Damages — Measure of damages — Breach of covenant of quiet enjoyment — Claims by tenants holding long leases in blocks of flats subjected to serious interference with the normal enjoyment of their occupation by construction of penthouses on the roofs of the flats — Whether loss of rentals for sublettings was recoverable as damages — Whether first rule in Hadley v Baxendale was applicable — Discussion of fundamental principles governing damages — Judge in present case held to be correct in deciding that loss of revenue from sublettings due to effects of construction works was within the first rule in Hadley v Baxendale
present case tenants in the affected flats had suffered from what can only be
described as a series of disasters as a result of the construction works — The
appalling catalogue of misfortunes included dust, noise, vibration, loss of
privacy, interference with television reception, deterioration of common parts,
water penetration and penetration of ceilings by workmen’s feet — In the two
representative cases, that of Mr and Mrs Mira and Dr Bush, the disastrous
conditions, in addition to causing other problems, prevented intended
sublettings from taking place — The question which came before Judge Newey; and
later before the Court of Appeal, was whether these aggrieved plaintiffs were
entitled to recover from the first defendants, their landlords, as damages for
breach of the covenant of quiet enjoyment, the loss of rents which they would
have received if sublettings had taken place in the normal way
ground that there was no privity of contract between the plaintiffs and
defendants, but it was accepted that the measure of damages for breach of
covenant was governed by the same principles as damages for breach of contract
— It was also accepted that there was no actual knowledge on the part of the
landlords in regard to the proposed sublettings — It followed that the first,
not the second, rule in Hadley v Baxendale applied — This meant that, as Lord Reid said in Czarnikow
(C) Ltd v Koufos, a plaintiff was entitled to recover as damages for breach
of contract a loss of a kind which the defendant, when he made the contract,
ought to have realised was not unlikely to result from the breach — This was
merely an application of the fundamental principle of damages, the object of
which was, so far as is possible by means of a monetary award, to place the
plaintiff in the position which he would have occupied if he had not suffered
the wrong complained of, be that wrong a tort or a breach of contract — Judge
Newey in the present case held that subletting was something which was likely
to arise naturally and in the ordinary course of events; in other words, within
the first rule in Hadley v Baxendale — The Court of Appeal agreed with this assessment — The
leases were long leases and subletting was clearly contemplated — Tenants might
wish to be absent for short periods of time without relinquishing their right
of ownership — A tenant should be able to recover the loss which he sustains
if, through the landlord’s breach, he is unable to sublet because the flat has
been rendered uninhabitable — The judge came to the right conclusion — Appeal
dismissed
The following
cases are referred to in this report.
Calabar
Properties Ltd v Stitcher [1984] 1 WLR 287;
[1983] 3 All ER 759; [1983] EGD 578; (1983) 268 EG 697, [1983] 2 EGLR 46, CA
City
& Metropolitan Properties Ltd v Greycroft
Ltd [1987] 1 WLR 1085; [1987] 3 All ER 839; (1987) 54 P&CR 266; [1987]
2 EGLR 47; 283 EG 199
Czarnikow
(C) Ltd v Koufos [1969] 1 AC 350; [1967] 3
WLR 1491; [1967] 3 All ER 686; [1967] 2 Lloyd’s Rep 457, HL
Dodd
Properties (Kent) Ltd v Canterbury City Council
[1980] 1 WLR 433; [1980] 1 All ER 928; [1980] EGD 229; (1979) 253 EG 1335, [1980]
1 EGLR 15, CA
Hadley v Baxendale (1854) 9 Exch 341
Lock v Furze (1866) LR 1 CP 441
This was an
appeal by the first and second defendants, Aylmer Square Investments Ltd and
Mowlem Property Developments Ltd, from the decision of Judge Newey, sitting for
the dispatch of official referees’ business, in which he held that the
plaintiffs, Mr and Mrs Mira, tenants of flat 18, and Dr Bush, tenant of flat
41, Tudor Close, Belsize Park, London NW3, were entitled to recover, as
damages, loss of rents which they would have received in the subletting of
their flats. The third and fourth defendants took no part.
Paul Collins
(instructed by Michael Freeman & Co) appeared on behalf of the appellants;
John McDonnell QC and Keith Hornby (instructed by Bindman & Partners)
represented the respondents.
