Landlord and tenant — Agreement to grant lease — Agreement provided that on completion of certain works the proposed tenants (in the meantime in occupation as licensees) would be granted a lease for 20 years — The works were extensive, including not only refurbishment but structural changes to bring certain adjoining properties into the premises — Defendants, the proposed tenants, were to carry out the works to the satisfaction of the landlords, and the defendants prepared a specification which was submitted to the landlords — Disputes arose, the plaintiff landlords claiming that they had approved the specification and the defendants saying that the approval was only very general and subject to approval of details before the works could be carried out — There was therefore a triable issue as to whether the defendants were contractually obliged to proceed
The following
case is referred to in this report.
Hadley v Baxendale (1854) 9 Exch 341
In this case
the plaintiffs, Ford Sellar Morris Developments Ltd and Stargas Nominees Ltd,
sought by motion a mandatory interlocutory injunction against the defendants,
Grant Seward Ltd and Vivat Holdings plc, requiring the defendants to allow the
plaintiffs to enter upon the premises at Market Street, Manchester, in order to
carry out certain specified works.
N J C Stewart
QC (instructed by Taylor Garrett) appeared on behalf of the plaintiffs; R
Akenhead (instructed by Clifford Chance) represented the defendants.
Giving judgment,
HOFFMANN J said: The second plaintiffs in this action are the owners of certain
shop premises in Manchester which they bought from the first plaintiffs,
completion having taken place on October 9 1987. The first defendants had,
prior to the acquisition of the premises by the first plaintiffs, been tenants
of part of them and had been in negotiation with the freeholders to acquire the
freehold. In the event, however, they entered into an agreement with the first
plaintiffs whereby the first plaintiffs acquired the premises and entered into
an agreement, dated August 7 1987, with the first defendants, to which the
second defendants are guarantors.
The premises
in question consist of a shop, which the first defendants had previously
occupied, together with a jeweller’s shop and baker’s shop, which apparently
adjoined the first defendants’ original premises.
The agreement
for lease to which I have referred provided in summary that the first
defendants would carry out certain works upon the premises, partly by way of
refurbishment and partly by way of structural changes to incorporate the
additional property into the same trading area, and that upon the completion of
that work, the first defendants would be granted a lease for a term of 20 years
in a form annexed to the agreement.
I must refer
in particular to certain of the clauses of that agreement. First, it defined
the tenant’s works in clause 1.4 as:
The works to be carried out by the tenant
as listed in the specification annexed to this agreement and as from time to
time approved by the landlord in accordance with clause 2.
The
specification attached to the agreement itself was in very general terms, and
it is, I think, common cause that the terms of that specification needed to be
filled out in very much greater detail before it would be possible to say
exactly what the tenants were obliged to do. For that purpose clause 2.1
provided that:
The tenant should forthwith prepare and
submit to the landlord for approval a plan and a specification of the tenant’s
works.
And under clause 2.2, immediately upon
the approval of the landlord having been obtained, the tenant was to proceed to
carry out and complete the tenant’s works, in accordance with the approved
plans, to the satisfaction of the landlord’s surveyors.
In September
1987 the tenants’ surveyors prepared a specification which was submitted to the
landlord. At that stage the landlord had contracted to sell the freehold to the
second plaintiffs, and the second plaintiffs were accordingly involved in the
approval of the specification. The plaintiffs say that they approved that
specification and that the tenants thereupon became obliged under clause 2.2 of
the agreement to carry it out. The tenants say that that is not the case. They
say that the landlord’s surveyors gave very general approval in principle to
the specification but were unwilling to allow the tenants to use it as a basis
for actually carrying out the works until more details had been provided and
approved. The tenants have exhibited correspondence passing between the
surveyors for the first and second plaintiffs which as late as January 1988
shows the second plaintiffs’ surveyors saying to the first plaintiffs’
surveyors: ‘Please will you confirm that no work will commence on site until
the identified problems have been addressed by the tenants’ engineers and their
proposals have been approved by . . .’ the first plaintiffs’ engineers.
Thus it is
agreed that there is a triable issue, which cannot be resolved on motion, as to
whether a situation had arisen in which the defendants were contractually
obliged to proceed with the scheme in accordance with the September 1987
specification.
Early in 1988,
there were negotiations between the parties for a revision of the scheme. A
second scheme was put up by the tenants, but that apparently came to nothing. A
third scheme was produced some time in April and appears to have reached a very
advanced stage of negotiation. The difficulty about forming any view about the
status of the third scheme is that at least part of the negotiations was without
prejudice. It appears to be accepted that those negotiations have not resulted
in any formal approval of the third scheme, although the exhibited
correspondence suggests that technically and as a scheme it would not be
unacceptable to the plaintiffs’ surveyors. But there is disagreement over some
unidentified and extraneous matter which is holding up agreement.
