Archive for the ‘Construction’ Category

Woops! The problem of the missing clause

January 29, 2013

In Sadd v Brown ([2012] UKUT 438 (LC)) the Upper Tribunal (Lands Chamber) had to deal with a dispute between the tenant of a flat held on a long lease and her landlord. The landlord covenanted to insure the building for its full reinstatement value. It sought to recover the cost of insuring the building. Unfortunately, there was no tenant’s covenant to reimburse a share of the premium.

The landlord sought to rely on a covenant to pay and indemnify the lessor against ‘all rates duties charges assessments impositions and outgoings whatsoever’. This was not adequate since this wording did not indicate an intention to repay an expense voluntarily incurred by the lessor ([18]). The landlord also relied on a number of other aspects of the service charge provisions in the lease but none of them amounted to an obligation to reimburse a share of the insurance premium (not even a covenant to contribute to the costs of estate management) ([16]).

Finally, there was no implied covenant. The lease was detailed and (on its face) a complete record of the terms that had been agreed ([20]). Business efficacy did not demand that a term to reimburse a share of the premium be implied. The mere fact that the landlord covenanted to insure was not a sufficient basis on which to imply the term. Nor was the fact that such a term would have been expected and was commonly encountered ([19] – [20]).

On the contrary:

‘To imply a term in the present case would be ‘to effectively draft a completely new paragraph in the Fifth Schedule to the Lease’ ([21].

The landlord could seek rectification or apply for the lease to be varied under Part IV of the Landlord and Tenant Act 1987 ([23]).

Implied terms as to termination of contractual licences

January 25, 2013

In Australia Blue Metal Ltd v Hughes ([1963] A.C. 74, PC) ABM granted H a licence to mine certain minerals on a specified portion of ABM’s land. There was no licence term nor any express provision as to how the licence could be brought to an end. ABM gave H notice requiring H to leave the land immediately.

The Privy Council held that this was not a licence coupled with an interest as Hughes had no right to extract any specified quantity of the minerals. This was either a case in which the licence could be terminated at any time on reasonable notice or it could be terminated with immediate effect but Hughes would then have a reasonable period of grace in which to leave. It was unnecessary to decide between these alternatives since either would lead to the same practical conclusion since Hughes had not been required to leave the land immediately and a reasonable period had since elapsed.

The Privy Council rejected the argument that the implied term was that ABM had to specify the notice period in the notice (and that this must be reasonable). There would need to be clear evidence to justify the implication of such a term.

On whether there was an implied term that notice should be reasonable, Lord Devlin said:

‘The question whether a requirement of reasonable notice is to be implied in a contract is to be answered in the light of the circumstances existing when the contract is made. The length of the notice, if any, is the time that is deemed to be reasonable in the light of the circumstances in which the notice is given.’ (p. 99)

On the construction of terms as to notice generally, he said:

‘An express provision about notice can be in any form which the parties care to adopt. If the term is that a contract is to terminate six months (or a reasonable time) after notice given, the notice need amount to no more than an election to terminate. It will automatically take effect after the expiry of six months (or of such period as the court subsequently determines to be reasonable). On the other hand, an express term can prescribe the form and content of any notice to be given and then a notice in the wrong form or with insufficient content will be bad. If the contract is, as here, entirely silent about notice and a term has to be implied, the nature and requirements of the term to be implied must be settled according to the ordinary rules governing the implication of a term. The question then will be whether the necessary implication extends beyond that of a simple notice to embrace a notice in a particular form or with a particular content.’ (pp. 100 – 101)

Deed of Mutual Covenant: approach to construction of charging clause

January 21, 2013

In Thorogood Estates Ltd v Robinson Heights (IO) ([2013] HKEC 55, CA) the Court of Appeal had to interpret the provisions of a Deed of Mutual Covenant allocating among the owners the liability to contribute to management expenses.

T owned the garage on the upper and lower ground floors of the development. The Incorporated Owners had carried out major works of repair and renovation works for the whole development. The question was whether all owners, including T, were liable to contribute in proportion to their shares in the development without any need to consider which parts of the development had benefited from the works. The Court of Appeal applied the well-known approach to contractual interpretation explained, for example, by Lord Hoffmann in Jumbo King.

The DMC divided the development into three (the Garage, the Tower and the Building). T argued that it was only liable to works relating to the Garage and the Building. The incorporated owners argued that T had to contribute to all works in proportion to the shares in the development that it owned.

