Rent review — Assumption that tenant’s repairing obligations performed — Building in poor structural repair with limited commercial life — Whether at review limited tenant’s obligations related to commercial life of building could be assumed in performance of repairing covenant
By a lease
dated September 1970 the appellant tenant held a 99-year term of hotel premises
subject to provisions for rent review. It was common ground that at review it
was to be assumed that the tenant had complied, inter alia, with its
covenant to repair up to and including the rent review date. In the course of
the rent review for June 24 1991, evidence was given that one of the buildings
which had been badly constructed, a tower, required extensive works estimated
to cost £500,000 to adequately remedy serious defects (‘Pyle 1 works’).
Evidence was also given of an alternative schedule of repairs,
that the tower had a commercial life of 15 years (‘Pyle 2 works’). In his
award, the arbitrator determined that it was not open to the tenant to limit
remedial repairs to the Pyle 2 works and that it must be assumed for the
purposes of review that the tenant’s repairing covenant obliged the tenant to
carry out the Pyle 2 works. The tenant appealed the arbitrator’s award
contending that the arbitrator had erred in disregarding the fact that a
building may have a commercial life different from its structural life.
was not support in the decided authorities for the ‘commercial life’ concept in
construing, and therefore limiting, a tenant’s repairing obligations. The
concession on behalf of the tenant, that no account was to be taken of the
effect of the Leasehold Property (Repairs) Act 1938, was plainly right. The
decision of the Court of Appeal in Anstruther-Gough-Calthorpe v McOscar
[1924] 1 KB 716 firmly established the general proposition that the standard of
repair required by a repairing covenant is to be determined by the parties’s
expectation at the time the lease is granted: and to rely on a diminished
expectation of commercial life occurring in the course of the term runs counter
to that general proposition. The arbitrator was entitled to decline to take
into account the fact that the tower was very badly built because this fact was
unknown to the parties’ predecessors when the lease was granted in 1970.
The following
cases are referred to in this report.
Anstruther-Gough-Calthorpe v McOscar [1924] 1 KB 716, CA
Brew Bros
Ltd v Snax (Ross) Ltd [1970] 1 QB 612;
[1969] 3 WLR 657; [1970] 1 All ER 587; (1969) 20 P&CR 829; [1969] EGD 1012;
212 EG 281, CA
Credit
Suisse v Beegas Nominees Ltd [1994] 4 All ER
803; [1994] 1 EGLR 76; [1994] 11 EG 151 & 12 EG 189
Holding
& Management Ltd v Property Holding &
Investment Trust plc [1989] 1 WLR 1313; [1990] 1 All ER 938; (1989) 21 HLR
596; [1990] 1 EGLR 65; [1990] 05 EG 75, CA
McDougall v Easington District Council (1989) 87 LGR 527; 58 P&CR
201; [1989] 1 EGLR 93; [1989] 25 EG 104, CA
Plough
Investments Ltd v Manchester City Council [1989]
1 EGLR 244
Smedley v Chumley & Hawke Ltd (1981) 44 P&CR 50; [1982] 1
EGLR 47; [1982] EGD 473; 261 EG 775, CA
This was an
appeal under the Arbitration Act 1979 by the appellant tenant, Ladbroke Hotels
Ltd, from an interim award of an arbitrator, R D Pickard Esq FRICS, in a rent
review under a lease of hotel premises of which the respondents, Santokh Singh
Sandhu and Harbhajan Singh, were the landlords.
David
Neuberger QC (instructed by Titmuss Sainer Dechert) appeared for the appellant;
Kirk Reynolds QC (instructed by Watson Burton) represented the respondents.
Giving
judgment, WALKER J said: This is an appeal (by leave of Lightman J) from
part of am interim award signed by an arbitrator, Mr R D Pickard FRICS, on May
5 1994. The arbitration was on a rent review under a lease dated September 24
1970, for a term of 99 years, of motel premises now known as Chester Resort
Hotel, Backford Cross, Cheshire. Both the freehold reversion and the leasehold
interest have changed hands: the leasehold interest in particular has had an
eventful life, having been disclaimed in the liquidation of the last tenant,
Penguin Hotel Group plc: it has now been vested, by an order of the High Court,
in Ladbroke Hotels Ltd.