Giving the
first judgment at the invitation of Dillon LJ, STUART-SMITH LJ said:
This is an appeal from the judgment of His Honour Judge Newey, sitting as an
official referee, given on December 1 1988, in which he held, on an assessment
of damages, that the first and second plaintiffs, Mr and Mrs Mira, and the
fourth plaintiff, Dr Bush, were entitled to recover as against the first
defendants, as damages for breach of the covenant of quiet enjoyment, loss of
rents which they would have obtained in the subletting of their flats to
subtenants.
The case
concerns three blocks of flats at Belsize Park in North London, known as Tudor
Close. The flats were built in 1935. Two of them are three storeys in height
and have no lift. One is four storeys in height and has a lift. In 1982 the
first defendants, Aylmer Square Investments Ltd, purchased the freehold of the
premises and granted long leases either to sitting tenants or, after
refurbishing the premises and modernising them, to new tenants. In 1984 the
first defendants agreed with Mowlem Property Developments Ltd, the second
defendants, to carry out the construction of a number of penthouses on the
roofs of the flats. The third defendant was to be the architect of the project
and the fourth defendant, the contractor.
Work began on
February 25 1985, but it had not been completed by the time of the trial on
damages. There had, in fact, been a series of disasters, and both the architect
and the contractor had been changed. Things had gone badly wrong from the
outset. All the tenants in all the flats had complained of dust, noise, dirt,
loss of privacy, interference with their television reception, deterioration of
common parts of the flats and general inconvenience, and the tenants of the top-floor
flats had, in addition, complained of there being holes in the ceiling and
water penetration damaging carpets and furniture.
There were
claims by many of the tenants against the first defendants for breaches of the
covenant of quiet enjoyment and to repair, and against the second, third and
fourth defendants in nuisance and negligence. Many of those claims have been
settled or are in the process of negotiation.
The issue
which fell to be determined by the learned judge was whether the tenants could
recover, as damages for breach of the covenant of quiet enjoyment, sums equal
to rents which they would have been able to obtain by subletting their flats.
The judge held that they could, and the first defendants appeal that decision.
Two cases, those of the first and second plaintiffs and the fourth plaintiff,
were taken as test cases or representative cases, there being four other
similar claims by tenants.
Mr and Mrs
Mira occupied flat 18, which was on the top floor of one of the three-storey
blocks, and Dr Bush occupied flat 41, on the top floor of one of the
four-storey blocks. The facts relating to Mr and Mrs Mira’s claim can be taken
from the judgment of the learned judge. On July 11 1983 the first defendants
demised to a Mrs Villiers that flat for a term of 125 years from December 25
1982 for a premium of £67,950 and a ground rent of £100 per year, with
provision for service charges. There was a covenant in the lease by the tenant
at clause 3 subclause 7, as follows:
(a) Not at any time to assign, sublet, charge or
part with possession of part only of the Demised Premises or to permit or
suffer the same to be done.
(b) Not at any time to assign, sublet for a period
exceeding twelve months or part with possession of the whole of the Demised
Premises or permit or suffer the same to be done unless there shall previously
have been executed at the expense of the Tenant and delivered to the Lessors
for retention by them a Deed expressed to be made between the Lessors of the
first part the Tenant of the second part and the person or persons to whom it
is proposed to assign sublet or part with possession shall have covenanted
directly with the Lessors to observe and perform throughout the said term the
covenants on the part of the Tenant herein contained including the covenant
contained in this subclause (and including a covenant to pay all arrears of
service charges due and/or owing under the terms hereof whether quantified or
not and whether relating to a period prior to the execution of the Deed or
otherwise) but excluding in the case of a subletting the covenant to pay the
rents hereby reserved Provided Always that the Lessors shall not themselves be
required to execute such Deed.
And then there
was provision for registration of assignments, which I do not think it is
necessary for me to read in detail.
In March 1985,
which was shortly after the building work began, Mrs Villiers wished to sell
her lease, the flat then being in good decorative condition, and she sold it to
Mr and Mrs Mira. They bought the flat, having first obtained an assurance from
the first defendants’ managing agents that the work proposed would take
approximately six months and that any damage would be put right. They paid a
sum of £68,950 for the lease. That assignment was effected on May 15 and the
Miras moved in on May 25.