In those
circumstances, the plaintiffs say that there is a contractual obligation on the
part of the defendants to proceed in accordance with the September 1987 scheme.
The defendants have not done so and by the notice of motion now before the
court the plaintiffs seek a mandatory order that the defendants do allow them
to enter upon the premises and themselves carry out the work in accordance with
the September specification.
The relief
which the plaintiffs seek by way of mandatory injunction is, of course, within
the jurisdiction of the court, but it falls within that category of
interlocutory relief about which the court is traditionally very careful,
because of its drastic and irreversible effects. There is at present, as I say,
a dispute as to whether there is a contractual obligation for the defendants to
proceed in accordance with the September scheme. If the plaintiffs are granted
the relief which they seek, they will be able to go upon the premises and carry
out the work in bricks and mortar, in accordance with that scheme. The order,
though interlocutory in form, will be irreversible in effect. It has been said,
as a general guideline for courts called upon to make an order of that kind,
that they should not ordinarily be made unless the court feels a high degree of
assurance that the plaintiffs would be successful at the trial in obtaining the
remedy which they seek at the interlocutory stage.
The first
question which I must therefore examine is whether, assuming that the
plaintiffs are right in the way in which they characterise the defendants’
obligations, the plaintiffs would legally be entitled to enter upon the
premises and do the work themselves. Now, the tenants have at all times been in
possession of the premises, and under clause 5.1 of the agreement they are
entitled to remain in possession, pending the grant of the lease, as licensees
paying a licence fee equal to the rent which would be payable if the lease had
been granted. Until recently, at any rate, the defendants have been carrying on
trading at the premises in the ordinary way. Under clause 5.3 they hold on the
terms and subject to the covenants and conditions of the draft lease as if it
had already been granted.
By clause 7
the landlords have a power to determine the agreement by notice in various
circumstances, including the failure of the tenants to complete the tenants’
works in accordance with the agreement. It may be that that provision is
subject to the statutory requirement for the service of the notice under
section 146 of the Law of Property Act 1925, but I need not go into that
because the plaintiffs have made no attempt to invoke it. They do not wish to
exercise a right to terminate the agreement or to treat the defendants as
having repudiated their obligations. They wish to keep the agreement alive and
to exercise contractual rights under the agreement to enter and do the works.
The question is where those rights are to be found.
Mr Stewart for
the plaintiffs says that they are to be found in two places: first, in the
provisions of the lease deemed to be applicable by virtue of clause 5.3 of the
agreement and, second, in the court’s jurisdiction to decree specific performance
of the obligations to carry out the tenants’ works.
I shall first
consider the terms of the lease. Under clause 3.34.1:
The tenant covenants to permit the
landlord and the lessees and occupiers of other parts of the building, or of
any adjoining or neighbouring property, at all reasonable times and at a
convenient hour and by prior appointment, except in an emergency, to enter the
premises:
(1) to view the premises to ensure that nothing
has been done or omitted within it constituting a breach of any of the
covenants in this lease, and also to examine the condition of the premises;
(2) to repair, alter, maintain, cleanse or
rebuild any part of the building and any adjoining building, and the conduits
belonging to or serving the same, or for any other proper purpose;
(3) to execute all works which the landlord may
be statutorily liable to carry out to the exclusion of the tenant,
notwithstanding any contract to the contrary, the landlord making good all
damage to the premises and causing as little inconvenience or annoyance as is
reasonably practicable.
Mr Stewart
relies upon the provision in clause 3.34.1(2): That the landlord is permitted
to enter the premises to alter or rebuild any part of the building or,
alternatively, for any other proper purpose.
What the
plaintiffs propose to do, Mr Stewart says, is to alter and rebuild a part of
the building, namely the demised premises, in accordance with the September
specification.
Before I
consider that submission, I must refer to the next two clauses: 3.34.2, which
is a covenant by the tenant ‘forthwith to make good any defects of repair of
which notice shall have been given by the landlord and for which the tenant is
liable under the lease’, and 3.34.3, giving the landlord a right to enter and
carry out repairs himself if, within one month of his having given the notice
under the previous clause, those repairs have not been carried out. There is
also, of course, the usual repairing covenant.
