BACK WHERE YOU STARTED? -or- Why, How and When Should a Tenant Reinstate Alterations and What are the Damages if the Tenant Defaults?

NIC TAGGART

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“You’ll be back where you started Than you’ll know how it feels when you’ve been discarded You’ll back where you started You think you got it made, but it won’t get you far No it won’t get you far, then you’ll be Back where you started!”

1 Tina Turner

A paper delivered to the Property Litigationth Associa tion Conference at Keble College, Oxford on 28 March 2014

1. INTRODUCTION - DAMAGES FOR REINSTATEMENT ARE A BACKGROUND MELODY: 1.1 There are lots of things that I really do not understand, but that has never stopped me from lecturing about them in the past. One of the things that strikes me as seriously curious is the lack of cases concerned with breach of the covenant to reinstate at the end of the lease. We find ourselves hip-deep in cases on repairing covenants; but by comparison there are very few cases concerned with reinstatement covenants. There is also very little written in the text books

2 about reinstatement covenants. So, I shall do what I can to “make good”.

2. REINSTATEMENT OBLIGATIONS AND SUCCESSORS IN TITLE - FOLLOW YOU, FOLLOW ME? 2.1 The mechanism by which the benefit and the burden of rights and liabilities in leases runs against successors in title to the original landlord and tenant is well understood and hardy controversial. The legal mechanism by which rights and liabilities in collateral documents, such as licences, is transmitted on an assignment of the lease or a transfer of the reversion has been quietly controversial.

1 W ritten by Bryan Adams and Jim Vallance. How many other titles or lyrics from songs not popular for

2 over 20 years can you find in the rest of this rant? In this paper, I am going to deal only with covenants to reinstate alterations at or before the end of the lease. I will not deal with covenants to reinstate the premises as a whole if they are destroyed during the term: those are a whole different kettle of ball-games. “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

st Tenancies granted prior to 1 January 1996: 2.2 The historic problem arose from the drafting of the statutory mechanism which transfers the benefit of a tenant’s covenants when the reversion is transferred. This has been on a statutory

3 basis since the Assignment of Reversions Act 1540. Between 1881 and 1996, the statutory

words used have been these, last found in the Law of Property Act 1925, section 141:

Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject-matter thereof, and on the lessee’s part to be observed or performed, ... shall be annexed and incident to and shall go with the reversionary estate in the land, or in any part thereof, immediately expectant on the term granted by the lease, ...

The section was expressed to effect only a transfer of the benefit only of the covenants in the

4 lease, not any in collateral licences. Thus, it was only the landlord who had himself granted a

licence for improvements with a covenant to reinstate in it had the statutory right to enforce the

5 obligation to reinstate.

2.3 This problem was never properly solved. In fact the House of Lords went out of its way to unsolve the problem. In Tito v. Waddell (Nº.2), of which much more anon, Megarry V-C had suggested the solution was a principle of pure benefit and burden: if the tenant’s successors in title wanted to take the benefit of the alterations, then they had to take the burden of the

6 obligation to reinstate. However, a unanimous House of Lords speaking through Lord

7 Templeman in Rhone v. Stephens, rejected this view:

It does not follow that any condition can be rendered enforceable by attaching it to a right nor does it follow that every burden imposed by a conveyance may be enforced by depriving the covenantor’s successor in title of every benefit which he enjoyed thereunder. The condition must be relevant to the exercise of the right.

3 32 Hen.8, c.34. This Act only dealt with the situation where the landlord’s reversion was assigned, so that Henry VIII could be sure that he was running off with all of the property held by the monasteries he was dissolving. 4 Confirmed in P&A Swift Investments (a firm) v. Combined English Stores Group plc [1989] AC 632, (HL)

5 per Lord Oliver. The same problem would not apply to the landlord’s grant of consent for the alterations. Section 142 of the 1925 Act effects the transfer of the benefit of landlord’s covenants, and it is not limited to covenants

6 in leases alone. 7 [1977] 1 Ch 106, 301 et seq. (Megarry V-C) [1994] AC 310, 322 per Lord Templeman. Lord Oliver, Lord W oolf, Lord Lloyd and Lord Nolan agreed. -2- “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

What Lord Templeman did not then do was to explain how the benefit of a tenant’s covenants in a collateral agreement, such as a licence for alterations, might “run”. If this is the mechanism which he was saying would apply, then one would have to argue that the “condition” of reinstatement “must be relevant to the exercise of the right” to enjoy the alterations. This seems to me to be difficult: the tenant who obtains the licence certainly gives his covenant as a quid pro quo for the right to make the alternation, but what if the alteration is of no objective or subjective value to, say, some assignee of the lease who is the tenant when the lease ends? He is only

8 “exercising the right” to enjoy the alterations because he has not bothered removed them.

2.4 Perhaps there is a better answer to be found in the dust of an ancient authority: Spencer’s Case, decided in 1582. Mr. Spencer sued Mr. Clark, his assignee tenant, for not building a wall on the

9 demised land pursuant to a separate covenant given by the original tenant. The Court of King’s

Bench obviously had a good time with this case:

... after many arguments at the Bar, the case was excellently argued and debated by the Justices at the Bench.

When they had quite finished, the Court decided that, notwithstanding the 1540 Act which applied to assignments of the reversion, the common law provided that an assignee of a lease is entitled to the benefit, and subject to the burden, of all covenants and conditions “touching and concerning the land”, by reason of the privity of estate between landlord and tenant. It is that essential nexus between landlord and tenant, privity of estate, which causes both the benefit and the burden of the covenants run with the land demised and with the reversion.

2.5 If that analysis is right, it makes an obligation to remove and then reinstate even a wholly useless alteration run with the lease, because the requirement that the obligation “must be relevant to the exercise of the right” has been removed. In its place is a requirement that there is both

8 As an example, take a picture of this: in the 1980s, the tenant of a large office building obtains a licence for alterations to install a huge computer room, with its own bespoke air-conditioning system, complete with state of the art filtering system to cool its leviathan of a main-frame. By the end of the lease in 2010, the assignee’s staff all use laptops and W iFi. The computer room and the air-con is still there, because it is expensive to remove it. Difficult to see how the obligation to reinstate is “relevant to the exercise of

9 the right” in those circumstances. (1582) 5 Coke Reports 16a; 77 ER 32.

-3- “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

privity of estate and that the covenant must “touch and concern” the demised premises. In this context, the phrase probably means no more that the obligation to reinstate “has reference to

10 the subject-matter of the lease”: which, of course, it will, being granted as a consequence of

the covenant regulating the tenant’s rights to make alterations.

2.6 This suggestion might not be the right solution, but it would reflect reality. Everyone has assumed that these reinstatement covenants bind the tenant’s assignees, and this theory explains how that happens, so this should be welcome to the real world.

st Tenancies granted after 1 January 1996: 2.7 Parliament half-solved the problem in 1995 - a mere 455 years after it messed it all up in the first place - with the Landlord and Tenant (Covenants) Act 1995. I say “half solved”, because the

st solution only applies to leases or tenancies granted after 1 January 1996, when the Act came

11 into force. For these “new tenancies”, the solution is simple. The 1995 Act asks first whether

any given obligation is a “landlord covenant” or a “tenant covenant”:

2.7.1 First, a “covenant” is defined to includes “a covenant ... contained in a collateral

12 agreement”. Right away, this disposes of the “lease only” problem.

2.7.2 A “landlord covenant”, “in relation to a tenancy, means a covenant falling to be complied with by the landlord of premises demised by the tenancy”. A landlord’s licence rendering lawful an alteration that would otherwise be a breach of a covenant against alterations is, pretty clearly, a “landlord covenant”.

10 11 Davies v. Town Properties Investment Corp Ltd. [1903] 1 Ch 797, 805 Cozens-Hardy LJ (CA). There are some transitional provisions which mean some leases granted after that date are still under the old regime: see section 1(3). The rule in Spencer’s Case is abolished by section 3(7) of that Act, “to st the extent that [it] remains in force”, but only in relation to tenancies granted on or after 1 January 1995,

12 subject to the transitional provisions. This definition and the next following two come from section 28 of the 1995 Act. -4- “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

2.7.3 A “tenant covenant” “in relation to a tenancy, means a covenant falling to be complied with by the tenant of premises demised by the tenancy”. Thus, a tenant’s covenant in a licence for alterations to reinstate is plainly a “tenant covenant”.

2.7.4 By section 3(1) of the Act, landlord covenants and tenant covenants generally run with any transfer of the reversion and/or any assignment of the lease, even if they are not contained in the lease itself, but in one of those “collateral documents”:

The benefit and burden of all landlord and tenant covenants of a tenancy- (a) shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and (b) shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them.

2.8 The most important exception to the generality of section 3 is that a covenant “which (in whatever terms) is expressed to be personal to any person”: such a covenant does not pass on

13 an assignment. It would be an act of madness to make a covenant to alter with a corollary

obligation to reinstate personal, for obvious reasons. However, the width of the words in parentheses, “(in whatever terms)”, might leave scope for some interesting arguments if the draftsman of the licence has been careless. If you are acting for an assignee tenant, might be

14 worth looking very carefully at the definitions used in the licence...

3. INCONSISTENCIES BETWEEN “REINSTATEMENT” AND “REPAIR” - THE LAND OF CONFUSION? 3.1 It is sometimes said that there is an irreconcilable tension between the obligations to “deliver up in repair” and “to reinstate”. Indeed, it has even been argued that the practical difficulties in working what works are necessary to reinstate alterations and to put the same building into repair are so difficult and profound that the tenant is discharged from having to either reinstate or repair. Really?

13 14 Section 3(6)(a). I suspect a reference to a named tenant without a reference to successors in title is enough, though: a similar argument (albeit in a different context) got nowhere in PW & Co. v. Milton Gate Investments Ltd. [2004] Ch 142 (Neuberger J).

-5- “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

3.2 No. In the case of Fairgate International Ltd. v. Citibank International plc, the troublesome

15 clause was (in part) as follows:

(A) At the expiration or sooner determination of the said term quietly to yield up the Demised Premises decorated repaired cleaned and kept in accordance with the Tenant’s covenants herein contained together with all additions and improvements thereto and all fixtures and fittings which may be fixed or fastened to or upon the Demised Premises EXCEPT tenant’s fixtures and fittings which the Tenant is entitled to and does remove prior to the expiration or sooner determination of the said term and to reinstate

(B) If so required by the Landlord prior to or upon the expiration or sooner determination of the said term at the Tenant’s own expense ... to remove all or any furnishings fixtures fittings or other items of whatsoever nature that the Tenant may have installed and to make good all damage caused to the Demised Premises by such removal and restore the same to their original condition to the reasonable satisfaction of the Landlord’s surveyor.

The landlord served a notice triggering the reinstatement obligation, which the tenant ignored. Come the litigation, the tenant argued that there was nothing in the lease to inform the tenant how to reconcile inconsistencies between the works required to be carried out to comply with the two limbs of the clause, so therefore it was discharged from having to comply with both the obligation to repair and the obligation to reinstate.