They soon
began to experience troubles as a result of the building operations. There was
a lot of noise from flapping tarpaulins. There was noise from bringing in steel
joists, electrical cables and planks. There were cracks, and damp patches
appeared in the chimney breast. There were vibrations. The overhead light in
the kitchen ceased to work. There was dust everywhere. The scaffolding
restricted the opening of windows and involved the loss of privacy because of
men constantly using it, and in October a workman created two holes in the main
bedroom ceiling when his feet went through it.
In October Mr
Mira learned that his employers, the Saudi Arabian Bank, were sending him to
New York for some time, beginning in November, and he and his wife decided that
she would accompany him, and that, at the end of the six-month period in New
York, they would take a holiday for some two months in the United States. As a
result, they decided that they would sublet the flat for a period up to August
1 1986, when they expected to return, the idea being that that would provide
them with money to meet the service charges and other expenses connected with
the flat and help to pay for their holiday.
They
instructed a number of firms of agents and they were advised that a rent of
approximately £250 per week could be obtained. Several people came to look at
the flat, but because of the activities of the first defendants and their
builders, none of them was prepared to take it.
In fact,
throughout the time that Mr and Mrs Mira were away, the flat remained unlet.
Partly for financial reasons and partly because of the failure to let the flat,
they cut short their holiday in America and returned to the flat on June 19
1986 and have lived there ever since. The learned judge held on the evidence
before him that they would have been able to let the flat at a rental of £210
per week from November 9 1985 to June 10 1986, and he awarded damages on that
basis, in addition to general damages, which were awarded under a separate
head.
So far as Dr
Bush’s claim was concerned, on December 29 1983 the first defendants had
demised flat 41 for a term of 125 years to a Mr Kaye, who was a sitting tenant.
He paid £35,000 for it and a ground rent of £100 a year, together with service
charges. The conditions in the lease were precisely the same as those in the
case of flat 18.
On January 1
1984, which was more than a year before the building work began, Dr Bush
purchased the assignment of the lease for a sum of £58,500. The flat needed
modernisation and redecoration and, after spending some £26,000 in redecorating
the flat, Dr Bush moved in in August 1984. Because his marriage had broken down
at an earlier stage he intended to use the flat as his home, but in the summer
of 1983 he had met a Miss Berry, who owned a three-bedroom house less than a
mile from Tudor Close, and after they became intimate with each other he spent
most of his time at her house, and from 1984 he began to live with her there.
They decided
that the flat at Tudor Close should be let and Dr Bush instructed agents to
find a tenant. Again, he was advised that a rental of £250 a week would be a
fair rent. The agents found Mr and Mrs Maxwell who were prepared to take a
tenancy. The tenancy was in the name of Mr Maxwell’s company. It was for six
months from February 11 1985, the rental being £6,500 for the six-month period,
that being equivalent to the sum of £250 a week. It was a term of that
agreement that, should Dr Bush decide to relet at the expiration of the tenancy
granted to Maxwell Ltd, then he would grant a further six-month term at the
same rent to Maxwell Ltd.
No sooner had
the Maxwells moved into the flat than the building work began. The Maxwells
made frequent complaints about it to Dr Bush and to the agents. There were loud
noises; cracks began to appear; the cornice fell away; light fittings were
displaced. There was dust and dirt everywhere and dampness appeared. In April
Mr Maxwell asked Dr Bush to reduce the rent because of the continuing
disturbance. Dr Bush felt that he was morally obliged to do so, and from that
time he reduced the rent to £200 a week.
In early
August, when the Maxwells were away on holiday, Dr Bush received a message
which caused him to go to the flat. He found that dirty water had poured
through the ceiling, causing damage to light fittings and to the carpet. When
the Maxwells returned from their holiday Mr Maxwell said that he was not
prepared to renew the tenancy, although they stayed on for a little while on a
weekly basis. However, later in August and again in September water entered the
flat, and in September a workman put his foot through the ceiling. A large hole
appeared, causing debris to fall on the settee where the Maxwells’ children had
shortly beforehand been sitting. Not surprisingly, the Maxwells had had enough,
and they moved out. In fact they moved to a flat in Tudor Close, but on the
ground floor, where they were not subjected to so much interference.