For simplicity
I shall refer to Ladbroke Hotels Ltd (the appellant in this appeal and the
successor to the respondent in the arbitration) as ‘the tenant’ and to the
freeholders Mr Santokh Singh Sandhu and Mr Harbhajan Singh (the respondents in
this appeal and the claimants in the arbitration) as ‘the landlords’.
The lease was
a tenant’s repairing lease. The terms of the tenant’s repairing covenant and
those of the rent review clause are set out in the interim award (paras 3 and
4) and I need not say more about them at this stage than that the repairing
covenant was in a simple form — it avoided what Hoffmann LJ has described as a
‘torrential’ style of drafting — and the rent review clause was also in a
fairly short form, typical of its period. The first review date was June 24
1991.
Para 6 of the
interim award records that on October 13 1993 the arbitrator directed that
there should be five preliminary issues, the first — and the only one in
respect of which Lightman J gave leave to appeal — being in these terms:
Which of the
items in the report of Brian Pyle Associates on the superstructure of the
Chester Resort Hotel, if any, are the liability of the [tenant] under the
lease, it being agreed that the premises should be valued on the assumption
that the items which are the liability of the [tenant] but no other items
should be treated as having been carried out.
This is
plainly not a preliminary issue of pure law: it is an issue of mixed fact and
law preliminary to the essential issue that the arbitrator must in due course
decide, that is what rent will be payable under the lease for the period of 21
years from June 24 1991.
The hearing of
the preliminary issues by the arbitrator (sitting with a legal assessor, Mr
Paul Morgan QC) occupied over three days and a good deal of oral evidence was
given. The arbitrator’s determination on the first issue is contained in paras
23.5 and 23.6 of the interim award. I will read those paragraphs, while
conscious that they — and indeed the first issue itself, as formulated by the
arbitrator — call for further explanation in order to be comprehensible.
Accordingly,
properly directing myself on the questions of lifespan, deterioration and
degree, it is my view that it was not open to the [tenant] prior to the rent
review date to limit the remedial work to the work shown in Pyle No 2 but,
rather, the repairing covenant obliged the [tenant] to carry out the work in
Pyle No 1.
Pyle No 1,
Appendix F contained alternative methods of treating the balconies. The landlords
did not contend that either method was the only possible method of repair.
Accordingly the [tenant was] free to choose which method of repair to adopt,
and for the purposes of the rent review it is to be assumed that the works, so
chosen, have been carried out.
The Pyle
reports
Brian Pyle
Associates are civil and structural engineers, and forensic engineers and were
instructed on behalf of the tenant. Mr Brian Pyle of that firm gave oral
evidence to the arbitrator on behalf of the tenant. The arbitrator accepted
that he was more experienced on engineering matters (including reinforced
concrete) than Mr Martin Catley FRICS, who gave evidence for the landlords (it
is fair to say that that was also readily accepted by Mr Catley).
Before giving
evidence Mr Pyle had prepared two written reports, the first dated April 14
1993. The second does not seem to be formally dated but it is common ground
that it was produced only shortly before the hearing. These are the reports
referred to as ‘Pyle no 1’ and ‘Pyle no 2’. The report referred to in the
formulation of the first issue was Pyle no 1, which was the only report from Mr
Pyle in existence when the preliminary issues were formulated.
Pyle no 1 and
Pyle no 2 are very different in their length and the fullness of their
supporting appendices and — what is much more important — in their approach,
recommendations and estimates of cost. I am conscious that this appeal is
strictly limited to questions of law and I do not wish to go into the facts
further than I must. But because of the way the matters proceeded before the
arbitrator, and because of the way that the first issue has been framed, it
seems to me unavoidable that I should go into the differences between Pyle no 1
and Pyle no 2 in some detail.
The motel was
built of reinforced concrete and consisted of three elements: a central podium
containing public rooms, a four-storey tower above part of the podium and
bedroom blocks of one or two storeys. Most of the evidence and argument centred
on the tower, which makes up about one-sixth of the total area of the motel.