3.3 Dyson LJ was not impressed: judges do tend to think that people ought to honour their contractual obligations, rather than devise cunning plans which require entitle them to say “I owe 16 you nothing; nothing at all”. Dyson LJ held that the two clauses were neither mutually exclusive nor self-cancelling. He also held that the tenant (or his building surveyor) had to proceed with a reasonable degree of practical common sense in order to achieve a pragmatic reconciliation 17 of the differing obligations:

15 [2006] 1 P&CR 2 (CA). I have simplified the clause for present purposes. 16 There are lots of examples of judicial pronouncements to this effect, but I quite like this one from Lord Steyn in Mannai Investment Co.Ltd. v. Eagle Star Life Assurance Co.Ltd. [1997] AC 749, 770 (HL): “In determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. W ords are therefore interpreted in the way in which a reasonable commercial person would construe them. and the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis

17 on niceties of language.” Maurice Kay and Buxton LJJ agreed.

-6- “BACK WHERE YOU STARTED?” - NIC TAGGART, LANDMARK CHAMBERS

[21] ... It would make no sense (and cannot have been intended) that the tenant should be required to repaint the partitions under [the first limb] and then strip them out under [the second limb] ...

[26] ... At the date of the notice, the tenant might well have been uncertain as to what repairing obligations it was required to discharge. It was implicit in this lease that the precise scope of work required under [the first limb] and [the second limb] might not be defined at the end of the term or when the notice was first given by Fairgate. This would only become clear when the details of the work required to be carried out [was] finalised.

In other words, the tenant has to work out for himself the overall effect of the two obligations: any item of repair which will be subsequently rendered un-necessary or pointless by undertaking an aspect of the reinstatement need not be done, and vice versa. The tenant has to visualise the net effect of the two covenants, and only has to do such items as will -for want of a better word-

18 not be superceded by other works.

3.4 Another potential source of confusion is the common practice of not serving a separate notice requiring reinstatement where one is required, but adding a request for reinstatement into the terminal schedule of dilapidations. This is just bad practice, and somebody will get hurt one day. Getting into the mind-set that reinstatement is all part of the terminal dilapidations process is dangerous, for a number of reasons.

3.4.1 First, it can add to the problems I will consider below in more detail about notices served so late that they cannot be complied with before the end of the term. There may be other conditions precedent to the service of a reinstatement notice which will also get overlooked if the process of calling for reinstatement just gets lumped in with terminal 19 dilapidations.

18 As will be seen in paragraph 4.2 below, the tenant here got knocked down, but they got up again to run a second argument based on mutual inconsistencies. 19 There are some precedent licences out there, which try to solve the problem of late notices by making it the landlord’s obligation to serve notice not more than twelve months and not less than six months before the lease end. Not so very long ago I had a case for a landlord who was under one of these 6/12 month obligations, but whose surveyor just stuffed the requirement to reinstate into the terminal schedule ... it didn’t go well ...

-7- 3.4.2 Secondly, it increases the risk that the only demand for reinstatement made before the end of the term will be in a draft schedule which has been served on an expressly “without prejudice” basis. If a notice which is meant to trigger a legal obligation is sent on a without prejudice basis, it is very likely to be held to be of no effect: remember, “without prejudice” does not just mean “this is an attempt to settle, so don’t tell the

20 Judge”, it also means “this has no effect on your legal rights”.

3.4.3 Thirdly, there is an increased risk that the Court might say that the schedule, construed as a whole, failed to sufficiently direct the tenant’s attention to the fact that it was exercising the landlord’s right to call for reinstatement under one or more licences, as well as identifying repairs which the tenant has an existing obligation to repair, whether or not the landlord sends a schedule.

3.5 There are such things, but at least one landlord has gotten away with it, In Westminster City Council v. HSBC Bank plc, the landlord specified certain works in the schedule of dilapidations as “reinstatement” works, but without actually referring at all to the licences for alterations, which

21 was where the obligation to reinstate the alterations actually came from. The Judge

considered the well known Mannai test for construing documents containing drafting

22 inelegancies, which he condensed into this neat summary:

(1) the question is how a reasonable recipient would have understood the notice;

20 Re Weston and Thomas’ Contract [1907] 1 Ch 244 (Swinfen Eady J), a case on notices to complete, but the effect of the words would be the same. See, too, Royal Life Insurance plc v. Phillips [1990] 2 EGLR 135 (Nolan J) and Maurice Investments Ltd. v. Lincoln Insurance Services Ltd. [2007] 1 P & CR 235 (HH Judge W eeks QC, sitting as Deputy Judge of the High Court), both cases on rent review trigger notices.

21 You have no idea how many times I see this particular error being made: time after time. 22 [2003] 1 EGLR 62 (Mr. Recorder Michael Black QC, sitting as a deputy judge of the division). Mr. Recorder Black QC at paragraph [29]. His quotation in sub-paragraph (5) is from Lord Clyde Mannai Investment Co.Ltd. v. Eagle Star Life Assurance Co.Ltd. [1997] AC 749, 782 (HL), “The standard of reference is that of the reasonable man exercising his common sense in the context and in the circumstances of the particular case. It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated. To demand a perfect precision in matters which are not within the formal requirements of the relevant power would in my view impose an unduly high standard in the framing of notices such as those in issue here. W hile careless drafting is certainly to be discouraged the evident intention of a notice should not in matters of this kind be rejected in preference for a technical precision”. Hands up if you’ve just had to Google “desiderated”: me too.

-8- (2) that question is to be answered objectively: the subjective intention or understanding of the giver of the notice and the subjective understanding of the actual recipient are both irrelevant;

(3) in deciding how a reasonable recipient would have understood the notice, regard must be had to the relevant contextual scene, and, in particular, to the terms of the relevant contractual documents: the reasonable recipient must be assumed to have had those terms in the forefront of his mind;

(4) regard must also be had to the purpose of the requirement to give notice;

(5) the notice is to be construed in a commercially sensible way, as opposed to a technical way, and without undue emphasis upon the niceties of language. The “evident intention of [the] notice… should not… be rejected in favour of a technical precision”.

Applying that five-part test, the Judge came to the conclusion that the bare reference to reinstatement was sufficient:

[48] I must then consider whether the schedule of dilapidations, when properly construed, amounts to a requirement to reinstate in accordance with the licences. The schedule did not, as matter of fact, refer to the licences. The appropriate test is whether, nevertheless, a reasonable recipient would have understood one of the purposes of the schedule as giving the notice necessary to invoke the reinstatement obligations. ...

[50] I find that a reasonable recipient in the position of the bank would not have been misled as to the [landlord’s] intentions. When I focus upon the fact, as I am enjoined to do by Lord Steyn’s speech in Mannai, that a reasonable recipient is bound to have the terms of the lease in the forefront of his mind, I am confident that the schedule would be understood to be referring to reinstatement under the licences, given that the authorised alterations could be called upon to be removed and reinstated only under the licences.

3.6 I think that the landlord there was the lucky one. In my view, paragraph [48] of the judgment assumes what it sets out to prove: if you ask the question in the terms the Judge did, you are looking for confirmation that the schedule gave the necessary notice to the reinstate the obligations. If, however, you ask the question more openly, such as “would the reasonable recipient of the schedule of dilapidations consider he was being told to do the reinstatement works when he received the schedule”, you might get a less positive response: especially as we all know that, in the real world, nineteen times out of twenty, the receipt of a schedule of dilapidations is met with utter disinterest and not actually read by anyone until the pre-action protocol letter arrives.

-9- 3.7 Moreover, it seems to me that, although the reasonable recipient is deemed to have the terms of the lease at the forefront of his mind, on the facts of that particular case, it was a harsh result for the tenant. The relevant licences included one entered into thirty years before the schedule was served. The reasonable recipient evidently has a very good memory or a very good filing system: I should be so lucky to have either.

4. REINSTATEMENT “TO THE LANDLORD’S SATISFACTION”? - COME TALK TO ME: 4.1 The Fairgate case also assists on another common question relating to reinstatement provisions. With the law of repair properly so-called, the standard of repair to be applied is a mixed question of the construction of the clause itself and the general law to be applied to such clauses, such

23 as the fabulously well-known (and fabulously frequently ignored) test in Proudfoot v. Hart:

... The [premises] need not be put into the same condition as when the tenant took it; it need not be put into perfect repair; it need only be put into such a state of repair as renders it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it.

An obligation to reinstate will usually be even easier then that: put it back to the way it was, before you altered it. Simple.

4.2 However, it is not an uncommon form of reinstatement obligation to find that the tenant has to reinstate “to the reasonable satisfaction of the landlord’s surveyor”, or some similar formula. In the Fairgate case, the tenant argued that such an obligation was void for uncertainty, particularly as the obligations “to repair” imposed an objective standard, whereas the reinstatement provision thus qualified was subjective.

4.3 Dyson LJ was about as impressed by this argument as he was by the mutual exclusivity

24 argument. An obligation to do something to a standard dictated by another person is not a

legal impossibility, even if it means that the tenant does not know what works he might need to do, until he has conferred with the landlord. Nor does it matter that, when the tenant receives

23 (1890) 25 QBD 42, 52-3 per Lord Esher MR (CA). See also Fluor Daniel Properties Ltd. v. Shortlands Investments Ltd. [2001] 2 EGLR 103 (Blackburne J) and Mason v. TotalFinaElf UK Ltd. [2003] 3 EGLR

24 91 (Blackburne J). I.e. not very. See paragraph 3.3, above.

-10- the notice, he cannot be immediately certain that he knows what to do. He can render the objective certain by engaging with the landlord’s surveyor.

4.4 What happens if the landlord’s surveyor will not engage with the tenant’s surveyor? Generally, the law backs rights with corollary duties, so there would be an argument that the landlord’s right to have works undertaken to his satisfaction imposes a positive duty on him to co-operate in the

25 achieving of that standard:

... as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.

In practical terms, the tenant’s team probably will not have any time to seek to enforce this duty against a landlord’s surveyor who is un-cooperative, even assuming that the Court would try to order “forced co-operation”: a concept which just does not sound right.

4.5 In Commercial Union Life Assurance Co.Ltd. v. Label Ink Ltd., HH Judge Rich QC was considering a conditional break clause, where the tenant had attempted to agree a programme of works to comply with the clause, but the landlord and his advisors were as elusive as shadows 26 in the rain. The judge took this refusal to co-operate into account, effectively giving the tenant the benefit of the doubt on whether or not it had complied with its obligations to yield up without 27 material breaches of the repairing covenant. However, this point was one of the many points in that case subsequently (and lavishly) disapproved by the Court of Appeal in Fitzroy House 28 Epworth Street (Nº.1) Ltd. v. Financial Times Ltd.