Dr Bush made
no further attempt to let the flat because he thought it was impossible to
obtain a subtenant. From October 1985 until early in 1988 he visited the flat
almost daily and sometimes slept there, particularly on occasions when he
thought there was a more than usual risk of harm being caused.
The judge
found that Dr Bush would, by the time of the trial, have sold the flat, but,
plainly, that was not possible in the present state of affairs. He held that Dr
Bush could not recover the £50 per week by which he had voluntarily reduced the
rent, but that after the first six months he was entitled to recover the £50 a
week until the Maxwells moved out, and thereafter at the rate of £250 until
judgment, less any reductions for tax or other expenses.
It is common
ground in this case that there is no privity of contract between the plaintiffs
and the defendants, but that the question of the measure of damages for breach
of covenant is to be governed by the same principles as damages for breach of
contract. In other words, the rules in Hadley v Baxendale (1854)
9 Exch 341 are applicable. It is also accepted by the plaintiffs that there was
no actual knowledge on the part of the first defendants of the proposed
sublettings. Therefore the second rule in Hadley v Baxendale is
not applicable. It
was recoverable under the first rule in Hadley v Baxendale*.
*Editor’s
note: The relevant passage in Hadley v Baxendale (1854) 9 Exch
341 is found in the judgment of Alderson B at p 354 as follows:
Where two
parties have made a contract which one of them has broken, the damages which
the other party ought to receive in respect of such breach of contract should
be such as may fairly and reasonably be considered either arising naturally, ie
according to the usual course of things, from such breach of contract itself,
or such as may reasonably be supposed to have been in the contemplation of the
parties, at the time they made the contract, as the probable result of the
breach of it. Now, if the special circumstances under which the contract was
actually made were communicated by the plaintiffs to the defendants, and thus
known to both parties, the damages resulting from the breach of such a
contract, which they would reasonably contemplate, would be the amount of
injury which would ordinarily follow from a breach of contract under these
special circumstances so known and communicated.
The
fundamental principle in relation to the recovery of damages was stated by
Donaldson LJ in Dodd Properties (Kent) Ltd v Canterbury City Council
[1980] 1 WLR 433 and was cited by Stephenson LJ in Calabar Properties Ltd
v Stitcher [1984] 1 WLR 287 at p 295. Those are:
So far as is
possible by means of a monetary award, to place the plaintiff in the position
which he would have occupied if he had not suffered the wrong complained of, be
that wrong a tort or a breach of contract.
And further,
the learned judge in the present case cited the dictum of Blackburn J in Lock
v Furze (1866) LR 1 CP 441 where, at p 453, he said:
The general
rule undoubtedly is as laid down by Parke B, in Robinson v Harman
(1848) 1 Ex 855, that, where a contract is broken, the person injured by the
breach is to be placed as far as money can do it in the same position as he
would have been in if the contract had been fulfilled. Where the carrying out
of the contract would give one of the contracting parties the enjoyment of a
particular thing, and he has lost it, the damages he would be entitled to would
be the value of that which he has lost.
He then
referred to the exception in relation to real property, but at p 454 said:
This,
however, is not the case of a contract for a sale of land; but the case of a
conveyance by which the lessor conveys out and out the thing intended to be
conveyed: and the conveyance contains a covenant for quiet enjoyment by the
lessee, which covenant has been broken. Why should the lessee, who has lost a
valuable lease, have a less measure of damage than he would have been entitled
to if by the [defendant’s] breach of contract he had lost a ship of a given
value?
Mr Collins, on
behalf of the appellants, submits that, although the loss in this case was
reasonably foreseeable, that is not enough in order for the plaintiffs to
succeed in a claim in contract. He has referred the court to the well-known
case of Czarnikow (C) Ltd v Koufos [1969] 1 AC 350 and
particularly to the speech of Lord Reid at p 382. The facts in that case are a
mile away from the present, but the statement of principle is generally
accepted as being applicable to all cases under the first limb of the rule in Hadley
v Baxendale. Lord Reid said at p 382G:
So the
question for the decision is whether a plaintiff can recover as damages for
breach of contract a loss of a kind which the defendant, when he made the
contract, ought to have realised was not unlikely to result from a breach of contract
causing delay in delivering. I use the words ‘not unlikely’ as denoting a
degree of probability considerably less than an even chance but nevertheless
not very unusual and easily foreseeable.