One provision (D5) provided for the relevant budget to be split into two parts, one relating to the Garage and the other relating to Units (any flat, roof or car parking space in respect of which an exclusive right of occupation had been granted). Another provision (E2) provided that liability to pay was to be apportioned among the owners by reference to the number of shares they owned. The incorporated owners relied on this provision but failed in the Court of Appeal.

The Court of Appeal argued that an exclusive focus on E2 did not have sufficient regard to the terms of the DMC as a whole, the purpose which it sought to achieve and (in this light) to properly discern the parties’ objective intention as it would be understood in the light of the relevant background knowledge.

In terms of purpose, the purpose of the DMC was to provide for a due propertion of the management expenses to be borne by the owners ([10]). An exclusive focus on E2 would not give due weight to the split budget arrangement in D5. A reading of the rest of section D of the DMC made it clear that the reason for splitting the budget into two parts was to ensure that where expenditure was incurred solely for the benefit of a unit then the owner of that unit would bear that cost ([32]). D5 sought to create a significant division between expenditure for the benefit of the Garage and that incurred for the benefit of the Towers ([34] – [35]).

As part of the relevant background, the court took into account the fact that:

‘It is not uncommon for provisions to be made in a DMC to differentiate between the contribution to be made by owners to management expenses in respect of different types of common areas and facilities, to cater for different requirements for maintenance owing to the different usage of common areas and facilities and to achieve a degree of fairness among the owners.’ ([33])

Kwan JA concluded:

‘Thus, viewing the DMC as a whole, and the practical object which it was intended to achieve, in my judgment a reasonable person having all the background knowledge would have understood clauses D5(a) and (b) to provide for a mutually exclusive apportionment of the estimated Management Expenses. The practical effect of clauses D5(a), 5(b) and 6 is that flat Owners who do not benefit from the use and enjoyment of the Garage would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the Garage including the Garage Common Areas, and the Garage Owner who does not benefit from the use and enjoyment of the flats in the Towers would not be required to contribute to the Management Expenses attributable solely to or solely for the benefit of the flats in the Towers including the Towers’ Common Areas and Facilities.’ ([38])

Interpretation of a badly drafted clause

December 7, 2012

In Multi-Link Leisure Developments Ltd v North Lanarkshire Council ([2010] UKSC 47) a fifty year lease of a golf course included an option for the tenants to purchase the reversion. The valuation formula was in the following terms:

‘The option price, if the option to purchase is exercised subsequent to the first year of let, shall be equal to the full market value of the subjects hereby let as at the date of entry for the proposed purchase (as determined by the landlords) of agricultural land or open space suitable for development as a golf course but, for the avoidance of doubt, shall be not less than the sum of ONE HUNDRED AND THIRTY THOUSAND POUNDS (£130,000) STERLING. In determining the full market value (i) the landlords shall assume (a) that the subjects hereby let are in good and substantial order and repair and that all obligations of the landlords and the tenants under this lease have been complied with, and (b) that the subjects hereby let are ready for occupation, and (ii) the landlords shall disregard (a) any improvements carried out by the tenants during the period of this lease otherwise than in pursuance of an obligation [to] the landlords, and (b) any damage to or destruction of the subjects hereby let.’

The question was whether the valuation was to be of the land as ‘agricultural land or open space suitable for development as a golf course’ or was to be the open market value without any such restriction. It was very likely that it would be possible to get planning permission for housing development on the site so the question was whether the price to be paid should reflect this hope value. The problem arose from the poor drafting of the clause. The Supreme Court held unanimously that the valuer was to determine the open market value and should take the hope value into account.

The majority of the Supreme Court aligned itself with the reasoning of Lord Rodger. It was clear that something had gone wrong with the drafting ([27]). The starting point in the task of interpreting the clause was the assumptions and disregards at the end since these were clear ([28]). The valuer was valuing land that was in good repair and condition and ready for development as a golf course ([33]). There was, however, no direction to the valuer to disregard hope value ([34] and [36]).

Lord Hope reached the same conclusion but steered a different route through the clause (although he had no quibble with Lord Rodger’s approach ([18]). He provided general guidance as to the task of interpretation. The assumptions and disregards were incompatible with the earlier parts of the clause:

‘In this situation the solution must be found by recognising the poor quality of the drafting and trying to give a sensible meaning to the clause as a whole which takes account of the factual background known to the parties at the time when the lease was entered into.’ ([19])

It is legitimate to ask what the parties’ commercial purpose was but this must be discovered from an examination of the objective contextual background ([21]).