25 Mackay v. Dick (1881) 6 App.Cas. 251, 263 per Lord Blackburn. See also Beazer Homes Ltd. v. County Council of Durham [2010] EW CA Civ 1175, which formulates the issue as one of implied terms. As the law currently stands, there is probably now no differences between the two ways of analysing the imposition of the obligation to co-operate: see Attorney General of Belize v. Belize Telecom Ltd. [2009]

26 1 W LR 1988 (PC), of which there will be very much more below. 27 [2001] L&TR 29 (HH Judge Rich QC, sitting as a Deputy High Court Judge). 28 Paragraphs [54]-[55]. [2006] 1 W LR 2207 (CA) at [17] per Sir Andrew Morritt, C. I was junior Counsel for the successful landlord in Commercial Union and a win’s a win even if the Court of Appeal subsequently disapproves every square millimetre of the judgment in your case.

-11- 4.6 So, it would seem to be that the landlord’s surveyor cannot be forced to co-operate, but the tenant’s obligation to reinstate still exists, notwithstanding this lack of co-operation. The way forward for tenant’s surveyors/lawyers seems to me to be this:

4.6.1 Keep a clear record of your attempts to engage the landlord or his surveyor. Make sure your audit trail is “open”, not “without prejudice”.

4.6.2 Don’t give up, you’re not beaten yet. Keep pestering the landlord/his surveyor and, if you anticipate that you will have to start taking decisions about what to do without prior approval, say so in advance, and set out what you will do if you do not hear back by a certain date. Where possible, set out briefly why you are going to adopt a particular course of action. Warn the landlord that you will have to take his failure to respond as an indication that he agrees with your proposed course of action. The legal effect of

29 trying to force the landlord to engage in this way is not wholly straightforward, but at

least you should be aiming for the sympathy vote.

4.6.3 If you end up doing the reinstatement without input from the landlord, try to undertake the works with at least some regard for how a reasonable landlord would ask you to do it. Although the observation of Mellish LJ in Finch v. Underwood, “the Court would be inclined to give credit to a survey thus honestly made” is not a general proposition, the 30 underlying point is a fair one. If the tenant makes an honest job of meeting the standard that a reasonable landlord might require, the Court will probably be receptive to any argument along the lines that the actual landlord has waived any right to require a different specification.

29 See, for a recent example PCE Investors Ltd. v. Cancer Research UK [2012] 2 P&CR 5 (Peter Smith J), th as analysed in the article, Don’t Estop Me Now by Bryan Johnston and N. Taggart, Estates Gazette 17 November 2012, pages 112-114 (the jokes were his idea, honest). It may well be that the points made in PCE Investors can be distinguished in reliance on the basis that the situation under discussion here

30 one where there is a duty to co-operate, whereas the PCE case is a proper caveat emptor situation. See the FT case [2006] 1 W LR 2207 (CA) at [17] per Sir Andrew Morritt, C.“It may be that Judge Rich QC [in Label Ink] had in mind the observations of Mellish LJ in Finch v. Underwood (1875-6) 2 Ch D 310 when suggesting that the efforts made by the tenant to avoid a breach could be relevant. If so, for the reason I have already given, I consider that he misunderstood the import of the observation”.

-12- 5. REINSTATEMENT ON DEMAND - SHOULD I STAY OR SHOULD I GO? 5.1 A very common form of reinstatement obligation causes serious conceptual problems, which never seem to arise in practice. This means one of two things: either everybody understands that this part of the map of the law is marked “Here Be Monsters” and avoids making the issue contentious; alternatively, it means nobody realises the enormity of the problem and, like Wile E. Coyote running off the edge of a cliff, are able to keep going because they haven’t looked down to see they are walking in the air.

5.2 This troublesome covenant is the classic requirement that the tenant must “reinstate on

31 demand”. This is an example:

At the expiration or sooner determination of the said Lease (if called upon by the Landlord to do so) at its own cost to reinstate and make good the premises and restore the same to the same state and condition as they are now and as if the works hereby authorised had not been made.

This drafting causes some serious problems: what if the landlord serves a notice so close to the end of the contractual term that the tenant cannot hope to comply with the obligation to reinstate, no matter how quickly he proceeds? There is a notable dearth of authority on this point although, as I will show, not a complete absence.

5.3 The right analysis to apply to such a clause could be (at least) any one of these:

5.3.1 Is the right analysis that the tenant has an implied right to stay in occupation and finish the works, which he must exercise unless he chooses to go into breach of covenant by vacating at the end of the term? If so-

31 There are lots of examples to be found in the books. I have taken this one from Westminster City Council v. HSBC Bank plc [2003] 1 EGLR 62, which I discuss on another point in paragraph 3.5 above. Smart money spins this obligation right round (like a record) by making the tenant reinstate unless the landlord releases it from having to do so. One such precedent is “Unless released from compliance with this obligation by the Landlord the Tenant must at its sole cost at the end of the Term created by the Lease remove the W orks and reinstate the Property making good any damage to the [reasonable] satisfaction of the Landlord’s Surveyor”.

-13- 5.3.1.1 if the tenant stays in after the end of the term to undertake the works, does he have to pay the landlord something for his occupation, such as an implied licence fee; or 5.3.1.2 if the tenant wants to complete the works, does he get to stay in occupation for free?

5.3.2 Is the right analysis that there is an implied obligation on the landlord not to serve a notice so close to the end of the term, which renders his notice ineffective if he serves it too late?

5.3.3 Or is the right analysis that the landlord has a right to, in effect, automatically put the tenant into breach of covenant by imposing an impossible demand?

5.4 Another common reinstatement obligation obliges the tenant to reinstate any alterations “at the end of the term, however determined”. Does that really mean “at the end of the term”? If it does, then the tenant has no obligation to even start the work until the last day. Surely that must be granting him an implied licence? It might be said that such a construction is daft, so the clause must mean that the tenant has to start the work so that it is completed “by the end of the term”, not “at” it. Yes, but what if the lease is forfeited, so that the tenant never gets the chance to do the work? Or, what if the landlord exercises a landlord’s break option, which does not give the tenant enough notice to complete any reinstatement works.

5.5 However one tries to resolve those conundrums, the mechanism which would have to be used is clear. Any resolution has to deal with the fact that the parties have left a lacuna or two in their lease (or licence), by failing to spell out whether the tenant can stay and, if so, on what terms. Whether and how the Court will backfill the gaps in the drafting requires a brief (-ish) review of the modern law on the implications of terms into formal contracts, such as leases and licences 32 for alterations.

32 I know you know this, but it’s good for you: stop your sobbing.

-14- The modern law of implied terms - speak to me in silent the tongue: 5.6 What follows is by no means an exhaustive of fully comprehensive review of a very tricky area of the law, but it is intended as a reasonably usable bluffer’s guide. The implication of a contractual term is all part of the single process of searching for what the lease or licence

33 actually means. This was stressed by Lord Wilberforce in Liverpool City Council v. Irwin:

To say that the construction of a complete contract out of these elements involves a process of “implication” may be correct; it would be so if implication means the supplying of what is not expressed. But there are varieties of implications which the courts think fit to make and they do not necessarily involve the same process. Where there is, on the face of it, a complete, bilateral contract, the courts are sometimes willing to add terms to it, as implied terms: this is very common in mercantile contracts where there is an established usage: in that case the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain. In other cases, where there is an apparently complete bargain, the courts are willing to add a term on the ground that without it the contract will not work ... . This is ... a strict test ... The present case, in my opinion, represents a fourth category, or I would rather say a fourth shade on a continuous spectrum. The court here is simply concerned to establish what the contract is, the parties not having themselves fully stated the terms. In this sense the court is searching for what must be implied.

5.7 In the same way that there are different circumstances in which it is right to imply a term, there are different ways in which the legal test for when a term is to be implied has been expressed. The modern approach is to see these different expressions of the test as also being “shades on a continuous spectrum”. Once again, Liverpool City Council v. Irwin provides a clear statement

34 of this approach, this time from Lord Cross:

Sometimes, ... what the court is in effect being asked to do is to rectify a particular -often a very detailed- contract by inserting in it a term which the parties have not expressed. Here it is not enough for the Court to say that the suggested term is one the presence of which would make the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give -as it is put- business efficacy to the contract and that if its absence had been pointed out at the time both parties -assuming them to have been reasonable men- would have agreed without hesitation to its insertion.

This formulation of the test for when a term will be implied has three distinct aspects:

33 34 [1977] AC 239, 253-4 (HL). [1977] AC 239, 256 (HL).

-15- 5.7.1 the first aspect is that the term must give “business efficacy” to the contract, this aspect

35 being derived from the famous case of “The Moorcock”;

5.7.2 the second aspect is that it must satisfy the “Officious Bystander” test for obviousness,

36 as derived from Shirlaw v. Southern Foundries (1926) Ltd.; and

5.7.3 lastly the implication must satisfy a test of necessity, as emphasised in Liverpool City Council by Lord Cross and Lord Wilberforce.

5.8 Taking the first aspect, the Courts will imply a term which is necessary to give a contract “business efficacy”: it can be readily assumed that the parties would have intended their contract

37 to be mutually efficacious. As Bowen LJ said in “The Moorcock”:

In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.

That point about assuming risks are balanced is important for our purposes: a Court is going to be concerned about any implied term which “impose on one side all [or most of?] the perils 38 of the transaction, or to emancipate one side from all the chances of failure”. As will be seen below, the same assumption of commercial balance does not as readily apply to whether a term should be implied at all.

35 36 (1889) 14 PD 64 (CA). 37 [1939] 2 KB 206 (CA). 38 (1889) 14 PD 64, 68 (CA). Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd. (The MV “Good Luck”) [1990] 1 QB 818, 870 (CA). The Judgment was that of the Court of Appeal (May, Ralph Gibson and Bingham LJJ) and delivered by May LJ: “It is nonetheless important, in attributing a purpose to a commercial transaction, to be sure that it is the purpose of both parties and not just one. If the purpose of the transaction is seen through the eyes of one party only an unbalanced view of the transaction may result. Many contracts represent a compromise between what one party wishes to obtain and the other is willing to give.” -16- 5.9 The second aspect outlined by Lord Cross derives from the intervention of the famous “Officious

39 Bystander”, born in the speech of MacKinnon LJ, in Shirlaw v. Southern Foundries (1926) Ltd.:

Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious it goes without saying; so that if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common “Of course”.

5.10 There some other, equally important, aspects of this test for when a term will be implied into a contractual instrument, which can be shortly summarised:

5.10.1 The Court will require that the term it is being asked to imply is objectively reasonable, because parties are unlikely to have agreed anything objectively unreasonable and not

40 then made express provision for it.

5.10.2 The Court will also require that the term is capable of clear and unambiguous

41 formulation. If it is not capable of being thus formulated, the proposed term lacks the

necessary degree of obviousness.

5.10.3 Thirdly, the implied term has to be consistent with the meaning of the lease or licence, as derived from its express terms. As Lord Parker said in Tamplin Steamship Co. v.