Now, it seems
to me that if clause 3.34.1(2) is to be construed literally, it would confer
the most extraordinarily wide power upon the landlord, and indeed not merely
upon the landlord but upon the lessees and occupiers of other parts of the
building. I find it difficult to imagine, without there being much clearer
language than this, that the landlord, or a fortiori anyone else, was to
be allowed under that clause to enter in order to carry out works which would
in practice involve excluding the tenant from possession of the premises. The
proviso at the end, ‘. . . the landlord making good all damage to the premises
and causing as little inconvenience or annoyance as is reasonably practicable’
suggests that the clause contemplated only a relatively passing presence by the
landlord upon the demised premises.
The lease
contains no definition of the term ‘the building’, which from the opening words
of the clause would appear to include more than the demised premises, although
the listed definitions in the index to the lease suggest that a definition was
contemplated but has somehow dropped out. I rather suspect that clause
3.34.1(2) was intended to give the landlord and the lessees and occupiers of
other parts of the building a right of entry upon the premises for the purposes
of doing work to parts of the building which were not comprised in the demised
premises themselves. That would make perfectly good sense and would explain why
the right is also conferred upon the lessees and other occupiers. It would also
fit with the reservation in para 5 of the first schedule to the lease. But I
need not express any concluded view upon that because it is sufficient for me
to say that I am quite satisfied that this clause cannot be used to justify an
entry for the purposes of works of the scale contemplated by the September
specification.
Mr Stewart
relied in the alternative upon the second branch, so to speak, of 3.34.1(2),
referring to an entry ‘for any other proper purpose’. In this case he said that
the purpose would be proper because it arose out of a contractual default by
the defendants. I think, however, that that part of the clause is subject to
the same comment as I have made as to the first part, namely that it cannot
extend to an exclusion of the tenants from possession of the whole of the
premises.
The other
clause upon which the plaintiffs rely is clause 3.34.2, read with clause
3.34.3, to which I have already referred. Mr Stewart says that the plaintiffs
have given notice requiring the defendants to carry out works in accordance
with 3.34.2 and that the defendants have not done so. Accordingly, he says that
they are entitled to enter and do the works themselves. But 3.34.2 applies only
to works for which the tenants are liable under this lease. That does not, in
my judgment, extend to work for which the tenants are liable under the
agreement providing for the grant of the lease, and, for that short reason, it
seems to me that the clause has no application.
I therefore
turn to the other way in which Mr Stewart put his case, namely that the order
would in effect be granting specific performance of the tenants’ obligations.
It is unusual for an order to be made for specific performance of obligations
under a building contract, the reasons being, first, that it is usually
difficult to formulate an order with sufficient precision so as to make it
clear to
damages would be an adequate remedy. However, there is no doubt of the
jurisdiction to make such an order. Mr Stewart, however, is not asking that I
order the defendants to carry out the work in the September specification, but
that I allow his clients to do so. He referred me to Ord 45, r 8, which
provides that if a mandatory order is not complied with, the court may direct
that the act required to be done may be done by the party by whom the order was
obtained. He submitted that there was no reason why there should not be, so to
speak, a convenient marriage of the specific performance order and the remedy
for non-compliance, and the plaintiff thereby given the right to perform the
act straight away.
In my view,
however, the jurisdiction under Ord 45, r 8, depends at least upon the court
being willing to grant a mandatory order against the defendant to do the act in
question. It may be that in a suitable case the court would take the view that
the defendant was so unlikely to do the act that in a case of urgency it would
be proper to authorise the plaintiff to do it himself at once. But I must ask
myself the preliminary question of whether I would make such a mandatory order
against the defendant.
The position
here is that, first, there is a dispute as to whether a contractual obligation
exists to do the works in accordance with the September specification and,
second, it appears that, at any rate so far as engineering details are
concerned, the September specification is not in itself sufficient to define
exactly what needs to be done. For those and other reasons to which I shall
return when I consider the balance of convenience, I would not have thought it
right to make an interlocutory mandatory order against the defendants requiring
them to carry the September specification into effect, and accordingly, the
necessary precondition for a claim by the plaintiffs that they should be
entitled to do the work is not established.
I turn,
therefore, to the question of the balance of convenience. The first question
under that head is why damages should not be an adequate remedy. The plaintiffs
accept that in the ordinary way they would. The cost of carrying out the work,
or any other damage caused to the plaintiffs through the work not being done,
would be easily quantifiable and it is accepted that at any rate the second
defendant, which is the holding company, would be good for the money.
The
plaintiffs’ claim that damages would not be an adequate remedy depends upon the
terms of the agreement which they entered into with the second plaintiffs by
which the second plaintiffs acquired the freehold. The price under that
agreement was £3.5m, but the purchasers out of that sum made two retentions.
