should award interest at the rate applicable to judgments, 8% per annum, as from the date of the expiry of the term created by the Lease, in the case of the agreed cost of repairs. It was contended on behalf of BT by Mr. James Barker that as the cost of repairs was in fact incurred over a period ending on the date of practical completion of the whole works, 27 April 2001, it would be wrong to award interest from 25 March 2000. In the absence of evidence as to when particular items of expenditure were incurred, submitted Mr. Barker, I should award interest only from the date of practical completion. Mr. Barker further submitted that in these days of low interest rates a rate of 8% per annum was excessive and that a more appropriate rate would be 4%.

The only sum which I have found to be due to Marchday is the agreed cost of repairs, £348,830.25. It is accepted that BT is entitled to a credit against the sum due of an amount of £22,604.66 as a rebate on service charges. That means that the sum to which Marchday is entitled is £326,225.59. Although in theory BT became liable to pay damages for breaches of covenant on 25 March 2000 when it delivered up the Demised Premises out of repair, in fact the quantification of the sums properly payable depended upon identifying what work was required to be done to remedy the breaches of covenant and what that work would cost. It seems to me realistic not to calculate interest from 25 March 2000, but from a date which reflects the fact that the actual expenditure of the sum which I have found to be due was incurred over a period ending on 27 April 2001. In my judgment it is unreal and disproportionate to expect a claimant in a case such as the present to adduce evidence as to exactly when particular items of expenditure were incurred to enable sophisticated interest calculations to be undertaken in respect of possibly small individual amounts for periods of a few days at a time. The Court traditionally exercises its discretion in relation to interest in a broader manner than that. It seems to me that justice would be served in the circumstances of the present case by taking as the date from which interest should run 1 October 2000.

The question then is what is the appropriate rate of interest to take. While in the real world interest is charged and paid on a compound basis, the Court only has power to award simple interest. In practical terms the inability of the Court to award compound interest can be mitigated by awarding simple interest at a higher rate than the compound rate which would be charged on loans by a bank. The policy of Parliament, as exemplified in Supreme Court Act 1981 s. 35A, is that the Court should only have power to award simple interest, but the rate is in the discretion of the Court. At the same time, the rate of interest payable on judgment debts fixed by Judgment Debts (Rate of Interest) Order 1993, SI 1993 No. 564, has remained unchanged notwithstanding the historically low rates of compound interest prevailing in the financial markets now for a number of years. In my judgment the failure of the responsible authorities to alter the rate of interest payable on judgment debts indicates a recognition that in reality a rate of simple interest lower than 8% is unlikely to provide adequate compensation for being kept out of money which ought to have been paid. In the real world a typical commercial rate of compound interest for a business borrower is 2% over base rate, which would be equivalent at present to a rate of 5.75%. I therefore intend in this case to award interest on the sum of £326,225.59 from 1 October 2000 at a rate of 8% per annum simple. To the date upon which this judgment is handed down interest is payable for three years and 42 days and thus comes to £81,297.21

There will be judgment for the Claimant in the total sum of £407,522.80.