42 Anglo-Mexican Petroleum Products Co. Ltd.:

It is, of course, impossible to imply in a contract. any term or condition inconsistent with its express provisions, or with the intention of the parties as gathered from those provisions. The first thing, therefore, in every case is to compare the term or condition which it is sought to imply with the express provisions of the contract, and with the intention of the parties as gathered from those provisions, and ascertain whether there is any such inconsistency.

5.11 Are these separate tests, so a term can be implied if only one or more criterion is satisfied, or are they cumulative aspect of a single test. The better view is that all you ever needed was the

39 40 [1939] 2 KB 206, 227 (CA). Liverpool City Council v. Irwin [1977] AC 239, 262 per Lord Salmon and also per Lord Edmund-Davies

41 at 265. 42 Shell UK Ltd. v. Lostock Garage Ltd. [1976] 1 W LR 1187 (CA), especially per Ormrod LJ. [1916] 2 AC 397, 422 (HL). -17- one test, and so the elements identified above are cumulative. See Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd., where Sir Thomas Bingham MR reviewed the

43 authorities before summarising them as being cumulative and overlapping:

... for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that, “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

5.12 This modern approach of synthesising a single test, albeit with a number of constituent components, has been confirmed by Lord Hoffmann’s speech in Attorney General of Belize v.

44 Belize Telecom Ltd. Indeed, Lord Hoffmann goes slightly further: not only are the methods by

which a term may be implied “shades on a spectrum”, but the implication of terms of terms into a contractual instrument is itself but a shade in the spectrum of interpretation. Interpretation and implication is one process, whereby one determines the way in which the reasonable person would understand the contract as a whole. Lord Hoffmann said:

[16] ... The Court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed ...

43 [1995] EMLR 472, 481 (CA), using a formulation derived from the advice given by the majority of the Privy Council (speaking through Lord Simon) in BP Refinery (Westernport) Pty. Ltd. v. The President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20, 26. See also Reigate v. Union Manufacturing Co. (Ramsbottom) Ltd. [1918] 1 KB 592, 605 (CA), where Scrutton LJ said: “A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, “W hat will happen in such a case”, they would both have replied, “Of course, so and so will happen; we did not trouble to say that; it is too clear”. Unless the Court comes to some such

44 conclusion as that, it ought not to imply a term which the parties themselves have not expressed.” [2009] 1 W LR 1988 (PC). The Board comprised Lord Hoffmann, Lord Rodger, Baroness Hale, Lord Carswell and Lord Brown. Lord Hoffmann had previously encapsulated this idea in an article, The Intolerable Wrestle with Words and Meanings (1997) 114 SALJ 656, in which he wrote, “In fact, of course, the implication of a term into a contract is an exercise in interpretation like any other. It may seem odd to speak of interpretation when, by definition, the terms has not been expressed in words, but the only difference is that when we imply a term, we are engaged in interpreting the meaning of the contract as a whole. For this purpose, we apply the ordinary rule of contractual interpretation by which the parties are depersonalised and assumed to be reasonable”.

-18- [17] The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

[18] In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.

5.13 For our purposes, Lord Hoffmann’s paragraph [17] is particularly interesting: not every perceived lacuna in a contract is necessarily there to be filled. Sometimes, there is a gap in the contractual logic because the parties intended there to be a gap. Perhaps the parties objectively took the risk that “stuff happens”? Sir Thomas Bingham made the point beautifully in Philips

45 Electronique:

... it may well be doubtful whether the omission was the result of the parties’ oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.

46 In Crema v. Cenkos Securities plc, Aikens LJ has gone as far as to say:

The default position is that nothing is to be implied in the instrument. In that case, if that particular event has caused loss, then the loss lies where it falls

5.14 It follows that, because the process is one of deriving the meaning of the contract, one has to be certain that any proposed term being implied is the only proper implication: if there are two or more possible implied terms, both of which could reasonably implied, then the Court must conclude that there is a deliberate lacuna. Because the parties have not chosen between the

45 46 [1995] EMLR 472, 482 (CA). [2011] BusLR 943 at [38].

-19- 47 alternatives, the Court cannot say that one implied term is more “necessary” that the other.

48 Sir Thomas Bingham MR in Philips Electronique:

And it is not enough to show that had the parties foreseen the eventuality which has in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred.

49 This is a most stringent requirement, as Jacob LJ explained in Chantry Estates v. Anderson:

[16] It follows that what one is looking for as the reasonable addressee is whatever the agreement means in context. That may be something else from what at a first look it apparently means. But that will be so when the only meaning consistent with the other provisions of the instrument read against the relevant background is that something else.

The emphasis is the learned Judge’s.

5.15 Lastly, it is critical to keep in mind when considering all of these different aspect of this composite test that no term is to be implied into a contractual instrument simply because it would be reasonable to insert it. The term itself has to be reasonable, but whether or not it is to be inserted is a question of necessity. Returning to the Liverpool City Council case, Lord

50 Wilberforce said:

In my opinion such obligation should be read into the contract as the nature of the contract itself implicitly requires, no more or less: a test, in other words of necessity.

See also per Lord Edmund-Davies, in the same case: “The touchstone is always necessity and

51 not merely reasonableness”.

Applying the implied terms test to a land of make-believe: 52 5.16 Let us imagine a less than fanciful scenario, and test how a term might be implied. Imagine that the reinstatement of some alterations to commercial premises will take a minimum of four

47 Or, more figuratively, the parties would not both have suppressed the intervening Officious Bystander with the same testy response: “just go away and stay away!” 48 49 [1995] EMLR 472, 482 (CA). 50 (2010) 130 Con LR 11 (CA). Jackson and Sedley LJJ agreed. 51 [1977] AC 239, 254. 52 At 266. The emphasis is in the original. Oh yes, I am the great pretender. -20- months, no matter how diligently the tenant gets on with the work. Imagine that the express terms of the reinstatement clause permits the landlord to serve the notice at any time, and he

th th does so on 30 August 2014. Imagine that the lease ends on the 28 September 2014, and the

53 Landlord and Tenant Act 1954 has been excluded. Imagine that the tenant was otherwise

ready to vacate and leave the premises in repair, but not reinstated.

Let’s stay together: though good and bad; happy and sad? 5.17 Is it right that my hypothetical the tenant has the right to stay in the premises for three months after the termination of the contractual term? If so, what other liabilities might he have? Does he have to pay the rent? Does he have to pay mesne profits or some notional licence fees?

5.18 There are some clues in the existing authorities on specific performance. The court will not order specific performance to carry out works on land against someone who no longer has a right to possession of that land. In Carpenters’ Estates Ltd. v. Davies, the seller of land had

54 contracted with a purchaser of part to build an access road on her retained land. Farwell J was

relaxed about granting an order for specific performance, because Mrs. Davies was lawfully in possession of the land on which the work would have to be done. However, he explained his reasoning by reference to the position if the works needed to be done on the land sold to Carpenters’ Estates. If the works were on its land, not hers, no order for specific performance

55 would have been made:

... what the plaintiff has to establish is that the defendant is in possession of the land on which the work is contracted to be done. Obviously, if the defendant is not in possession of the land, it may be impossible for him to carry out the contract, and, of course, in such a case as that the Court would not grant specific performance. But if, as in the present case, the defendant is in possession of the land, and there is no difficulty about her carrying out the obligation under which she has put herself ... the Court can in my judgment, grant specific performance.

53 This makes the assumptions “pure”, because the tenant would otherwise have an arguable right to retain possession to complete the works, by reason of the Landlord and Tenant Act itself, by analogy with Pointon York Group plc v. Poulton [2006] 3 EGLR 37 (CA), a case on fitting out (but see Hillil Property and Investment Co. Ltd. v. Naraine Pharmacy Ltd. [1979] 2 EGLR 65 (CA), where dumping rubble from

54 work on adjoining shop was not “business occupation”). 55 [1940] 1 Ch 160 (Farwell J). Pages 164-5. Pennycuick V-C followed this in Jeune v. Queen’s Cross Properties Ltd. [1974] Ch 97, 99- 100. -21- This seems correct: if Mrs. Davies had no right to go onto the land to do the works, she would be trespassing. A Court Order which makes you a trespasser if you comply with it and a contemnor if you do not comply is obviously wrong in principle.

5.19 The analogy with our hypothetical situation is, however, helpful because of the focus on the right to be on the land in question. It seems wrong that the landlord can, with the one hand, seek an injunction to force a tenant to reinstate and, at the same time, treat the tenant’s occupation as a trespass which entitles the landlord to damages. So, as we are presently assuming that a late demand for reinstatement is permissible, perhaps the tenant’s occupation has to be treated as consensual?

5.20 This must also mean that the tenant cannot be liable in damages for mesne profits, in respect of his continuing occupation of the premises: he is, on this analysis, not occupying because he is in breach of his obligation to give up vacant possession. On the contrary, he is in occupation performing his obligation to reinstate: damages in contract and in tort are awarded for breach of obligations, not for diligent performance of them.

5.21 There is some support for this analysis in Saner v. Bilton (Nº.1), where Fry J held that an landlord’s obligation to carry out structural repairs carried with it an ancillary right to enter onto the demised premises to carry out that obligation, notwithstanding the covenant for quiet

56 enjoyment in the lease:

It is further said that the construction of the covenant, as carrying with it an implied licence to enter, is inconsistent with the lessor’s covenant for quiet enjoyment. I do not think it is, and for this reason, that the covenant for quiet enjoyment, if read as absolutely unqualified, is as inconsistent with an entry on the warehouse for a single moment as it is with an occupation for a month or a year… I think the covenant for quiet enjoyment must be read as subject to the licence which I have held to be implied in the covenant to repair.

Indeed, this could be seen as a natural part of the process of “fitting together” the covenants in a lease, wherever they need to be read together to make a coherent whole. This is what Sedley

56 (1878) LR 7 ChD 815, 824 (Fry J).

-22- LJ had in mind when giving the decision of the Court of Appeal in Goldmile Properties Ltd. v.

57 Lechouritis:

[8] It is axiomatic that where the provisions of any contract, including a lease, come into conflict, they are to be interpreted and applied so as to give proper effect, if possible, to both of them.

5.22 This seems all very plausible, and there is even an unreported authority which analyses the consequences of late service of a landlord’s request for reinstatement in just this way: the case

58 of Scottish Mutual Assurance Society Ltd. v. British Telecommunications plc. Unfortunately,

the transcript of the judgment contains only trace elements of legal reasoning. A licence for alterations was entered into, which obliged the tenant, BT, to “reinstate the property to its original layout and design at the expiry of the Lease at its own cost, should the Lessor reasonably so require.” SMA served notice requiring reinstatement just six days before the lease ended.

5.23 The Judge held that, as the licence specifically referred to the tenant having to reinstate “at the expiry of the Lease”, the landlord was entitled to serve a notice this short, because, “the intention was ... to require the work to be put in hand at the time of, but not to be completed by, the expiry of the Lease”. That sounds odd: what would the parties to the licence be objectively trying to achieve by obliging the tenant to start something, even if he could not finish it? And what if the task of reinstating the alterations was so significant that the tenant could not hope to achieve anything in the six days? Surely, this is the legal equivalent of darkness on the edge of town?