Construction of the motel had begun in about 1965, but there had been an
interval of some years during which the frame was exposed to the weather before
the building was completed.
In Pyle no 1
Mr Pyle stated his view that the estimated life of the original structure, if
properly constructed, would have been at least 60
tower block was badly constructed to the point where there was a concern about
its stability. The adequacy of cover of the metal reinforcement by the concrete
was ‘woefully inadequate’. some columns needed to be demolished and recast.
Realkalisation (a specialised spray treatment to counteract the process of
carbonation) was recommended. The interim award summarises Pyle no 1, with
several direct quotations from it, and concludes (paras 11.18 and 11.19):
Appendix F to
Pyle No 1 contained budget repair costs. Scaffolding was costed at £45,000,
further testing at £20,000 and realkalisation at £80,000. The works identified
were costed at £400,000 to which was added a contingency of 25% bringing the
total to £500,000.
It should be
noted that although in paragraph 1.2 of Pyle No 1 the scope of the report was
to include advice on a suitable type, or range, of repair options, only one
option was in the event identified and recommended.
Pyle no 2, by
contrast, recommended works costed at just over £60,000. This startling
difference arose because Pyle no 2 provided for much less extensive repairs to
the concrete, no realisation and a much smaller outlay on scaffolding. These
much less extensive repairs were not, as Mr Pyle candidly accepted, going to be
sufficient to preserve the structure until the end of its expected lifespan of at
least 60 years. In para 3.8 of Pyle no 2 Mr Pyle said:
The schedule
of repairs proposed is a perfectly reasonable one to take, on the assumption
that the building has only a life expectation of no more than 15 years (ie
to 2009). I understand that this is the commercial view of the life of the
building
(Emphasis
supplied.)
The very wide
difference on estimated cost, as between Pyle no 1 and Pyle no 2, is therefore
directly attributable to the assumption, which Mr Pyle made on instructions,
that the appropriate repairs were those needed to see the building through the
last 15 years of its assumed commercial life. On this evidence the arbitrator
concluded (in para 23.5 of the interim award which I have already quoted) that
it was not open to the tenant to limit itself to the repairs in Pyle no 2 and
that the repairing covenant obliged the tenant to carry out the work in Pyle no
1.
Questions
of law on the appeal
The source of
the view on which Mr Pyle’s instructions (for Pyle no 2) were based seems to
have been Mr Hamish Martin, an architect employed by Stakis Hotels, who gave
evidence at the hearing on behalf of the tenant. The arbitrator did not find Mr
Martin’s evidence of much help, since Mr Martin said he could not really speak
for an hotel operator in what was referred to as ‘the second division’. But I
provisionally assume in the tenant’s favour that Mr Martin provided some
evidence that the motel, as at 1991 had a ‘commercial life’ expiring
significantly sooner than the predicted lifespan of the motel building as it
appeared when the lease was granted in 1970. On that assumption, the question
of law under appeal begins to emerge, that is whether the arbitrator erred in
law when he said (in para 20.7 of the interim award):
In these
circumstances, I accept the [landlords’] submission that it is not relevant to
assess the remaining commercial life of the building during a long term but it
is relevant to determine the lifespan of the building as it was seen at the
commencement of the term.
This was
referred to in the arbitration as ‘the commercial life point’, and it is the
main point in the appeal. A subsidiary point (‘the predicted life point’) is
whether the arbitrator erred in law when he said (in paras 20.9 and 20.10 of
the interim award):
The [tenant]
contends that if the true facts had been known in the 1960s, it would have been
appreciated that the tower did not have an expected life of 60 years due to the
fact that it was very badly built. If one is measuring the standard of repair
by reference to the contemplation of the parties, then it seems to me that the
[tenant’s] submission could be right if it was shown that the parties
appreciated at the commencement of the term the fact that the tower was badly
built. On the evidence before me, I did not feel able to find on the balance of
probabilities that the parties at the commencement of the term did appreciate
this. It seems to me very much more likely that both parties contemplated that
the tower would have the typical lifespan for structures of its kind.