The local authority had a duty to get the full market price for the land; the option could have been exercised at any time during the lease term and much could happen during that time; the parties could have contemplated that planning permission for housing development might be granted; and disregarding hope value would give the tenants a windfall at the expense of the landlords ([22] – [23]). These features outweighed the argument in favour of a construction requiring hope value to be left out of account.

Covenant only to build domestic houses

November 29, 2012

Expressluck Development Ltd v Secretary for Justice ([2007] HKEC 1352, CFI) concerned land on which houses had been built. The Conditions of Exchange under which the land was held provided that “The lessee will not be allowed to erect any buildings on the lots except domestic houses.” From the 1940s onwards, the ground floors of the houses had been used for commercial purposes without the Government taking any formal action in respect of the breaches of covenant. Where, however, other major changes of use had been proposed, consent had been sought by the owners. Expressluck now intended to build a block of residential units but with the ground floor being used for commercial purposes. It did not want to apply for a variation or release of the covenant. Instead it sought, inter alia, declarations to the effect that the proposed development did not amount to a breach of covenant, that the covenant had been abandoned or waived (because of the long history of tolerating commercial use) or that the Government’s demand for rent based on commercial use of the ground floor of the development gave rise to an estoppel. Expressluck failed in all respects.

First, there was a breach. The covenant did not affect only the type of building that could be built but also its subsequent use. Second, although the Government may have waived breaches of the covenant, it had not waived the covenant itself:

’81. What I glean from the authorities is that waiver of a covenant cannot be lightly inferred. It can be, but only where acquiescence by the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct.
82. Further, it is important to distinguish between waiver of a breach of a covenant and the covenant itself.
83. Acquiescence will not amount to a waiver of the covenant unless in the particular circumstances, there was a clear intention to do so for all time.’ (Deputy Judge Gill)

Finally, there was no estoppel the Commissioner for Rating and Valuation had issued the demand but this did not bind the relevant department of Government (the Director of Lands).

Construction of lease terms: wrong word used?

November 23, 2012

In Campbell v Daejan Properties Ltd ([2012] EWCA Civ 1503, CA (Eng)) a building was split into several units. C was the tenant of a maisonette on the upper (third and fourth) floors of the building. She originally held the property under the terms of a lease for 65 years granted in 1958. This required her to contribute 40% of the cost of repairing the roof and walls of ‘the premises’ (the maisonette rather than the entire building). Her property was covered by the original pitched roof of the building but there were three other flat roofs over extensions to the original building. C had contributed to the cost of repair work carried out in 1992 with her share of the cost having been calculated in accordance with the above arrangement.

In 1998, D granted a new lease of the premises to C for 164 years. This lease repeated the identical arrangement concerning C’s liability to contribute to the cost of repairs. Nevertheless, after repair works in 2005 / 6, D argued that a mistake had been made when the new lease was granted and that C should be liable to contribute 40% to the cost of repairing the roofs and walls of the whole building and not just the costs associated with repairing the roof and walls surrounding C’s maisonette. This was a claim based on an approach to the proper construction of the lease rather than on rectification.

D failed in the Court of Appeal; the lease meant what it said (or said what the parties must be taken to have intended). After a brief review of the authorities, Jackson L.J. said:

‘The two questions which I must address are: (i) whether it is clear that something has gone wrong with the language of clause 3 (iii); (ii) if so, whether it is clear that reasonable persons would have understood clause 3 (iii) to be referring to all of the roofs and all of the external walls of the house.’ )[47]).

It was not clear that something had gone wrong with the language.

Derogation from grant: relevant factors

October 3, 2012

In Platt v London Underground Ltd ([2001] WL 172012) LUL granted a lease of a kiosk to P. The kiosk was in the exit from an underground station. Only people leaving the station through that exit (there was another) would use the kiosk. P claimed that LUL only allowed passengers to use the relevant exit during the morning rush hour and at no other times. Thus, the kiosk was starved of trade. P succeeded in his claim that LUL had acted in derogation from grant.

The surrounding circumstances at the time of the grant were a strong indicator as to what the parties must have had in their mutual contemplation. The kiosk relied on passengers going through the exit as its only source of customers. At the time of the lease, the exit was open for much of the time. This was plainly important to the tenant. There was nothing in the circumstances at the time of the grant or in the communications between the parties, or in the express terms of the lease to indicate that P had accepted a risk that the exit might be closed most of the time. The parties had contemplated that the exit would be part of the station operation during the opening hours of the station. Closure of the exit for much of the time during the lease did amount to a derogation from grant.