5.24 However, the Judge rationalised these problems this way:

... it seems to me to be a necessary corollary to acceptance of SMA’s construction of ... the ... Licence that it must be inferred that BT were to be given a reasonable time following the expiry of the Lease for the carrying out of works of removal of the Licence works and reinstatement thereafter.

The Judge did not expressly state who bore the costs of the occupation. He did say that the tenant’s occupation pursuant to these works would reduce the loss of rent claim in respect of the

57 [2003] 1 EGLR 60, 61 (CA). 58 th Unreported, 18 March 1994. Mr. Anthony Butcher QC, sitting as an Official Referee. I am, as always, most grateful to Mr. John Male QC: this time, I am grateful for a copy of the judgment in this case.

-23- dilapidations, because the tenant should probably have used this time to do the repairs. The inference from this is - I think- that the tenant should not have to pay the costs of its occupation (whether as rent or implied licence fee) during this period. In any event, this comment was obiter, as the Judge held that there was no loss of rent claim on the facts, one way or another.

5.25 However, there are three serious difficulties which the SMA case does not address. The first one is a merry one. We all know that damages for terminal dilapidations are subject to a

59 statutory cap, by reason of the Landlord and Tenant Act 1927, section 18(1). We probably also

all know that the calculation of the diminution of the landlord’s reversion caused by the disrepair can be dramatically reduced if a sub-tenant retains occupation under the 1954 Act, paying rent

60 and bearing an ongoing repairing obligation. What might the effect of the diminution of the

value of the reversion if, on the last day of the term, the landlord has granted a three month gratuitous licence to someone else to undertake works of reinstatement, especially if the landlord does not know if the tenant will choose to do some or all of the repairs that might otherwise be needed? What differences will it make to this valuation if this implied licence actually impliedly

61 obliges the tenant to pay a licence fee consistent with the passing rent? Loss? What loss?

5.26 The second point is related to the first. If by serving a late notice demanding reinstatement, the landlord grants the tenant a licence to do the works, is that licence revocable? If it is not revocable, there might be an even bigger impact on that section 18 valuation? If the landlord changes his mind, say because someone makes him a great offer to buy the reversion if he can give vacant possession, can the landlord revoke the licence?

59 If you did not know that, you have come to the wrong conference. No, really. Maybe right people, right

60 time; but the wrong location? Family Management v. Gray [1980] 1 EGLR 46 (CA); Crown Estate Commissioners v. Town Investments Ltd. [1992] 1 EGLR 61 (Mr. Recorder Barry Green QC, sitting as an Official Referee); Crewe Services & Investment Corporation v. Silk [1998] 2 EGLR 1 (CA) - a case under the Agricultural Holdings Act 1986,

61 but the principles are the same. Obviously, this is properly a matter of valuation, not a matter of law. So, don’t ask me no questions and I won’t tell you no lies.

-24- 5.27 It would seem that the licence is not revocable: if someone has been granted a contractual

62 licence, the court will protect their right to occupy the premises pursuant to that contract. For

our purposes, a good example is Hounslow London Borough Council v. Twickenham Garden Developments Ltd., the plaintiff Council purported to terminate the defendant builders’ contract to undertake certain major construction works on the Council’s land and seek possession of the land from the builders. Megarry J was evidently troubled by the case, but eventually concluded

63 that the builders could only be evicted if their contract was validly determined:

Now in this case the contract is one for the execution of specified works on the site during a specified period which is still running. The contract confers on each party specified rights on specified events to determine the employment of the contractor under the contract. In those circumstances, I think that there must be at least an implied negative obligation of the borough not to revoke any licence (otherwise than in accordance with the contract) while the period is still running ...

5.28 If I might digress for a moment, perhaps the late service of notices to reinstate is not always in the landlord’s interests after all? Imagine a situation akin to that in Ibrend Estates BV v. NYK Logistics (UK) Ltd., where the lease had a break clause which was not conditional on compliance with the covenants relating to decoration and repair, but was conditional on giving

64 up vacant possession. The tenant wished to avoid a claim for terminal dilapidations, and asked

for permission to stay in the premises to complete the works after the term date. When the landlord did not reply, the tenant decided to stay on and complete the works, thereby failing to

65 deliver up vacant possession. Rimer LJ told it the way it is:

[46] ... I have some sympathy for NYK, but not a lot. The terms of its own proposal show that it knew that, in order not to prejudice the operation of the break option, it needed to obtain Ibrend’s agreement to what it wanted to do. It ought also to have known that, when that agreement was not forthcoming by 3 April, its only safe course was to move everyone out of the warehouse on Friday, including its security guard; to have e–mailed Ibrend’s agent on that day to explain that that was what it was doing and that it would the same day deliver the keys to the agent. It could then have contacted Ibrend on Monday 6 April and asked it whether it would permit it to return to the warehouse as its licensee in order to complete the outstanding works.

62 63 Verrall v. Great Yarmouth Borough Council [1981] QB 202 (CA), for example. At page 247. See also page 252, where there is a list of examples of situations in which this problem might arise. This case has had mixed reviews in subsequent cases, such as Wiltshire Construction (South) Ltd. v. Parkers Developments Ltd. (1997) 13 Const. LJ 129 (HH Judge Havery QC, Official

64 Referee), but the criticisms are directed to points other than the one we are considering here. 65 [2011] 2 P&CR 9; [2011] 3 EGLR 1 (CA). The tenant must have thought that he can check out any time he likes; but he can never leave. -25- Now, maybe a very different answer might have been forthcoming if Ibrend had served a late (or late-ish) notice requiring reinstatement of alterations. Particularly, imagine the attitude of the Court if came to the conclusion that the landlord had, perhaps, served the notice deliberately late in order to try and set the tenant an Ibrend Estates trap. In such a case, the Court might decide the tenant should have all the time in the world he needs to finish off the works, without his occupation breaching the obligation to give up vacant possession.

5.29 There is much to be said for this implied licence theory and I have said much: but coming back to the three problems with the SMA analysis, the issue I find the most troubling is whether the tenant has to pay the landlord for the right to occupy the premises after the term ends. The Judge in SMA evidently thought the tenant could stay in rent-free, and that the landlord’s loss of rent claim would be reduced if the tenant chose to do some or all of the dilapidations whilst he was about it. But, why should it be taken as almost axiomatic that the tenant stay for free?

5.30 Say the tenant in my earlier hypothetical situation asked the landlord if he could stay on for three months after the termination date in order to finish off the works of repair, but there were no works of reinstatement to add to do. If the landlord said, yes, but insisted on being paid one quarter’s rent, we would not think that automatically unfair. If the tenant had done the work earlier he would not need to stay on, and the landlord would have the premises ready to re-let on the due date. You might say that this is the distinguishing point, because the landlord could have given the tenant notice sufficiently early to give the tenant opportunity to get the work done before the term day.

5.31 But is that really fair on the landlord? The right to undertake alterations is, almost always, a privilege conferred upon the tenant, because the lease will usually prohibit the tenant from altering the premises without the landlord’s consent. Even if consent is not to be unreasonably withheld, it does not seem to be unfair for the landlord to insist that he be paid additional rent if the tenant elects to stay on in occupation at the end of the term to undertake works of reinstatement. Certainly, the landlord may have served the notice late, but:

-26- 5.31.1 first, the tenant could have declined to agree to a provision in the original licence which permitted the landlord to serve a notice too close to the end of the term for the tenant to have done the necessaries before the term ends. The Encyclopaedia of Forms and Precedents has a model licence which requires the tenant to ask the landlord if he

66 requires reinstatement six months before the end of the term.

5.31.2 Secondly, the tenant has enjoyed beneficial occupation of the premises for longer, because it has not had to start the reinstatement works four months before the end of the term. This does not seem an unreasonable implication from the grant of the privilege of being allowed to undertake the original alterations.

5.31.3 Thirdly, perhaps the tenant does not have to lie back supine and wait for the landlord to serve the notice. Perhaps the tenant can, as a matter of law, force the landlord to serve

67 the notice in good time. This is a big point which I will need to come back to.

5.32 Leaving aside the idea, for the moment, that the tenant can force the landlord’s hand, the implied licence theory is, in some respects, potentially unfair on the tenant as well. The tenant ought to be entitled to know where he stands in respect of the alterations, and ought to be able to plan the costs of vacating the premises, without having to get a late demand for reinstatement. It might be a serious cost to the tenant, as well: he might have planned, or even undertaken, a fully comprehensive schedule of repair work, thereby being put to very significant cost by the landlord’s late service of a demand for reinstatement. On top of any such costs as might be thrown away, the tenant now has the risk of another three months liability for rates, even if the proper analysis is that he can occupy rent-free: by no means a forgone conclusion, for the reasons I have just given.

5.33 Do these aspect of unfairness and the lingering uncertainty as to whether the implied licence should be at no cost to the tenant support the view that the better answer is that the landlord has an implied duty to serve any such notice requiring reinstatement in good time?

66 th 67 5 edition, 2010 re-issue, Volume 22(3)A, Form 50, clause [1124]. See paragraphs 5.41 et seq, below.

-27- If I could turn back time - must the landlord serve a reinstatement notice in good time? 5.34 That leads me to the alternative analysis, which is not supported by the SMA case, or any other authority for that matter. Is it an implied term that the landlord can only serve a notice demanding reinstatement a reasonable time before the end of the term, thereby giving the tenant sufficient time to get the works done?

5.35 On one view, this is a tempting solution. The tenant is now protected from the potential adverse financial consequences of the landlord serving a notice so late the tenant either cannot comply or needs to overstay the end of the term. It also gets rid of all of the hideously complicated questions surrounding whether the tenant has to pay something for his occupation, if he stays on too long. That objective, reasonable man might immediately favour this solution on the basis that it is simple to express, easy to understand and so forms the obvious solution. What’s not to like?

5.36 Yes, but; no but: the thing about the reasonable man is that, because the test for the implication of a term is a cumulative series of shades on a continuous spectrum, he is also that irritating Officious Bystander. If the Officious Bystander were to say to the hypothetical landlord and tenant, busy negotiating their licence, “if the landlord does not serve the notice in time for the tenant to actually do the work, he loses the right to call for reinstatement, does he not?” I

68 suspect that they would not both “testily suppress him with a common ‘Of Course’”. The

landlord would have two separate, if connected reasons for having a different view:

5.36.1 First, he might not know, or have any way of knowing precisely what the tenant had done. He may have the plans and maybe some specifications of things which the tenant was proposing to do, but he might not have a detailed method statement. He also might not know whether the tenant - for perfectly good reasons - might have implemented the works in a different way from the proposed specification. Why should he then bear the risk of serving the notice too late?

68 Being the Shirlaw v. Southern Foundries test: see paragraph 5.10 above.

-28- 5.36.2 Secondly, the landlord might perfectly reasonably point out that he was conferring a benefit on the tenant by allowing him to make alterations, in return for which he wanted to have the right to require reinstatement at the end of the term. Why, then, should the landlord bear the risk of having to work out when to serve the notice, perhaps where he does not have any cheap and quick way to estimate how long the reinstatement work should take? Why should he pay for this estimate? He would also not be unreasonable in saying that the consequences to him of getting it wrong are disproportionate.