Commercial
life point
In approaching
this point I have the initial difficulty that the arbitrator did not in terms
set out what precise meaning (if any) the expression ‘commercial life’ had for
him. I have not thought it right to go behind the award to the transcripts of
evidence to see whether Mr Martin gave any clear account of what he meant by
the expression.
I take its
general meaning to reflect the fact that there are some buildings — especially
commercial buildings built for fairly specialised uses, such as motels,
cinemas, bowling centres or supermarkets, to take a few examples — of which, if
they were in a state of disrepair, an owner-occupier or a prospective purchaser
or tenant might say to himself: the basic structure of this building will last for
another 30 of 40 years, but it does not make commercial sense to spend money on
proper refurbishment; it would be a waste of money to do more than patch it up.
Various commercial factors might lead to such a conclusion, some having nothing
to do with the state of the building as such: for instance, changing social
habits and patterns of demand, or changes in the neighbourhood. Others might be
connected with the building: for instance, the belief that an hotel business
carried on in an old and unfashionable building, however well refurbished,
could no longer hold its market position and justify the expense of
refurbishment.
That is what I
take to be the general meaning of ‘commercial life’ (as opposed to, I suppose,
structural life). But in setting out my understanding of its meaning I have
deliberately not referred to a sitting tenant, because I still have to consider
whether the arbitrator was right or wrong to treat the concept as irrelevant to
the assessment of the tenant’s repairing liability as at the valuation date for
the rent review. It can be relevant only if it has a bearing on the standard of
repair required by the tenant’s repairing covenant.
Mr David
Neuberger QC, who appeared for the tenant, submitted that the arbitrator seemed
ready to accept that a building may have a commercial life different from its
structural life, but that he erred in disregarding it as irrelevant. Mr
Neuberger stressed that he put forward commercial life simply as a relevant
factor, not a conclusive factor. He relied on what had been said by Nicholls LJ
in Holding & Management Ltd v Property Holding & Investment
Trust plc [1990] 1 EGLR 65 and by Mustill LJ in McDougall v Easington
District Council [1989] 1 EGLR 93.
The Holding
& Management case was concerned with repairs to a 12-storey block of
flats built in the early 1960s in reinforced concrete with brick cladding, by
works costed at over £1m (involving removal of all the brick cladding and
various remedial works) were proposed to be carried out by the maintenance
trustee, at the expense of the residential tenants. The principal issue was
whether these works constituted ‘repairs’ and the Court of Appeal, upholding Mervyn
Davies J, decided that they did not, on grounds that largely depended on the
particular facts of the case. But Nicholls LJ (with whom the other members of
the Court of Appeal agreed), after quoting Sachs LJ in Brew Bros Ltd v Snax
(Ross) Ltd [1970] 1 QB 612 at p640, said (at p68):
Thus the
exercise involves considering the context in which the word ‘repair’ appears in
a particular lease and also the defect and remedial works proposed.
Accordingly, the circumstances to be taken into account in a particular case
under one or other of these heads will include some or all of the following:
the nature of the building, the terms of the lease, the state of the building
at the date of the lease, the nature and extent of the defect sought to be
remedied, the nature, extent, and cost of the proposed remedial works, at whose
expense the proposed remedial works are to be done, the value of the building
and its expected lifespan, the effect of the works on such value and lifespan,
current building practice, the likelihood of a recurrence if one remedy rather
than another is adopted, the comparative cost of alternative remedial works and
their impact on the use and enjoyment of the building by the occupants. The
weight to be attached to these circumstances will vary from case to case.
The context
suggests that the above reference to ‘expected lifespan’ was looking at the
position at the time of the proposed works. A little later in his judgment
Nicholls LJ referred to the ‘expected lifespan’ of the building in a context
where he must, it seems, have been looking at the position as it was in 1972,
when the leases were granted. But that does not, I think, create any particular
problem, since in the normal case of a properly-constructed building it makes
little or no difference whether a reference to expected lifespan is measured
from the grant of the lease, or some later date: in the latter case the years
that have elapsed will normally be deducted from both sides of the equation.