One was in the sum of £125,000 and was retained in connection with part of the
work which the tenants were obliged to carry out, which was called the
refurbishment works; the other was for £300,000 and was retained in connection
with what were described as the incorporation works, which I think related to
the structural changes to incorporate the bakery.
Under the
agreement the first plaintiffs undertook to ensure that the works were
completed by the end of 1988, or originally a potentially earlier date which
was subsequently deleted by agreement between the parties.
The treatment
of those retentions, the two retentions in the agreement, appears to have
differed somewhat.
In respect of
the refurbishment works the provisions of clause 17F of the agreement seem —
and I need not express any concluded view on this — to have entitled the first
plaintiffs to a progressive release of that retention as the refurbishment
works were completed. A substantial sum has in fact already been released to
them under that clause. However, in respect of the £300,000 retention for the
incorporation works, clause 17H provides that they are entitled to that sum
only on completion of the works which, read in the context of the clause as a
whole, appears to mean practical completion.
Then clause
17P, as amended, says:
If the works are not completed by the
31st December 1988, the purchaser shall be entitled to enter on the property
for the purposes of completing them and the vendor shall no longer be entitled
to the first retention and the second retention, which shall be released to the
purchaser.
Now, by virtue of those provisions, the
first plaintiffs say that they are at risk that they may forfeit over £400,000
if the works are not completed by the end of the year, and that this is not a
sum which they would be able to recover by way of damages from the defendants,
because the agreement between the plaintiffs was not entered into until well
after the agreement for the grant of the lease, and a loss of that kind, by
forfeiture of the retentions, would not reasonably have been within the
contemplation of the parties to the agreement for lease in accordance with the
rule in Hadley v Baxendale (1854) 9 Exch 341.
Accordingly,
the plaintiffs say that unless they are granted an injunction they will be
prejudiced in a way which cannot be compensated in damages.
The
defendants, on the other hand, say that this is an illusory fear because the
provision for forfeiture, at any rate of the retention relating to the
incorporation works, is quite plainly an unenforceable penalty. This submission
put Mr Stewart, who appears for both plaintiffs, in something of a difficulty,
because he is hardly in a position to concede on behalf of one client that it
is a penalty or on behalf of the other that it is not. He did, however, very
fairly accept that there appeared to be good arguments for saying that it was a
penalty, and I agree.
Looking at the
other side, namely the defendants’ position, the order that the plaintiffs seek
will put them out of their premises and take out of their control the conduct
of the works which it was originally contemplated they would have. Now, it may
be that this is the defendants’ own fault because they are in breach of their
contractual obligations, but there is, as I have said, a triable issue on this
question, and it may turn out that they were not. If so, they would have to
recover under their cross-undertaking in damages for any loss which they have
been caused. That loss may arise in various ways. It could be that the works,
as carried out by the landlords, are not as commercially advantageous to the
tenants as those which they would be contractually entitled to carry out. The
tenants say, for example, that the scheme which has been the subject of the
most recent without-prejudice negotiations is from a shopping point of view a
much better scheme than the first one. Again that may be right or it may be
wrong, but if it does turn out to be right, and the shop as it eventually
emerges from the landlords’ hands is not as convenient as it might have been,
it would be very difficult for the tenants to quantify their loss. One never
knows what the position might otherwise have been. Similarly, the tenants say
that there may be claims on account of the works carried out by the landlords
taking too long, or being in some way defective, all of which could give rise
to problems in the future which are not easily quantifiable.
I have,
therefore, on the one hand, a potential financial loss by the first plaintiffs,
which, on the view which I take of the law, seems to me unlikely to materalise
and, on the other hand, a potential loss by the defendants which could quite
easily arise if the conduct of the work were taken out of their hands and which
would be difficult to compensate in damages. Above all, I have to take into
account, as I have said, the nature of the order which I am asked to make and
its irreversible effect. If I ask myself the question indicated in the
guideline, namely whether I feel a high degree of assurance that the plaintiffs
would succeed at the trial, I have to say that I do not. Quite apart from the
triable issue over whether the defendants are in breach of contract or not
(something which has not been fully explored on the evidence) I consider that
the plaintiffs’ case for having a right to enter and do the work, even assuming
that they are right on the contractual point, is very shaky indeed.
Taking those
matters and the considerations which I have dealt with under the balance of
convenience into account, I do not think that this is a case for making an
interlocutory mandatory order, and the motion is therefore dismissed.