5.37 There is a further reason to reject this suggestion, at least on some precedents for licences. If the tenant’s obligation is to reinstate at the end of the term, then the landlord can never give enough time. The tenant does not have to start the works until the last day. As we have seen,

69 an implied term cannot contradict an express term.

Choosing between two implied terms - I want it all or nothing at all? 5.38 The above analysis leaves me with a conclusion that some might find surprising: my answer is that there is no obligation on the landlord to serve the notice in good time and there is no implied licence for the tenant to stay on and do the works if the notice is late. If the notice is in time, the tenant can choose to start the work. If it is not, tough on the tenant. My reasons are a reflection of the law of implied terms, for better or worse:

5.38.1 The default position is that there are no implied terms. If the parties have not provided for an obviously foreseeable situation, the losses should lie as they fall. Stuff happens and now stuff has happened.

5.38.2 The two alternative implied terms considered above both have their difficulties. Neither of them are truly obviously the “necessary” implication; equally, neither of them are obviously wrong. If there is not one obvious implied term, then no term is to be implied. A contract, including its implied terms, can only have one meaning, no matter how much stuff happens.

69 Tamplin Steamship: see paragraph 5.11.3 above.

-29- 5.38.3 This might be unfair on the tenant, but the purpose of the law of implied terms is not concerned with making a contract more fair or reasonable. Stuff happens and here the tenant gets stuffed. Deal with it.

Can the tenant force the landlord to serve a notice in good time? 5.39 If it is the answer that the landlord has the right to serve a notice requiring reinstatement too late for the tenant to be able to do the work, and so create a breach, has the tenant any prophylactic tactics? Can the tenant go to the landlord and say, “please, please tell me now, is there something I should know?”

5.40 The relevant legal concept is making time of the essence. In our context, the analogy is where a rent review clause provides for the landlord to trigger the review by serving a notice, but he fails to do so. The tenant can choose to make time of the essence of this obligation, effectively forcing the landlord’s hand to serve the trigger notice or lose the right to implement the review

70 in hand. Neuberger LJ said this, in Lancecrest Ltd. v. Asiwaju:

[26] ... the day after the review date, the tenant can make time of the essence for the service of a trigger notice. Accordingly, while it might seem a commercially unrealistic solution to many people, and not what the parties to the lease envisaged, the tenant’s right to make time of the essence for the service of a trigger notice means that he need suffer very little delay ... By very promptly making time of the essence, he could, in practice, ensure that the trigger notice is served, say, one month, or even possibly two or three weeks, after the review date, failing which the landlord will have lost the right to review the rent.

Perhaps this concept might be applied to the service of a landlord’s notice to demand reinstatement?

5.41 One general limitation on a party’s ability to make time of the essence is that there must be a 71 time limit (express or implied) for the step in question. If a right is open-ended, time cannot be made of the essence. This is not a problem in the case of a landlord’s right to demand reinstatement. The notice has to be served before the term ends. Another general limitation is that a notice making time of the essence of another party’s right to choose to do something

70 71 [2005] 1 EGLR 40 (CA). For an example, see Barclay’s Bank plc v. Savile Estates Ltd. [2002] 2 EGLR 16 (CA).

-30- cannot be validly served too early. If there are procedural steps to be undertaken before the landlord’s right to serve the notice crystallises, the steps need to be taken before time can be

72 made of the essence. That is not a problem as such: the tenant needs to just be careful about

how early he serves his notice, so it cannot be said to have been served before the landlord should reasonably be put to an election.

5.42 Perhaps the real difficulty in making time of the essence is this: the reason that the law gives a party a right to serve a notice making time of the essence is to provide him with a remedy against inaction by the other party. Accordingly, a party cannot serve a notice making time of the essence for taking a step which it is open to the party himself to take. In Factory Holdings Group Ltd v. Leboff International Ltd., the tenant could not make time of the essence of the landlord’s right to apply to the President of the RICS for the appointment of an expert, because

73 the tenant himself could apply. In the context of covenants to reinstate, it might be said that

the tenant could always do the work necessary to reinstate anyway and that is his remedy

74 against inaction.

6. DAMAGES, COMPENSATION AND LOSS - MONEY FOR NOTHING? 6.1 As some of you who have heard me speak at the RICS Dilapidations Conferences in 2012 and 2013 might know, I have ranted - at not inconsiderable length - about the inappropriateness of applying the reasonable loss test as espoused in Ruxley Electronics & Construction Ltd. v. 75 Forsyth to claims for disrepair properly so-called. My central thesis is that the law of damages for disrepair is, and always has been, different to the general law of damages for breach of contract. However, damages for failing to reinstate alterations have never fallen into any special 76 category: Ruxley rebooted, perhaps?

72 73 Northern and Midland Holdings Ltd v. Magnet Ltd. [2004] EW HC 120 (Ch); [2004] NPC 7 (Mann J). 74 [1987] 1 EGLR 135 (W arner J). 75 That is a tough one to call: what if the tenant need consent for alterations in order to reinstate? 76 [1996] AC 344 (HL). Obviously, that is not all I have to say: fool if you think it’s over in one paragraph.

-31- The basic measure - everyone seeks damages and everyone agrees... 6.2 Let us see if we can get some clarity by starting with the basic rule, on which almost all

77 calculations of damages for breach of contract apply. This basic rule is beguiling in its

78 simplicity - see Parke B in Robinson v. Harman:

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed.

In order to give effect to that rule the Court must ascertain, as accurately as it can, which way of calculating the damages will most accurately compensates the wronged party for its loss. This is how Viscount Haldane LC explained it, in British Westinghouse Electric and Manufacturing Co.

79 Ltd. v. Underground Electric Railways Co. of London Ltd.:

The quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in dealing with particular cases. ... Subject to these observations I think that there are certain broad principles which are quite well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. ...

6.3 It is all very easy to say that the purpose of an award in damages is to put the injured party in as good a position as he would have been in, had the bargain he made been performed, but the critical problem is identifying the proper amount of the loss.

77 I say almost all as the law of contract damages would appear to be evolving towards a recognition of restitutionary basis for damages for breach of some forms of contract: see Attorney-General v. Blake [2001] 1 AC 268 (HL), a case about an ex-spy who broke his contractual obligations not to publish a memoir of his time on Her Majesty’s secret service- especially after he had defected and was back in the USSR. Restitutionary damages attach to the sum the contract breaker has made by his breach, not what the injured party has lost, so the spy and his publishers had to disgorge all their profits: as is often the

78 case, only diamonds are forever. 79 (1848) 1 Exch. 850, 855; (1848) 154 ER 363, 365 (Court of Exchequer). [1912] AC 673, 688-689 (HL). This case concerned a mercantile contract, not one relating to real estate: the supply of steam turbines used to produce electricity for the downbound trains of the London Underground. -32- On an island, but in disrepair 6.4 The Courts have not had to consider this issue in the context of reinstatement very often; on one occasion, however, the Court really went to town on it producing one of the longest judgments ever: 241 pages, read out for four days. That case is Tito v. Waddell (Nº.2), and concerned the

80 devastation of Ocean Island, a small island in the Pacific, by the mining of phosphate. By

leases granted between 1902 and 1913, a mining company was granted extensive rights to mine phosphate, subject to various obligations to undertake significant restoration works, including

81 replanting:

Whenever the said land shall whether before or at the end of the said term cease to be used by the company for the exercise of the rights hereby granted the company shall replant the said land as nearly as possible to the extent to which it was planted at the date of the commencement of the company’s operations ... with such indigenous trees and shrubs or either of them as shall be prescribed by the Resident Commissioner for the time being ...

In 1942, Ocean Island was occupied by the Imperial Japanese Army, who deported the inhabitants of the Island, the Banabans, to other islands. When Ocean Island was recovered from the Japanese, it had been devastated and was uninhabitable. Mining recommenced and continued until 1971, when the Banabans brought their claim for specific performance of reinstatement and replanting covenants. The Commissioners (as successors to the mining lease) declined: the work would be hugely expensive, as soil would have to shipped from Australia and would be pointless, as the Banabans would not be returning home.

6.5 Before turning to the judgment on damages, it might be salutary to note this comment made by Megarry V-C, almost in passing, when he was setting out the background to the case about the

82 standard to which the reinstatement should be undertaken:

... in recent years some emphasis has been placed by some of the Banabans on modern ideas of rehabilitation and reinstatement being desirable and even obligatory on environmental grounds. I can

80 [1977] 1 Ch 106-347 (Megarry V-C). Ocean Island lies just south of the equator in the W estern Pacific, about 170° west of Oxford and roughly half-way between the Hawaiian Islands and the coast of Australia. Take the road to nowhere, turn left and just keep going... In passing, a beautiful elegy to life on Ocean th Island and the other islands in the same group in the early years of the 20 Century is A Pattern of Islands by Arthur Grimble, still in print and available through Auntie Amazon. A life-affirming book and

81 reading it is good for your soul. 82 The clause is set out at page 273 of the judgment. I have very much simplified the facts. At page 281.

-33- indeed follow this as a general concept: but in deciding legal liability it is plainly impossible to take a bargain struck on a basis of no reinstatement but limited replanting and then say that because environmental ideas are changing for the better, the legal burdens accepted by one party to the bargain ought to be correspondingly increased. However potent such arguments may be in political or social fields, they cannot affect the law of contract.

Accordingly, Megarry V-C had to consider at some length what “replanting” meant by the standards of 1902-1913 when the leases were granted, not by the standards of 1976, when he was hearing the case.

6.6 Megarry V-C decided that specific performance of the covenant was the appropriate remedy in principle, but exercised his discretion not to make such an order. That led him to consider damages. He synthesised the existing case law into a five-point summary, which I have yet

83 further condensed:

6.6.1 It is fundamental to all questions of damages that damages are compensatory. An award of damages should put the wronged party, as nearly as possible, in the same position as he would have been in had he not suffered the wrong. One disregards any benefit to the defendant which flows from his failure to perform his bargain.

6.6.2 If the claimant has suffered monetary loss, as by a reduction in the value of his property by reason of the breach of contract, that is plainly a loss that he is entitled to be recouped. In other words, the primary measure is diminution on value, not cost of cure.

84 6.6.3 The “essential question [is] what is his loss”. If the claimant can establish that his loss

consists of, or includes, the cost of doing the work himself which the defendant has failed to do, then prima facie the claimant can recover damages equivalent to the cost of cure. This will usually displace the primary measure: if the work is done, or will be done, there should be no loss of capital value.

83 84 Pages 332-5. Page 332.