There are other
relevant passages in the speech of Lord Reid and in the speeches of their
lordships, but I do not take them to alter what is said by Lord Reid in that
passage.
Mr Collins
accepts, as I understand it, that the damages, in this case the loss of rentals
on subletting, were easily foreseeable, but he submits that they would not
occur in the majority of cases or in the great multitude of cases, and
therefore they could not be described as not very unusual. In support of that
submission he referred the court to the case of Calabar Properties v Stitcher
[1984] 1 WLR 287. That was a case where the landlord was in breach of a
repairing covenant, with the result that very considerable damp had affected
the tenants’ property. It had affected the husband’s health and the tenants had
had to move out, and they had incurred expense in obtaining alternative
accommodation. The landlord, the plaintiff, sued for arrears of rent and the
tenants counterclaimed for damages.
The claim for
damages included a claim for injury to health and inconvenience and general
damages, and His Honour Judge Stabb awarded £3,000 under that head, as to which
there was no dispute on appeal. He also awarded the sum of £3,000, which was
said to be the diminution in the value of the flat from the time the landlords
had notice of want of repair until the judgment. It is clear that the evidence
in relation to that was somewhat unsatisfactory, and, in fact, the learned
judge assessed it on the basis of the cost of repairs less some betterment.
The dispute
related to a claim for consequential loss for loss of use during the period
that they had had to move out, based not upon the cost of alternative
accommodation, which the Court of Appeal held would have been recoverable, but
upon the capital value of the flat or, alternatively, the loss of rack-rentals
which might have been gained had the flat been sublet during the period that
the defendants moved out.
It was in
relation to that claim that Stephenson LJ said at p 293D:
The second
objection is that to submit that what the defendant has lost by the plaintiffs’
breach of covenant is the consequent diminution in the value of the flat as a
marketable asset is to ask the court to take a wholly unreal view of the facts.
The reality of the defendant’s loss is the temporary loss of the home where she
would have lived with her husband permanently if the plaintiffs had performed
their covenant. She cannot increase her loss by deciding not to return after
the covenant has been performed, and she does not seek to do so. But she can
claim, as it seems to me, to be in as good a position as she would have been if
the plaintiffs had performed their covenant, at least as early as they had
notice that the main structure was out of repair instead of years later.
This is the
passage upon which Mr Collins particularly relies:
If she had
bought the lease as a speculation intending to assign it, to the knowledge of
the plaintiffs, the alleged diminution in rental (or capital) value might be
the true measure of her damage. But she did not; she bought it for a home, not
a saleable asset, and it would be deplorable if the court were bound to leave
the real world for the complicated underworld of expert evidence on comparable
properties and values, on the fictitious assumption that what the flat would
have fetched had anything to do with its value to her or her husband. I do not
think we are bound by the authority of Hewitt v Rowlands (1924)
93 LJKB 1080, or any other decision to do something so absurd, and Mr Pryor’s
second objection must, in my opinion, rule out any damages for difference in
rental value.
At p 299D
Griffiths LJ, having also said that the defendants were entitled to recover,
had they claimed it, the cost of the alternative accommodation, said:
If the tenant
has rented the property to let it and the landlord is aware of this, then ‘the
difference in value to the tenant’ may be measured by his loss of rent if he
cannot let it because of the landlord’s breach. If the tenant is driven out of
occupation by the breach and forced to sell the property then ‘the difference
in value to the tenant’ may be measured by the difference between the selling
price and the price he would have obtained if the landlord had observed his
repairing covenants. But each case depends upon its own circumstances and Hewitt
v Rowlands should not be regarded as an authority for the proposition
that it is in every case necessary to obtain valuation evidence.