Neuberger J. provided some commentary on the law concerning derogation from grant. There is  a ”very substantial degree of overlap, between the obligation not to derogate from grant, the covenant for quiet enjoyment, and a normal implied term in a contract.’ (p. 5)

He endorsed the approach of Bowen L.J. in Myers v. Catteson ((1889) 42 ChD 470 at 481) who said that the aim of the covenant is to give effect to,  ‘the obvious intention of the parties, so as to give the transaction between them a minimum of efficacy and value which upon any view of the case it must have been their common intention that it should have.’

The judgment contains a set of principles concerning non-derogation from grant (pp. 4 – 8). The express terms of the lease and the surrounding circumstances at the date of the lease will be highly relevant in determining whether an act amounts to a derogation from grant. Where the action complained of is the use of the landlord’s retained land, the tenant cannot complain of uses to which the retained land could reasonably be put after the grant of the lease.

‘When assessing what the parties to a contract actually or must have contemplated, one should focus on facts known to both parties and statements and communications between them. A fact which could only have been known to one party could not, save in very unusual circumstances, be a legitimate part of the factual matrix. A thought locked away in the mind of the parties, or even perhaps of both parties, cannot normally be a relevant factor when assessing the parties’ understanding. In English law at any rate, contract is concerned with communication as well as mutuality’.

Waiver of breach and resolving ambiguity in a lease by looking at the counterpart

September 18, 2012

In Matthews v Smallwood ([1910] 1 Ch. 777) a tenant granted a sub-lease in breach of a covenant against sub-letting. There was an ambiguity in the proviso for re-entry in the lease in that it allowed for re-entry in the event of a breach of  ‘the covenant’ therein contained. Was the right of re-entry only available for the breach of a single covenant in the lease and, if so, which one? This ambiguity, having arisen, could legitimately be resolved by looking at the counterpart which allowed for re-entry in the case of a breach of any of the ‘covenants’ contained in the lease.

There was also the question of whether there had been a waiver of the breach. There had not:

‘Waiver of a right of re-entry can only occur where the lessor with knowledge of the facts upon which his right to re-enter arises does some unequivocal act recognizing the continued existence of the lease.’ (786, per Parker J.)

The court refused to grant relief to the sub-lessee since it had been careless in failing to check on the terms of the head-lease concerning sub-letting.

Was an agreement for lease binding?

September 14, 2012

In Tang Wai Man v Fotosky Investment Ltd ([2006] HKEC 2358, CFI) F owned the basement of a commercial building. It sent T a letter of agreement containing the terms of a proposed letting of the basement to T for use for the parking of motor vehicles (not headed ‘subject to contract’ but providing for a later formal tenancy agreement). When T then advertised for customers for the car park, F argued that the agreement was that the basement was to be used as a vehicle showroom and not for parking vehicles. F ran a vehicle parking business on other basement floors of the same building and T’s rates undercut its rates. F argued that T’s agent had misrepresented the use to which the property would be put, that in any event there was no binding agreement or (if there was) T’s use amounted to a repudiatory breach which F had accepted.

F succeeded. Although a preliminary agreement could be binding (even if a later formal agreement was envisaged) this was not the parties’ intention in this case ([69]). If there was an agreement then, despite the wording of the agreement, the parties’ shared intention was that the property was only to be used as a showroom ([62]). F had accepted a repudiatory breach.  of this term. The agreement did not properly identify the intended tenant ([72]). Although the agreement was not subject to contract, the phrase had been used by T’s agent at the outset and never been expunged ([76]). Alternatively, if there were an agreement, it had been induced by a misrepresentation ([81]).

‘Common parts’ where the DMC does not expressly identify them

September 6, 2012

Chung Yuen Mansion (IO) v Fully King Trading Ltd ([2012] HKEC 1228, LT) concerned the ownership of open areas to the side of the flat owned by the respondent. The incorporated owners sought a declaration that they were common parts. The DMC did not expressly identify the common parts and the Tribunal applied the definition in section 2 of the Building Management Ordinance (all areas other than those designated for exclusive use in an instrument registered at the Land Registry). The Tribunal reminded itself of the principles to emerge from the CFA decision in Jumbo King. It looked at the DMC and the first assignment. Only ‘floors’ were identified as being for exclusive use and open areas were not ([54] – [57]). So the open areas remained in common ownership ([59]). This conclusion was supported by the fact that the DMC made the repair and maintenance of external areas the responsibility of all of the owners while internal areas were the responsibility of individual owners ([60]). The DMC and first assignment were the crucial documents.