-34- 6.6.4 If the claimant fails to establish that he will do the works that the defendant has failed to do, then damages for the diminution in the value of his land, but not for the cost of doing

85 the work is probably the most appropriate remedy:

... if the plaintiff has suffered little or no monetary loss in the reduction of value of his land, and he has no intention of applying any damages towards carrying out the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done. It would be a mere pretence to say that this cost was a loss and so should be recoverable as damages.

6.6.5 If the claimant has not done the work, the Court “ought to be ready to act on evidence which, without assuring certainty, nevertheless carries conviction” that the work will be

86 done.

6.7 On the facts, Megarry V-C found that the Banabans had not established the necessary intention to carry out the works. He concluded that the correct method of assessing damages was, therefore, prima facie, based upon the diminution in the value of their Island.

6.8 Time has not been kind to the judgment in Tito v. Waddell (Nº.2). There are more than a few critical cases. But it actually remains the most recent reported decision on damages for a tenant’s failure to reinstate alterations in English law. (There has been a case or two in

87 Australia, apparently but ...) One of the issues that has proved very problematic for the

civilized courts in this jurisdiction has been that difficult question of subjectivity. To what extent is it, or should it be the case that the claimant’s intentions to undertake the work are relevant?

88 See, for example, Arden LJ in Latimer v. Carey:

[24] Although courts are not normally concerned with what a claimant does with his damages, a landlord’s conduct in taking steps or not taking steps to remedy a breach of the covenant to repair may throw light on the question whether the repairs are reasonably necessary, and thus on the question whether there was any diminution in value of the reversion as a result of the disrepair.

85 86 At page 332. 87 Page 334. Bowen Investments Pty Ltd. v. Tabcorp Holdings Ltd. [2008] FCAFC 38 and Meriton Apartments Pty Ltd.

88 v. Industrial Court of New South Wales [2008] FCAFC 172. So? [2007] 1 P&CR 13 (CA). See also Crewe Services & Investment Corporation v. Silk [1998] 2 EGLR 1 (CA), per Robert W alker LJ. -35- 6.9 However, the initial reaction to Tito v. Waddell was favourable, with Oliver J applying the principles by which damages were to be awarded to a case about a failure to build in accordance with a contract so to do. This is important for our later analysis: if the principles applicable to reinstatement apply to building contracts, then the reverse ought to be true. I will come back to

89 that, but Oliver J’s decision in Radford v. de Froberville is interesting for another reason.

Brigadier Radford sold part of the garden of his house to the defendant, with a covenant to build a wall separating the two plots. When Mrs. de Froberville failed to do so, Oliver J had to decide if the true measure of damages was the cost of erecting the wall, or the loss of the capital value to the retained land. He had little hesitation in awarding the cost of cure, but the interesting point

90 is this:

If, for instance, the plaintiff is suing for damages for failure by a contractor to carry out for him an eccentric scheme of interior decoration, measured by the increased cost of having the work done by another contractor, [Counsel for Mrs. de Froberville] does not suggest for a moment that it is any answer to say that such a scheme would not increase the value of the dwelling-house, so that the damages must be nominal, although I think that he would concede (and indeed assert) that it would be an answer if it was proved at the trial that the plaintiff had sold the house without having the work carried out. ... I can readily see that there may be cases in which, either because the plaintiff cannot mitigate by carrying out comparable work on his own land or because the court is satisfied that he has no intention of doing so, diminution in value is the only appropriate measure.

What if the contract that has been breached is to do something bonkers? Or, perhaps, something which might be bonkers when the case comes before the court, but was a perfectly sane thing when the agreement was entered into?

6.10 The same point was flirted with by Kerr LJ, in Dean v. Ainley, a case in which the Court of

91 Appeal approved the decision in Radford v. de Froberville. Dean’s case concerned breach of

a contract to “tank” the basement of a residential house, for use as a miniature rifle-range. As

92 you do. The cost of cure measure was adopted, but Kerr LJ made this observation:

There had been evidence that the plaintiff had intended to use the cellar as a miniature rifle range or as a games room, and the judge appears to have concluded that this measure of relief from dampness, puddles or worse would still not have enabled the cellar to be suitable for any such

89 90 [1977] 1 W LR 1262 (Oliver J). At page 1273. I have simplified the facts somewhat: the submission was actually made by Counsel for

91 a third party, Miss. Lange, who had indemnified Mrs. de Froberville. 92 [1987] 1 W LR 1729 (CA). At 1736. -36- purpose. But that does not entail the conclusion that the plaintiff is only entitled to nominal damages on the ground that he has effectively suffered no damage at all. Performance of the contractual obligation to render the terrace watertight by sealing it off from the cellar would have made the cellar substantially less wet or damp, and to that extent a better and more usable space than if water continued to percolate from the terrace vertically as well as from the surrounding earth laterally. The position might well have been different if the defendant had shown that performance of the contractual obligation would have served no purpose at all, because the cellar would have been unusable for any purpose at any time in any event.

My emphasis. This passage suggests that works which will provide the claimant with no objective benefit at all will give rise to only nominal damages, which sounds right, but it leaves aside that interesting issue about eccentric uses, which the Court did not have to resolve.

They want to make me go to Ruxley, but I said “no, no, no”: 6.11 That leads us neatly to the infamous decision in Ruxley Electronics & Construction Ltd. v.

93 Forsyth. As you will recall, Ruxley Electronics & Construction contracted to build a swimming

pool in Mr. Forsyth’s garden. The parties agreed that the pool should have a diving area 7' 6"

94 deep. In error, the completed diving area was only 6' deep. However, there was no adverse

effect on the value of the house, garden and swimming pool. The total cost of building the pool itself was £38,564.77. The estimated cost of rebuilding the pool to the specified depth was £21,560.00: 56% of the initial cost. When Mr. Forsyth refused to pay the remainder of the bill

95 for the pool, Ruxley sued him for the outstanding £9,113.38.

93 94 [1996] AC 344 (HL). The pool actually descended to a depth of 6'9", but this was only at a point so close to the edge of the pool, that it still could not be dived into. You could jump into this bit, if you fancy a bit of “bombing”: see Lord Lloyd at 362-3. . Indeed, on this point, the whole case is a bit of a mystery, as no-one challenged the findings of good old HH Judge Diamond QC, the trial Judge: “the pool as constructed is perfectly safe to dive into. A depth of 6 feet is adequate even for a beginner and there is an adequate area of 6 feet depth extending about 7 feet out from the deep end wall. The I.B.R.M. (Institute of Baths and Recreational Management) handbook states that diving should not be permitted into water with a vertical depth of less than 5 feet. There was, of course, a greater depth of water than this for quite a reasonable part of the deep end of the pool.” See [1994] 1 W LR 650, 653 where Staughton LJ states the facts by

95 reading from the trial judge’s judgment. I have simplified this a little: there was a separate contract with another company, Laddingford Enclosures Ltd, for an enclosure around the pool. Mr. Forsyth refused to pay Laddingford another £24,917.37 because it was owned by the same man who also owned Ruxley. On a global view, Mr. Forsyth was withholding payment of £34,030.75 by reason of an error in a contract worth £38,564.77 which would cost only £21,560.00 to fix. How would the case have ended if he had not tried withholding 88% of the total contract sum, or to put it another way, 158% of his actual losses? W ould that have changed the Courts’ views on “reasonableness”? W ho knows?

-37- 6.12 The House of Lords held that the primary measure of the loss is dependent upon what an objectively reasonable person in the position of the claimant might do. If that reasonable man would make good the works, the damages are to be the cost of that making good, no matter whether the actual claimant would undertake the works, and vice versa. The three reasoned

96 speeches were given by Lord Jauncey, Lord Lloyd and Lord Mustill. Lord Jauncey said:

Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate. A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure.

6.13 There is, however, a subjective twist: the actual intentions (or actions) of the actual owner can be taken into account in deciding what the hypothetical reasonable man might do. Lord Jauncey

97 again:

What constitutes the aggrieved party’s loss is in every case a question of fact and degree. Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective. Thus if a building is constructed so defectively that it is of no use for its designed purpose the owner may have little difficulty in establishing that his loss is the necessary cost of reconstructing. Furthermore in taking reasonableness into account in determining the extent of loss it is reasonableness in relation to the particular contract and not at large. ...

... I should emphasise that in the normal case the court has no concern with the use to which a plaintiff puts an award of damages for a loss which has been established. Thus irreparable damage to an article as a result of a breach of contract will entitle the owner to recover the value of the article irrespective of whether he intends to replace it with a similar one or to spend the money on something else. Intention, or lack of it, to reinstate can have relevance only to reasonableness and hence to the extent of the loss which has been sustained. Once that loss has been established intention as to the subsequent use of the damages ceases to be relevant.

98 Lord Lloyd agreed, adding this:

If the court takes the view that it would be unreasonable for the plaintiff to insist on reinstatement, as where, for example, the expense of the work involved would be out of all proportion to the benefit to be obtained, then the plaintiff will be confined to the difference in value.

96 97 At 357. 98 At pages 358-9 Page 369. See also Lord Mustill at page 361.

-38- Accordingly, the damages were limited to the diminution in the value plus loss of amenity, irrespective of whether Mr. Forsyth intended to carry out the works himself.

6.14 For the reasons I have not got time to explore here, it is my view that the decision in Joyner v. Weeks means that the legal principles by which damages for breach of a tenant’s repairing

99 covenant are to be quantified is unique, and is not subject to the general law of damages. Not

so damages for failure to reinstate alterations. The law as stated in Ruxley almost certainly does apply to quantifying damages for reinstatement.

6.15 Although we do not have a case on reinstatement in the landlord and tenant context, we do now have a post-Ruxley case which a very helpful analogy. In Scutt v. Lomax, the defendant trespassed onto the claimant’s land and uprooted a number of relatively mature trees. The claimants’ claim was advanced, not on the basis of a diminution of value of the land (which was

100 no doubt minimal) but on the basis of the cost of reinstatement. The Court of Appeal held this

was the correct measure, with Clarke LJ saying:

1. The claimant will ordinarily be entitled to the diminution in value of the property unless the reasonable claimant would have reinstated the land at less cost.

2. The claimant who has in fact reinstated the property will ordinarily be entitled to recover the reasonable cost of doing so, even if the cost is greater than the diminution in value, unless he has acted unreasonably in reinstating the property.

3. Where the claimant has not in fact yet reinstated the property, (subject to 4 and 5 below) he will ordinarily be entitled to recover the reasonable cost of reasonable reinstatement, even if it is greater than the diminution in value.

4. In assessing what is the reasonable cost of reasonable reinstatement, the court will consider whether the amount awarded is objectively fair; that is fair to both parties. In particular, the court will not award a sum which is out of proportion to the benefit conferred on the claimant.

5. In assessing what steps it is reasonable to take by way of reinstatement, the court will take account of the cost of the reinstatement. Thus it may not be reasonable fully to reinstate the property because the cost of doing so may not be justified. All will depend on the circumstances of the particular case.

99 [1891] 2 QB 31 (CA), 100 th Unreported, 20 January 2000 (CA). The case was, however discussed and quoted from in Southampton Container Terminals Ltd. v. Hansa Schiffahrts GmbH (The MV “Maersk Colombo”) [2001] 2 Lloyd’s Rep. 275 (CA).

