Landlord and tenant — Liability of landlord’s statutory successor for building defects — Whether tenant entitled to rely upon agreement relating to workmanship and quality of building made prior to grant of lease — Whether statutory successor entitled to indemnification from third party
The plaintiff,
Optilon Ltd, held a lease dated June 10 1987 granted by the Commission for the
New Towns Aycliffe & Peterley Development Corporation (‘the corporation’)
statutory predecessor of the defendent. The lease contains a lessee’s full
repairing covenant and was granted for a term of 21 years from January 1 1981
pursuant to an agreement (‘the agreement’) dated June 9 1987, which contained a
term of clause 20 that: it should be read and construed as if it had been
validly executed by the parties on December 5 1979. The plaintiff alleged that
the work of construction of the premises undertaken by the fourth party, John
Laing Construction Ltd (‘Laing’), was defective, in particular the construction
of the roof and roof lights. Although the plaintiff, as against the third
party, Aycliffe & Peterlee Investment Co, as the owner of the reversion of
the lease, is prima facie liable to repair the defects by virtue of the
repairing obligations under the lease, it claimed that the defendant, as
successor to the corporation, is liable for damages in respect of the defects,
by being in breach of its obligations, express and implied under the agreement.
The following
questions were directed to be tried as preliminary issues: (1) whether the
agreement merged with the lease and with it the express and implied obligations
relied upon by the plaintiff; (2) if the answer to question (1) is no, as a
matter of construction of the agreement what express or implied obligations did
the defendant’s statutory predecessors owe to the plaintiff; and (3) whether SI
1988, No 412 transferred those express and implied obligations relied upon by
the plaintiff in the agreement from the corporation to the defendant.
In the course
of proceedings the defendant conceded that the effect of SI 1988, No 412 was to
transfer to the defendant all the obligations which the corporation owed to the
plaintiff; accordingly question (3) did not arise for determination. Because
clause 12 of the agreement provided that notwithstanding the execution of the
lease the agreement should remain in force with regard to anything remaining to
be done performed or observed thereunder and not provided for in the lease, the
first directed preliminary question did not arise either.
There was a
further question for determination between the defendant and the third party;
whether the defendant could claim an indemnity against the third party in
respect of the claim brought by the plaintiff.
the second preliminary issue was that the corporation owed to the plaintiff the
express obligations set out in clauses 3 and 15 of the agreement. Clause 3
provided that the corporation ‘shall . . . by the Corporation’s contractors
proceed diligently with the construction of the . . . premises in a good and
workmanlike manner and with good quality materials so as to achieve practical
completion thereof as soon as may be reasonably practicable’. Clause 15 of the
agreement imposed obligations on the corporation to make good defects ‘after
the date of practical completion’ and clause 2 required the plaintiff
to enter into the lease ‘on practical completion’. The quality obligation in
clause 3 is an express obligation on the corporation to procure that the work
was carried out by the contractor ‘in a good and workmanlike manner and with
good quality materials’. In so far as work remained to be done or defects to be
remedied after practical completion, because of a breach of that obligation,
that was something remaining to be done under the agreement and not provided
for in the lease. Therefore, the plaintiff is at liberty to sue for damages for
breach of such obligation, notwithstanding the execution of the lease.
The
preliminary issue between the defendant and the third party
reversion of the plaintiff’s premises was conveyed to the third party by a deed
of transfer dated December 31 1987, clause 3 of which provided that the
transferee would at all times thereafter keep the transferor and its estate and
effects indemnified against all rights or claims whatsoever of lessees and
occupiers of the property. The natural meaning of the words in that clause, in
the absence of words limiting liability elsewhere, did enable the defendant to
claim an indemnity against the third party in respect of the claims brought by
the plaintiff.
The following
cases are referred to in this report.
Hancock v Brazier (BW) (Anerley) Ltd [1966] 1 WLR 1317; [1966] 2 All
ER 901, CA
Nevill
(HW) (Sunblest) Ltd v Wilham Press & Son Ltd
(1982) 20 BLR 78
This was the
trial of certain preliminary issues in a claim brought by the plaintiff,
Optilon Ltd, against the defendant, Commission for the New Towns. The defendant
sought indemnification from the third party, Aycliffe & Peterlee Investment
Co, who in turn had issued a fourth-party notice against John Laing
Construction Ltd.
