This one has been sitting in my draft collection for a while, but, as Christmas fades towards the new year, it finally got done. For the leaseholders in this particular appeal, it was, however, distinctly short of glad tidings.

Gavin & Anor v Community Housing Association Ltd [2013] EWCA Civ 580

What kind of liability might there be where a leasehold property is damaged by defects in parts retained by the landlord, but where there is no express repairing covenant by the landlord? This case took a rather unusual route in exploring the issue.

The Claimant, Ms F was the leaseholder of two adjoining commercial premises, Community Housing Association being the lessor.  Both properties consisted of the ground floor and basement of a larger building owned by CHA. The extent of the demise was to the coverings for floors, wall and ceiling plaster and Ms F covenanted to keep the demise in repair.  There was, however, no corresponding covenant by CHA to keep the building in repair. The closest was an insurance covenant, which read:

“To insure the Demised Premises and the Development in an insurance office of good repute or at Lloyds against the Insured Risks and in the event of the Demised Premises being destroyed or damaged by any of the Insured Risks the Landlord shall with all convenient speed (subject to the availability of all necessary labour and materials and the obtaining of all necessary permissions) lay out and apply in rebuilding repairing or otherwise reinstating the Demised Premises all monies received by virtue of such insurance other than monies received in respect of loss of rent Provided that the Landlord shall be under no liability to the Tenant hereunder if the insurance money under any policy of insurance effected by the Landlords shall be wholly or partially irrecoverable in the circumstances set out in 5(22) above….”.

Under a clause headed ‘Landlord’s Liability’ was:

“In any case where the facts are or should reasonably be known to the Tenant and not reasonably known by the Landlord the Landlord shall not be liable to the Tenant in respect of any failure of the Landlord to perform any of its obligations to the Tenant hereunder whether express or implied unless and until the Tenant has notified the Landlord of the facts giving rise to the failure and the Landlord has failed within a reasonable time to remedy the same.”

There was also a ‘cesser of rent’ clause:

“If the Demised Premises or any part thereof shall be destroyed or so damaged by fire or any other risk for which the Landlord is indemnified under the insurance of the Demised Premises so as to be unfit for occupation or use then unless the insurance of the Demised Premises shall have been vitiated by the act neglect default or omission of the Tenant the rent hereby reserved or a fair and just proportion thereof according to the nature and extent of the damage sustained shall be suspended and cease to be payable until the Demised Premises or damaged portion thereof shall have been reinstated or made fit for occupation or until the third anniversary of such destruction or damage whichever shall be the sooner.”

Ms F started trading from the premises as a gallery space, however, there was a series of problems . There was a leak from glass pavement lights into the basement of one of the properties in April 2004. These were repaired by CHA in September 2004 and a payment of £150 insurance money later made to Ms F. There was a second period of leaks through the pavement lights between June and October 2006; and a third period between May and June 2008.

In September 2006, one of the soil pipes carrying sewage from the flats above, which ran down the rear wall of one of the demises, leaked and sewage permeated the wall. CHA’s contractors remedied the leak in January 2005 and replaced part of the wall. There was later an insurance payment.

In February 2005, the stack pipe at the rear of the other demise leaked, which was repaired by CHA in April 2005. There was no insurance payment as it was under the £100 excess.Then in June 2005, a leak from a tap or leaking pipe in one the flats above inundated the premises, a week before an exhibition was due to start. This required replacement of a ceiling, in October 2005, and resulted in an insurance payment of £3,141.65.

Ms F continued to pay rent until June 2008, when payments ceased. CHA served notice, but Ms F also did not pay the September rent. Her solicitors argued that this was a set off against the rent paid in 2005, when the properties had been ‘unfit for occupation’ within the meaning of the cesser of rent clause set out above, such that no rent was due for those periods.

CHA re-entered the premises and changed the locks in October 2008. Ms F obtained an injunction for the leaseholders’ re-entry in November and this matter went to trial. CHA argued that even if the property was uninhabitable, which was denied, Ms F had no claim in restitution or otherwise to recover the rent paid in 2005. The High Court found that there was never an occasion on which the property had become uninhabitable for the purposes of the cesser of rent clause because “there was never an occasion when the premises were wholly unfit for occupation and use”.