But on any view, Nicholls LJ appears to have been looking at the expected
lifespan of the building as a structure, not at the different concept of
‘commercial life’.
The same
applies to what Mustill LJ said in the McDougall case. That was an
extraordinary case, where prefabricated houses erected in the late 1960s had
proved a disaster and the houses had had to be completely reconstructed. As
Mustill LJ said (at p96):
When the work
was complete, the house not only looked different; it was different. The
changes were not simply cosmetic. The roof, elevations and fenestration were of
different configurations and materials. With the exception of the basic
concrete boxes, no feature of the house was left untouched in the course of the
work. The outcome was a house with a substantially longer life and worth nearly
twice as much as before. Acknowledging that repairs, properly so called,
inevitably involve an element of renewal and improvement, I still think it
clear that the learned recorder was right to hold that these could not be
described as repairs. They gave the building a new life in a different form.
The case is
therefore one of the clearest possible examples of works which did indeed turn
the demised premises into something different from what had been originally
demised, and Mustill LJ’s observations (including his reference to ‘a
substantially longer life’) are emphasising that point. They do not, it seems
to me, give any support whatever to the commercial life point relied on by the
tenant in this case.
In short,
although Mr Neuberger made his submissions in a most skilful, moderate and
engaging way I do not find any support in authority for the ‘commercial life’
concept. Nor do I find any support in principle. It is important to remember
that the whole subject of repairs is material to the rent review only as a
preliminary issue, that is as determining the condition of the
notionally-repaired premises which the tenant is to take for the next 21 years
after the valuation date. The fact that commercial premises had been designed
and built for a specialised use which had become totally obsolete (such as, for
instance, Mr George’s shooting gallery and fencing school between the Haymarket
and Leicester Square as described in ‘Bleak House’) would be a very strong
reason for the court to decide, under the Leasehold Property (Repairs) Act
1938, that a tenant ought not to be held liable for substantial repairs to
premises which would inevitably have to be substantially reconstructed, if not
completely demolished, before long. But Mr Neuberger concedes that the effect
of the Leasehold Property (Repairs) Act 1938 is not to be taken into account in
determining the notional state of repair for the purposes of the rent review. I
think that concession was plainly right, but I also think it puts an end to his
arguments on the commercial life point. In my judgment, the arbitrator was
correct to treat this point as irrelevant for his purposes.
I think there
may also be another, simpler reason why the commercial life point should be
rejected as a matter of principle, at least in a case like the present. If a
tenant disregards his repairing obligations and, as a result, the premises
become run-down and commercially unattractive, it hardly lies in the tenant’s
mouth to rely on that fact as lowering the standard of repair required under
the tenant’s repairing covenant. But Mr Kirk Reynolds QC (who appeared for the
landlords) did not rely on this point. I do not therefore attach much weight to
it since it has not been the subject of argument.
What Mr
Reynolds did rely on, on the commercial life point, was the decision of the
Court of Appeal in Anstruther-Gough-Calthorpe v McOscar [1924] 1
KB 716. That appeal was on a special case stated by an arbitrator, the issue
being the dilapidations that should be paid by tenants at the end of 95-year
leases, granted in 1825, of houses near Gray’s Inn. At the beginning of the
term they had been smart suburban residences; in 1920, by contrast, the
district was a fairly depressed inner-city area. The Court of Appeal (Bankes,
Scrutton and Atkin LJJ) firmly rejected the suggestion that the standard of
repair (in matters such as the repointing of brickwork) should be no higher
than the standard likely to be required in 1920 by the average tenant wanting
to live (probably under a short-term rent) in the district. Mr Neuberger says,
rightly, that in that case the tenants were relying primarily on a change in
the neighbourhood, whereas in the present case it is a change in expectation as
to the motel’s ‘commercial life’ that is relied on. Nevertheless the decision
of the Court of Appeal does firmly establish the general proposition that the
standard of repair required by a repairing covenant is to be determined by the
parties’ expectations at the time the lease is granted: and to rely on a
diminished expectation of commercial life occurring in the course of the term
runs counter to that general proposition, just as much as reliance on a
lowering of standards in the neighbourhood that occurring in the course of the
term.