-39- Clarke LJ went onto apply this (and Ruxley) to the case of Southampton Container Terminals Ltd. v. Hansa Schiffahrts GmbH (The MV “Maersk Colombo”). The defendant’s container-ship -a tad negligently- rammed and destroyed a dockside harbour crane. The claimant had already ordered a new, better crane before the accident happened. It claimed the cost of a replacement crane (cost of cure), but not surprisingly was awarded the second-hand value of the destroyed

101 crane (diminution in value).

What if our house, in the middle of our street, is an objective embarrassment? 6.16 Perhaps you call it madness, but I still have a problem with Ruxley. It is the point touched on by Kerr LJ in the miniature rifle-range case of Dean v. Ainley: what if the contract is for something just daft? In Ruxley, Lord Bridge had contrasted two hypothetical situations:

6.16.1 A man contracts for the building of a house and specifies that one of the lower courses of brick should be blue. The builder uses yellow brick instead. In all other respects the house conforms to the contractual specification. To replace the yellow bricks with blue would involve extensive demolition and reconstruction at a very large cost. This might be called a “blue bricks” case: one where it would clearly be unreasonable to award to the employer/owner the cost of reconstructing because his loss was not the necessary cost of reconstruction of his house, which was entirely adequate for its design purpose, but merely the lack of aesthetic pleasure which he might have derived from the sight of blue bricks.

6.16.2 By contrast, another man contracts for the construction of a grotesque garden folly, which is the central focus of the contract. If it was built so badly that it collapsed, it would do the employer/owner a favour, as its presence in the garden would be diminishing the value of the property as a whole. Surely, however, there is something inherently wrong in saying to the employer/owner there that builder’s failure to build in accordance with

101 See also Sealace Shipping Co.Ltd. v. Oceanvoice Ltd. (The MV “Alecos M”) [1991] 1 Lloyd’s Rep. 120 (CA). A shipbuilder failed to supply a spare propeller which, on the evidence, the ship would probably never need. The owner sought damages based on making and supplying a new propeller (cost of cure), but had to make do with the scrap value of the metal (diminution in value).

-40- the contract has been an objective benefit to him. If someone wants the performance of a contract to leave them inevitably worst off, it feels wrong to say the contract-breaker has done them a favour. The law should be about the enforcement of bargains, as well as being about compensating objectively assessed losses.

6.17 By only discussing the question by references to blue bricks and garden follies, the House of Lords ducked the issue. A house with yellow brick not blue bricks is still a perfectly reasonable house, so the real aim of the contract has been delivered. If the real aim of the contract was a

102 garden folly, the contract does not deliver if the folly falls flat - literally. Lord Jauncey:

To replace the yellow bricks with blue would involve extensive demolition and reconstruction at a very large cost. It would clearly be unreasonable to award to the owner the cost of reconstructing because his loss was not the necessary cost of reconstruction of his house, which was entirely adequate for its design purpose, but merely the lack of aesthetic pleasure which he might have derived from the sight of blue bricks...... What constitutes the aggrieved party's loss is in every case a question of fact and degree. Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective. Thus if a building is constructed so defectively that it is of no use for its designed purpose the owner may have little difficulty in establishing that his loss is the necessary cost of reconstructing. Furthermore in taking reasonableness into account in determining the extent of loss it is reasonableness in relation to the particular contract and not at large. Accordingly if I contracted for the erection of a folly in my garden which shortly thereafter suffered a total collapse it would be irrelevant to the determination of my loss to argue that the erection of such a folly which contributed nothing to the value of my house was a crazy thing to do.

My emphasis. Judged from the landlord’s perspective, surely “the contractual objective” of a licence for alterations is nothing less that the right to them taken away by the end of the term, if he so desires? Reasonableness “in relation to the particular contract” might be said to be giving the landlord the quid pro quo he bargained for, when he permitted that which would otherwise have been a breach of his property rights. Therefore, why should a tenant who “has entirely failed to achieve the contractual objective” not have to pay, as damages, “the loss” which is “is the necessary cost of achieving that objective”?

103 6.18 Perhaps there is support for that in Lord Lloyd’s speech, when he said:

102 103 Page 358. Page 371.

-41- The eccentric landowner is entitled to his whim, provided the cost of reinstatement is not unreasonable. But the difficulty of that line of argument in the present case is that the judge, as is clear from his judgment, took Mr. Forsyth’s personal preferences and predilections into account. Nevertheless, he found as a fact that the cost of reinstatement was unreasonable in the circumstances. The Court of Appeal ought not to have disturbed that finding.

This is difficult, because the first sentence does not specify by what the reasonableness of the cost is to be measured. The rest of the quotation appears to be contrasting the cost of repair with the objective test of whether it is reasonable to do the work. I suspect Lord Lloyd is really saying that the Court can always impose its view on the reasonableness of a claim for damages, even if the contract is for a garden folly.

6.19 Should this ever get litigated, I suspect that Lord Lloyd’s approach will prevail. In fact, it may be that the Courts have, actually, been applying Lord Lloyd’s approach for years without knowing it. If we go back to the 1947 forfeiture case of Eyre v. Rea, the landlord had forfeited for breach of a covenant not to alter, as the tenant had converted the premises from a single-occupancy

104 dwelling to five flats. The evidence was that the premises were more valuable as five flats

than as a single dwelling, but that the landlord wanted to retain the premises as one house for estate management purposes. Atkinson J held that his damages for breach of covenant were to be the cost of reinstatement, plus loss of rent, notwithstanding that this was significantly

105 higher than the diminution in value:

Section 18 is limited to damages for a breach of covenant to repair. The cases cited to me also dealt merely with covenants to repair. It seems to me that I cannot extend that principle to a breach of a covenant of this sort and say to the plaintiffs: “Despite that covenant and although you let and are entitled to receive back an unconverted house, that is, a house suitable for single occupation, because you have got something which you may be able to let at a higher rent than the house which you are entitled to have back, you have suffered no damage.” ... I think that what [the plaintiffs] are entitled to is the cost of restoring this house to the condition in which they were entitled to have it returned to them, namely, an unconverted house. ... The evidence is that it will take two to two and a half months to do the work, during which no rent can be earned, and the damage for that will be another £50...

That was “a garden folly” case.

104 [1947] 1 KB 567 (Atkinson J). 105 Pages 570-1.

-42- 106 6.20 By contrast, an example of a “blue bricks” case is James v. Hutton & J.Cook & Sons Ltd. That

case was concerned with damages for failure to reinstate alterations: the tenant had failed to remove a shop façade he had been permitted to instal. Unlike the Eyre case, the evidence was that the landlord was not going to remove the alterations and there was no good reason to do

107 so. Lord Goddard CJ said:

What, then, is the measure of damage applicable to the breach of a covenant to restore on request when the only is that there has been no compliance with that request? In our opinion, the general rule as to damages for breach of contract ought to be applied, namely, to ascertain what is the amount of the damage actually suffered. A covenant is only a special form of contract and the same rules apply to a breach of covenant as apply to a breach of a simple contract so far as damages are concerned. ... We see no ground here for assuming that the plaintiff in this case has suffered any damage at all. She has got back a shop, or would have done, if the premises had not been requisitioned, provided with a modern and convenient front, and there was no suggestion that the work had not been carried out properly. We do not for one moment suggest that it might not be possible for a lessor in circumstances such as these to give evidence that she or her superior landlords at the end of the term desired to carry on or to let the premises for the purpose of carrying on a business for which the altered shop front would be inappropriate and the old one suitable. In that case she might well say that it is of value to her to have her shop back in its former condition and she would suffer damage, if the lessee’s covenant to restore was not carried out, but if it is a mere matter of getting back a shop which has been altered and there is no suggestion that any damage whatever has been caused to the plaintiff thereby, it appears to us that she has suffered no damage by reason of the defendants’ failure to comply with her requirements to reinstate. In our opinion, therefore, she cannot be entitled to any more than nominal damage, which we should assess at twenty shillings, by reason of this breach of covenant.

That was a “blue bricks” case.

6.21 The landlord’s actual intention itself cannot be directly relevant to the question of damages, for the reasons explored above in the context of Ruxley. However, the actual intention of the wronged party may be evidence of whether or not the cost of works is proportionate or not. If the landlord’s perception of his own best interests demonstrate that he will not actually reinstate, that has some evidential value in assessing the reasonableness of assessing damages on the cost of works basis. Paradoxically, therefore, the intentions of the wronged party are more relevant when they decide it is commercially sensible to live with a breach (as in James), then when they decide to insist on their contractual rights, even though that may not be commercially

106 [1950] 1 KB 9 (CA). 107 At page 17. The judgment was of the Court: Lord Goddard CJ, Tucker and Singleton LJJ.

-43- sensible (as in Eyre). It is only if we get a case in this brave, post-Ruxley world that we may find out.

7. CONCLUSION - TAKE THE MONEY AND RUN: 7.1 In some ways, I feel that this paper has been an investigation into something which is not, in practical terms, a problem. I hope you will agree that maybe some day we will find it has not all been wasted time, because one or two of the arguments considered here might have demonstrated there are loopholes to be exploited - if there is ever a case which is worth enough money.

7.2 One last idea, before I finish. Where a landlord is asked for consent for alterations, he commonly asks for all sorts of warranties and indemnities in relation to the construction work, to ensure that he has no liabilities arising from the carrying out of the alterations in the first place. Hardly ever do you see a contractual indemnity against the cost of reinstating the alterations at the end of the term. Nor do you see a provision by which the tenant agrees with the landlord that, if the tenant fails to reinstate the works, the landlord may undertake the reinstatement works himself, and recover the costs thereof from the tenant as a debt. Conceptually, there seems to be nothing wrong with that, as we can see from the case of Jervis v. Harris, although that case was of course concerned the landlord’s ability to recover the costs of his performance

108 of the tenant’s repairing covenant during the term. But, why not?

7.3 Perhaps the answer to why such clauses are not common is that the landlord prefers to not have to do the work first and then recover it as a debt: he might prefer to just take the money and run. But it would neatly side-step the problems I have discussed at such length above.

7.4 Of course, we also know from Jervis v. Harris that an obligation whereby the tenant agrees to pay to the landlord, as a debt, the sums actually expended by the landlord in carrying out works of repair, section 18 does not apply to that obligation. It would be difficult to apply Ruxley as

108 [1996] Ch 195 (CA).

-44- well: that is a case concerned only with damages for breach of covenant, not at all with obligations to pay a debt. Now, there’s a thought ...

NIC TAGGART

! th 13 March 2014 © N Taggart, 13.iii.2014

This seminar paper is made available for educational purposes only. The views expressed in it are those of the author and are expressed to in a way to promote debate and merriment. The contents of this paper do not constitute legal advice and should not be relied on as such advice. The author and Landmark L Chambers accept no responsibility for the accuracy or continuing accuracy of the contents.

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