Ms F also brought a claim for damages arising from the leaks, including financial loss arising. At one stage this was as high as £2 million. The claim was on the basis of

an implied obligation to keep the retained parts in repair or alternatively a common law duty as adjoining occupier to remedy any defect in those premises which was capable of causing damage to the demised premises.

At trial of the damages counterclaim, Judge Cowell accepted that there was an implied duty on CHA to remedy any defects in the retained parts that would cause damage to the demised properties.

He based this on the decision in Hargroves, Aronson & Co v Hartopp [1905] 1 KB 472 which was approved by this court in Cockburn v Smith [1924] 2 KB 119. The scope of that duty was, he held, to take reasonable care to remedy defects in the retained premises which the landlord knew had caused, or were likely to cause, damage to the premises demised to the tenants. Absent negligence, the duty to repair only arose once the landlord was aware that damage had been caused.

On the specific leaks, he found CHA were liable in respect of the February 2005 leak, as this could and should have been remedied by 8 April 2005, not 26 April, following Duke of Westminster v Guild [1985] 1 QB 688 and Gordon and Teixeira v Selico Co Ltd (1986) 18 HLR 219

On the other leaks, he found that CHA had carried out repairs in good time and that the flood from the flat above was an unforeseeable incident.

On the pavement light leaks, the first leak was covered by caveat lessee, being a pre-existing defect. But if that was wrong, it was within the capability of the lessee to remedy and fell under their duty to mitigate. The cost was covered by insurance. Considering the 2006 leak, CHA had acted promptly and at its own expense when insurance wouldn’t pay. The 2008 leaks did not give rise to any liability as CHA did not know or have any means of knowing where the leaks were coming from.

Judge Cowell awarded £100 in damages for the two and a half weeks for which he found liability established. As this did nothing to extinguish the rent arrears, he declared the forfeiture was stablished, possession to be given forthwith, with payment of mesne profits equivalent to market rent. He also awarded costs against Ms F on an indemnity basis.

Ms F had been acting in person at trial, but secured pro bono assistance for an (amended) set of grounds of appeal, though not representation at the hearing. The appeal grounds were:

(1) the judge was wrong to hold that the landlord’s liability for damage caused by a defect in the retained premises was limited to a liability in negligence and depended on the landlord having notice of the defect and a reasonable opportunity to remedy it. He should have held that the landlord was in breach as soon as the defect occurred and caused damage to the demised premises;

(2) the absolute duty contended for arose as an implied obligation under the lease. The principle of caveat lessee has no application;

(3) the judge misconstrued the rent cesser provisions which were triggered by the damage to part of the premises and the tenants were entitled to recover and set off the rent paid during that period against their liabilities for unpaid rent in 2008;

(4) if the tenants succeed on grounds (1)-(3) they are entitled to substantial damages for loss of profit;

(5) even if the tenants are wrong on grounds (1)-(3) the damages of £100 awarded for the breach which the judge found proved were grossly inadequate;

(6) and (7) if the tenants are entitled to substantial damages for loss of profit in excess of the rent due up to 29th October 2008 then the landlord was not entitled to forfeit the leases and the tenants’ continuing liability is to pay rent at the rate reserved and not mesne profits; and

(8) and (9) the judge’s order that the tenants should pay the costs of the action including the reserved costs of all interlocutory applications was clearly wrong.

CHA cross-appealed on the basis that the Judge had been wrong to find any liability, as

the express terms of the lease excluded the duty which the judge found to have been breached so that, regardless of any negligence or breach of duty, the landlord had no liability to the tenants for damage caused to the demised premises by any of the leaks.

The Court of Appeal considered liability first. An attempt by Ms F to argue that the rule in Rylands v Fletcher (1866) L.R. 1 Exch. 265 applied giving rise to a strict liability on CHA was quickly dealt with

The use in question must therefore be extraordinary and unusual in contrast to, for example, a domestic water supply or lavatory which are neither. It is therefore well established that the tenants cannot sue under Rylands v Fletcher for damage caused by defective guttering or leaks in water pipes retained by the landlord in the absence of proving negligence: see Carstairs v Taylor (1871) LR 6 Ex 217; Prosser& Son Ltd v Levy [1955] 1 WLR 1224. The same principle must apply to the soil pipes in this case.