Predicted
life point
The arbitrator
declined to take account of the fact that the tower was very badly built (and
therefore did not have an expectation of life of 60 years), because this fact
was unknown to the parties’ predecessors when the lease was granted in 1970.
This was argued as a subsidiary point in the appeal, although I do not find it
particularly easy to see how it could amount to an error of law in the
arbitrator’s decision on the first issue. The arbitrator had to decide, on the
first issue, the nature and scale of repairs to be notionally carried out to
the motel by the valuation date. The worse the actual condition of the building
at the valuation date, the more the extensive the works needed to restore it
and the stronger (other things being equal) the argument for saying that those
works went beyond mere repair. It seems to me rather unreal to argue that, had
the original landlords and the original tenant known the true facts in 1970,
they would have contemplated the motel rapidly deteriorating into a run-down
state in which the tenant’s repairing obligation would be limited to
patching-up to a low standard. It seems to me far more likely that in those
circumstances the lease would not have been granted at all, at least on the
same terms.
I am inclined
to think that the arbitrator could have reached his conclusion on the first
issue without commenting on the predicted life point at all. He chose to do so,
perhaps out of deference to the full arguments that had been addressed to him,
but I cannot see that he made any error of law in the observations in para
20.10 of the interim award. Those observations are well in line with the
authorities down to and including the very recent case of Credit Suisse
v Beegas Nominees Ltd [1994] 4 All ER 803*. That case was concerned with
aluminium and glass cladding on newly built premises which was from the first
defective in that it was not watertight. It was one of those cases where the
landlord had a repairing obligation but his obligation to repair, as Lindsay J
said at p818 (echoing Scott J in Plough Investments Ltd v Manchester
City Council [1989] 1 EGLR 244 at p247):
*Editor’s
note: Also reported at [1994] 1 EGLR 76.
although
nominally an obligation, is in a sense a right. It enables the landlord to keep
its building in repair at the tenant’s expense and, as to works within the
covenant, it is the landlord rather than the tenant who determines how the work
is to be done.
After a
reference to the decision of the Court of Appeal in Anstruther-Gough-Calthorpe
v McOscar (above) Lindsay J said:
it is
expectation or contemplation which is important. Of course, in most
circumstances the hypothetical required condition and actual condition as at
the date of the lease will coincide …
If, as I think it is, the relevant standard of
that the tenant of the class I have described would require, then what is
important is not so much the state of fact as at the date of the demise but
what the tenant in particular then thought was the fact or, in the absence of
direct evidence as to that, what it can be inferred the tenant is likely then
to have thought in relation to the condition of the building.
Mr Neuberger
recognises that Lindsay J considered the putative condition at the time of
grant relevant, but submits that he did not say that the actual condition at
the time of grant was irrelevant. Lindsay J did not do so in terms, but it
seems to me implicit in his judgment. The fact that both freehold and leasehold
interest may change hands more than once during the term (as has occurred in
this case) may be a further reason for an objective assessment of what is to be
supposed to have been in the contemplation of the original lessor and lessee.
Mr Neuberger
also submits that it is an absurd result if the worse built premises are at the
beginning of the lease, the more stringent the repairing obligation is. I
cannot wholly accept that. That result may be hard and perhaps unfair, especially
if the landlord has himself (directly or through contractors) constructed the
defective building, and it may be a reason for a prospective tenant to obtain
detailed advice from surveyors before committing himself, but I cannot see that
it is absurd or illogical. In a case where a landlord is personally responsible
for the defective state of the premises, the court may be able to avoid a harsh
result, either by the process of construing the landlord’s obligations as in Smedley
v Chumley & Hawke Ltd (1981) 44 P&CR 50* or possibly, in some
cases, by recognising that the tenant had some collateral claim to a remedy.
*Editor’s
note: Also reported at [1982] 1 EGLR 47.
In any event I
am not satisfied that the arbitrator made any material error of law on this
subsidiary point.
For these
reasons I shall dismiss the tenant’s appeal.
Appeal
dismissed.