Mr Collins
submits that in those two passages the learned lords justices are plainly
contemplating a claim based upon the second rule in Hadley v Baxendale,
namely special circumstances known to the landlord at the time of the granting
of the lease. No doubt that is so, but I do not read either of those judgments
as saying that those are the only circumstances in which such a claim might be
made. As Griffiths LJ said in the last sentence of the passage quoted, each
case depends upon its own circumstances.
In City
& Metropolitan Properties Ltd v Greycroft Ltd [1987] 1 WLR 1085*,
Mr John Mowbray QC, sitting as a deputy High Court judge, was concerned with a
case where there was a claim by an assignor of a lease to recover against his
former landlord, as damages for breach of a repairing covenant, loss incurred
on the resale of the lease to an assignee. The learned judge in that case held
that, in principle, the assignor was entitled to make such a claim, although it
is right to say that he did not, in fact, hold that the assignor should
succeed, because there had to be an assessment of damages.
*Editor’s
note: Reported also at [1987] 2 EGLR 47.
At p 1089, Mr
Mowbray dealt with the argument, which is the same argument that was advanced
to us by Mr Collins in this case, namely that the claim had been ruled out by
what was said by Stephenson LJ and Griffiths LJ in the passages to which I have
referred. He said:
Mr Moss said
the landlord here had no knowledge, and was not aware, that the tenant had
bought as a speculation, therefore on those statements the tenant could not
recover damages for commercial loss. He may very well be right in saying that
the necessary contemplation of the parties cannot be established, but I have
concluded that it would not be right to shut the tenant out from trying to
establish it on the inquiry.
My reasons
are these. I do not take Stephenson and Griffiths LJJ in the
in which commercial losses can be recovered in such a case as the present. They
took imaginary examples of cases where the landlord actually subjectively knew,
or was aware, of the tenant’s speculative purpose. That brought their examples
into the second branch of the rule in Hadley v Baxendale (1854) 9
Exch 341 and avoided any question about what the parties might or might not
reasonably have contemplated, the objective test in the first branch of the
rule. But I do not read them as saying that the first branch of the rule could
never apply, or that there must always be actual knowledge or awareness on the
part of the landlord
— and then he
goes on to deal with the facts of the present case.
I agree with
that appreciation of the Calabar case and, in my judgment, the judgments
in that case do not preclude, if the facts are sufficiently established, a
claim being brought under the first rule in Hadley v Baxendale.
The learned
judge in this case held, and I quote from the bottom of p 13 of his judgment,
as follows:
In my
judgment for Mrs Villiers, or her assignees, Mr and Mrs Mira, to sublet was
something which was likely to arise naturally and in the ordinary course of
events; in other words within the first rule of Hadley v Baxendale.
I can find
nothing wrong with that assessment of the situation. One applies the words of
Lord Reid in Czarnikow v Koufos, to which I have referred.
It seems to me
that the prospect of that damage occurring was not very unusual and was easily
foreseeable. The leases were long leases. They clearly contemplated that there
would, or might be, assignments or sublettings. No formality whatever was
required for subletting for less than 12 months and there was very little
restriction, only the requirement of notice and registration, for subletting
for longer than that period or for assignments. Flats of this sort are not
infrequently sublet. The tenants may wish to leave them for short periods of
time without relinquishing the right to own them completely, wanting to return
at some future time.
There are many
reasons why a person in that position may wish to sublet. People prefer that
they should have their home occupied, rather than left unoccupied at the mercy
of burglars and others. They may wish to obtain income to defray expenses of
other accommodation or holidays, or for other reasons.
It is clear
from the decision in the Calabar case that, if a tenant is driven out of
possession by reason of breaches of a repairing covenant or breach of the
covenant of quiet enjoyment, he can recover the costs of alternative
accommodation. If the tenant happens to own other accommodation which he is
driven to use, through the landlord’s breach, he ought to be able to recover
the loss which he actually sustains because he is unable to sublet the flat in
question during the time that it is rendered uninhabitable.
In my
judgment, the learned judge came to the right conclusion here, that the loss
was within the contemplation of the parties within the first rule of Hadley
v Baxendale. It was not unusual and it was readily foreseeable. I would
dismiss the appeal.
DILLON and RALPH GIBSON LJJ agreed and did not add anything.
The appeal
was dismissed with costs.