There was no case in nuisance as nuisance was fault based, and any delays in abating a nuisance in this case was not such as to amount to the landlord adopting the nuisance, Sedleigh-Denfield v O’Callaghan [1940] AC 880.

The central question, then, was the liability that the Judge below had found via Cockburn v Smith and whether, as Ms F contended, there should be a general implied term in the lease that the landlord should keep the retained premises in repair at all times.

Cockburn v Smith did establish “an obligation [on the landlord] to take reasonable care that the premises retained in his occupation are not in such a condition as to cause damage to the parts demised to others”. While there was division as to whether this was tortious or an implied contractual term, the Court of Appeal in that case appears to have accepted that the obligation was best considered as an implied term of the lease.

However:

Whether the duty imposed on the landlord to take reasonable care of the retained premises arises in tort or contract, the court has still to consider whether the express scheme of repair or insurance imposed by the lease excludes any other form of liability which the law might otherwise impose. The tenants’ appeal on liability in this case depends not only on establishing that a liability on the landlord to keep the retained parts in repair should be implied or imposed over and above the express terms of the two leases but also that the implied obligation to repair should be absolute in nature in the sense that the landlord became liable for the consequences of the disrepair as soon as it occurred regardless of whether he had or should have had notice of the defect.

But the argument for an immediate liability faced serious difficulties. The tenant’s claim in damages was based on the line of authority culminating in Gordon v Selico Ltd and “the Court of Appeal has decided in those cases that any liability derived from the position of the landlord as an adjoining occupier is based on negligence and notice and we are bound to follow those decisions”. This meant that the tenant’s argument for an immediate liability on the part of the landlord could not sit with Ms F’s claim for damages unless a contractual basis for an immediate liability could be established and moreover on based on more than the landlord’s control of the retained parts of the building. And there was also CHA’s argument that the express terms of the lease precluded the implication of any such term.

While in Earle v Charalambous [2006] EWCA Civ 1090, Carnwath LJ had made reference to ‘the general rule’ that “the covenant requires the lessor to keep the premises in repair at all times, and he is in breach immediately a defect occurs (British Telecommunications plc v Sun Life plc [1996] Ch 69)” this did not go anywhere, as it referred to the express covenant [or also the s.11 L&TA 1985 implied covenant, which does not apply to long leases. NL].

The problem for Ms F was seeking to imply a covenant which is stricter in effect that that which would be imposed on the landlord by reason of his control of the building. That latter obligation is “based on notice and corresponds in scope to the landlord’s obligation to repair defects in the demised premises themselves which only arises when facts come to his attention which would put a reasonable landlord on inquiry as to whether works of repair are needed: see O’Brien v Robinson [1973] AC 912.”

Liverpool City Council v Irwin [1977] AC 239 found that to impose an absolute duty on the landlord would “involve such a wide departure from the ordinary law relating to easements that it ought not to be held to exist unless expressly undertaken and should not be implied”.

More devastatingly for the tenant’s case, Gordon v Selico and Adami v Lincoln Grange Management Ltd [1998] 1 EGLR 58 both found that where there was a contractual scheme that provided for repair of the building, via insurance, there was no necessity to read in an implied term. Thus in Gordon v Selico:

The repair and maintenance scheme provided by this lease is a very cumbersome one and we agree with the learned judge that, even if the lessors and their agents were duly to carry out their obligations, the scheme might not always suffice to give the lessees necessary and timely protection — for example, as he pointed out, through the continued inability or refusal of other lessees to pay their proper contribution. Nevertheless, on a reading of the lease, we feel little doubt that it was intended, by all parties, to provide a comprehensive code in regard to repair and maintenance of the block. We are by no means satisfied that the implication of any further terms in this respect is necessary to give the lease business efficacy, or that the lessor, assuming it to have been a reasonable person, would have “agreed without hesitation” to the insertion of the suggested implied additional terms relating to the repair and maintenance of the block.”

