City of London v Various Leaseholders of Great Arthur House (2021) EWCA Civ 431

This was the Court of Appeal judgment on an appeal from the Upper Tribunal (our report here) where the issue was whether the leaseholders were liable under their service charge for the costs of works by City of London, the freeholder, to remedy structural defects.

First a word of caution as this is understandably a very hot topic, given the current crisis of fire safety and build defects and associated prospects of leaseholders becoming liable for very substantial major works charges. The first part of this judgment, which sets out the general position in law as it has evolved, is of broader application. The second part, which addresses the liability of the specific leaseholders in Great Arthur House, is not. The Court of Appeal’s findings turn on some very specific and very unusual clauses in the relevant leases, which were only granted in those terms by City of London between 1983 and 2015.

The issue was a) whether works of repair could also include remedying structural defects, and b) whether under the terms of the leases and statute, the freeholder could recover the costs of remedying a structural defect whether the works also encompassed repairs.

i) The position in common law

Until Ravenseft Properties Ltd v Davstone (Holdings) Ltd (1980) QB 12 the position had been that a repairing covenant did not obligate the covenantor to make good an ‘inherent defect’ (a fault in the original design of a building as opposed to faulty materials or workmanship). However, Ravenseft held:

Whether works amount to repair was a question of fact and degree; and the relevant inquiry was whether the carrying out of the works in question would involve giving back to the covenantee a wholly different thing from that which was demised. If a scheme of works did not amount to giving back to the covenantee a wholly different thing to that which was demised, they were works of repair. They did not cease to be works of repair merely because they also eradicated an inherent defect which had given rise to the need to repair in the first place.

This was elaborated in McDougall v Easington DC (1989) 58 P & CR 201, with three tests:

(i) Whether the alterations went to the whole or substantially the whole of the structure or only to a subsidiary part;
(ii) Whether the effect of the alterations was to produce a building of a wholly different character than that which had been let;
(iii) What was the cost of the works in relation to the previous value of the building, and what was their effect on the value and lifespan of the building.

Quick v Taff Ely BC [1986] QB 809 provided that an obligation to repair (including any potential remedy to a design fault) was not triggered until there was disrepair. The was developed further in Post Office v Aquarius Properties Ltd (1986) 54 P & CR 61, that:

“where defects in the building had existed since the date when it was constructed, but there had been no damage to or deterioration in the condition of the building, a repairing covenant did not require the defect to be eradicated. In that respect it did not matter whether the original defect “resulted from error in design, or in workmanship, or from deliberate parsimony or any other cause”.

So, in general, there was no hard and fast line. Remedying a build defect may form part of repairs, so long as they did not transform the building, and so long as there were repairs needed beyond the fact of the build defect and the defect had caused the damage.

In the present case, the issue was that an aluminium framework to curtain walling had not had any allowance made for expansion when fabricated, and lacked vertical support members, causing deformation and leaks. Remedying the aluminium framework would fall under the common law definition of repair. The cost of remedial works done would be about £72,000 per leaseholder if passed on.

ii) The lease clauses and statute.

The leases were ‘right to buy’ leases granted by City of London. The leases required the leaseholder to pay their proportion of

“… repairs carried out in order:
(i) to keep in repair the structure and exterior of the premises and of the Building in which they are situated (including drains gutters and external pipes) not amounting to the making good of structural defects;
(ii) to make good any structural defect of whose existence the Corporation has notified the tenant in the notice served pursuant to (statutory requirements) which therein stated the Corporation’s estimate of the amount (at then current prices) which would be payable by the tenant towards the costs of making it good (such defects being listed in the Fourth Schedule hereto) or of which the Corporation does not become aware earlier than ten years after the grant hereof and
(iii) to keep in repair any other property over or in respect of which the tenant has any deemed rights.”

The relevant ‘statutory requirements were those in Housing Act 1980 Schedule 2, which effectively provided that right to buy leaseholders could only be charged for structural defects where (paragraph 17):

“A structural defect falls within this paragraph if—
(a) the landlord has notified the tenant of its existence before the lease was granted; or
(b) the landlord does not become aware of it earlier than 10 years after the lease was granted.”

(The position is different after Housing and Planning Act 1986, amending Housing Act 1985, which provided for a statutory limitation on build defect costs only within the first 5 years of the lease – the s.125 notice period – but that did not affect the leases in this case.)

The Court of Appeal approved the formulation of the Upper Tribunal of a ‘structural defect’ in the statutory and lease wording:

A structural defect is not confined to a so-called inherent defect but must be something that arises from the design or construction (or possibly modification) of the structure of the Building. It is to be contrasted with damage or deterioration that has occurred over time, or as a result of some supervening event, where what is being remedied is the damage or deterioration.

The Court of Appeal held that the lease clause and Schedule Housing Act 1980 clearly ‘carved out’ remedying structural defects from the leaseholder’s obligation to pay.

works fall within paragraph (i) of the definition if:
i) They are repairs;
ii) They are carried out in order to keep in repair the structure and exterior of the building and
iii) They do not amount to the making good of a structural defect.
Each element of the definition must be satisfied. If works do not fall within this paragraph, then they may fall within paragraph (ii) if the conditions stated in that paragraph are satisfied. But even to fall within paragraph (ii) of the definition the scheme of works must also amount to repairs, because of the over-arching restriction on what can be included in the service charge.

Thus the leaseholders were not obligated to pay for works to remedy structural defects, even where those defects had caused damage and repairs were required and the making good of the defect was incidental to or part and parcel of the work of repair, (unless the Council was aware of the defect before the grant of lease and included it in its notice, or had only become aware of the defect more than 10 years after th grant of lease).

The council objected that this made charges complicated and went against the legislative purpose of right to buy. The Court of Appeal did not consider that seperating out the costs of remedying structural defects was necessarily that complicated, but where thee were grey areas, this was a matter well within the expertise of the First Tier Tribunal. On the purpose of right to buy:

Nor do I consider that the interpretation that the Upper Tribunal adopted is in any way contrary to the legislative purpose of the right to buy. The purpose of the legislation was to encourage home ownership by council tenants; often persons of modest means. That was achieved not only by giving them the right to buy at all, but allowing them to buy at a substantial discount from market value. Although it is true (as Mr Straker said in his skeleton argument) that many people were attracted by the investment value of such acquisitions, the legislation deterred quick turnover by providing for clawback of the discount in the case of early sales. It has long been the common law that (except in the case of the sale or lease by a builder of a dwelling in the course of construction) a seller (or lessor) gives no implied warranty that the dwelling has been properly constructed; or, indeed, that it is fit for habitation. But it is by no means surprising that Parliament gave a measure of consumer protection to persons to whom the right to buy was given by partially insulating them from liability to contribute towards the cost of rectifying structural defects in the property in question. The case is all the stronger in the case of a building like Great Arthur House; because it cannot be supposed that the purchaser of single flat in a large block would commission a structural survey of the whole building before committing himself to acquiring a long lease.

(Those last two lines might cause a wince amongst those leaseholders of flats in large blocks currently lacking consumer protection from parliament against the costs of remedying defects.)

City of London’s appeal dismissed.