And in Adami:

I can see no ground for importing any obligation on the part of the lessor to carry out works of repair to the block from causes which are not covered by an insurance policy effected pursuant to the terms of the lease (modified in practice by the substitution of a block policy and its extension to cover damage by subsidence), in particular damage which might result from the gradual deterioration of the structure during the term of the lease. In Duke of Westminster v Guild [1985] QB 688, Slade LJ, at p697, approved a passage in Woodfall, Landlord and Tenant 28th ed (1978) vol I, para 1/1465 p618 in these terms:
In general, there is no implied covenant by the lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation, occupation or cultivation, or for any other purpose for which it is let. No covenant is implied that the lessor will do any repairs whatever …

The Court of Appeal found that the insurance clause in these leases provided such a scheme.

Although there is no express repairing covenant imposed on the landlord, the repair of the structure of the building is catered for through the provisions of clause 7(2). In the face of these provisions there is no reason based on necessity or business efficacy to alter the balance of the scheme by imposing an implied covenant to repair on the landlord, let alone one under which his liability to repair is made absolute. If one applies the modern approach to the implication of terms as a process of construction (see AG of Belize v Belize Telecom [2009] 1 WLR 1988) to do so would be to seek to improve the contract from the point of view of the tenant rather than to give it the meaning and effect which both parties must have intended given the terms and structure of their contract. The reasonable man looking at the matter with all the relevant background information would not in my view assume that the only meaning which could reasonably be given to the contract was that CHAL should be responsible for any defects in the repair of the retained parts irrespective of any negligence on its part.

For much the same reasons, the existence of what the parties obviously intended should be a comprehensive scheme for the repair of both the demised and the retained parts of the building is sufficient to exclude from their legal relationship any liability at common law in tort which the landlord might otherwise be subject to in relation to its retained premises.

And that did for Ms F’s claim and appeal. The Judge below had been wrong to find even the limited liability for one of the sewage pipe leaks.

On the cesser of rent issue, the tenant sought to appeal on the basis that the Judge below had failed to consider unfitness of part. But the tenant’s case had been that the property was wholly unfit for use and the Judge had been entirely entitled to find on that case. There was nothing in this ground of appeal.

This meant that there were outstanding arrears when the landlord forfeited. There was no set-off for disrepair damages. The possession order was correct as was the order for mesne profits.

The indemnity costs order against Ms F and the tenants was within the Judge’s legitimate ambit of discretion. There had been a Part 36 offer from the Landlord of £25,000 and costs. There had also been an offer from the landlord of a further 5 years lease of one of the properties at the same rent. Both had been refused by Ms F.

An award of indemnity costs did not necessitate:

some kind of misconduct on the part of the paying party and unreasonable conduct on the part of the tenants, coupled with their refusal of reasonable offers to settle, can in my view engage the court’s power and make the exercise of it proportionate. The reality of the claim in this case is that it was always exaggerated. Although the incidents of water and sewage leaking into the tenants’ premises were undoubtedly distressing and inconvenient, they never justified a claim for damages in excess of £2m and were, for the reasons I have given, in fact legally unfounded. Mere failure in the action is not enough to justify an award of costs on the indemnity basis but here the inflated nature of the damages claim was matched by a failure to limit the basis of the claim both factually and legally so that the judge was required, as he put it, to conduct a kind of inquiry instead of trying a case based on defined issues. Although some allowance has to be made for the fact that the tenants acted in person, that does not justify a complete disregard of procedural rules or the making of unfounded and exaggerated claims.

Appeal dismissed. Cross appeal allowed.

Comment

While a claim for £2 million for a few months interrupted trading for a gallery was always going to be an uphill battle in terms of evidence, the construction of the lease in this case was always going to present difficulties, in the absence of an express repairing clause. This is an issue that would apply equally to commercial and residential leases. But the Court of Appeal finding that the insurance arrangements provided for repair of the structure of the building, at least sufficient to stop the tenant’s own repairing obligations becoming otiose is fatal.

There is a clear lesson that the express obligations in the lease, to repair, or if silent, to insure, need to be every careful considered in any such case, as the likelihood of a leaseholder being able to argue for an implied obligation to repair (on notice) will depend on the express terms and on the basis of them being

necessary to give the lease business efficacy, or that the lessor, assuming it to have been a reasonable person, would have “agreed without hesitation” to the insertion of the suggested implied additional terms