David Blunt QC
(instructed by Ingledew) appeared for the plaintiff; Mark Raeside (instructed
by D J Freeman) represented the defendant; Philip Boulding (instructed by
Gregory Rowcliffe) represented the third party; the fourth party did not appear
and was not represented.
Giving
judgment, JUDGE RICH QC said: This was a trial of preliminary issues
between the plaintiff and the defendant and between the defendant and the third
party. The plaintiff occupies factory premises at 2 Cook Way, Peterlee, County
Durham, under a lease granted to it by the statutory predecessor of the
defendant, Aycliffe & Peterlee Development Corporation, whom I shall refer
to simply as ‘the corporation’. That lease is dated June 10 1987. It contains
at clause 2(6) a lessee’s full repairing covenant. The term is for 21 years
from January 1 1981. The lease was granted pursuant to an agreement dated June
9 1987, which however contains a term at clause 20 that it:
shall be read
and construed as if it had been validly executed by the parties . . . on 5th
December 1979 . . .
The
preliminary points between the plaintiff and the defendant which remain for my
determination depend on the construction of that agreement which I shall refer
to as ‘the lease agreement’, at least when it is necessary to distinguish it
from other agreements.
It is alleged
by the plaintiff that the work of construction of the premises, which was
undertaken by the fourth party, to whom I shall refer as ‘Laing’, was defective
in particular in regard to the construction of the roof and roof lights of the
factory. The plaintiff does not, however, claim any right of action against
Laing, who had, prior to the deemed date of execution of the lease agreement,
entered into a building contract in the Standard JCT Form 1968 ed — July 1977
revision dated November 5 1979, with the corporation as employer.
At the date of
the lease agreement it may be, as Mr Mark Raeside has submitted on behalf of
the defendant, that the parties would have believed that the law would give the
occupier of the premises a right of action against the builder in respect of
defective work. I do not, however, find speculation as to the parties’
assumptions as to the law a helpful indicator of their intention, which, for
the purpose of determining the parties’ obligations under the lease agreement,
I am to derive from that agreement construed as if validly executed in 1979. I
do not, therefore, consider the position of Laing further, except of course to
note that they did not appear upon the trial of these preliminary issues and no
doubt will defend the fourth-party proceedings brought against them.
If, as I must
assume for the purpose of determining these preliminary points, the buildings
are suffering from the defects alleged, the plaintiff would, as against the
third party, which now holds the reversion of the lease, at least prima
facie be obliged to repair those defects, by virtue of its repairing
obligations under the lease. The plaintiff therefore claims that the defendant,
as successor to the corporation, is liable for damages in respect of the
defects. The basis of this claim is the allegation that the defects arose
because the corporation was in breach of its obligations, express and implied,
under the lease agreement. The defendant denies that the plaintiff has any
right to sue in respect of these alleged defects either because the
corporation, on a true construction of the agreement, was not in breach of any
relevant obligation or because such obligation no longer subsists following the
grant of the lease itself.
In case,
however, it is found that the defendant has such liability, it seeks an
indemnity against the third party. The defendant relies on the provisions of
the deed of transfer dated December 31 1987, under which the corporation
transferred the freehold reversion of the premises to the third party. There
is, following a concession made on behalf of the third party, no issue that the
defendant has the benefit of any indemnity which the corporation had from the
third party. The issue between these parties is therefore the true construction
of the indemnity clause contained in the deed of transfer.
I turn first,
therefore, to the issues as directed to be tried between the plaintiff and the
defendant. These are:
1. Did the
[lease] agreement merge with the lease and with it those express and implied
obligations relied upon by the plaintiff?
2. If the
answer to 1 is negative, as a matter of construction of the agreement what
express or implied obligations did the defendant’s statutory predecessors owe
to the plaintiff?
3. Did SI
1988, No 412 transfer those express and implied obligations relied upon by the
plaintiff in the agreement from [the corporation] to the . . . defendant?
I have, in
transcribing the issues as directed, omitted reference to the Commission for
the New Towns as the ‘first’ defendant. It had been so named, because the
plaintiff had sued the third party as a second defendant, although before this
matter came before me those proceedings had, with leave, been discontinued. The
pleadings had not, however, been appropriately amended and in any case their
reading during the course of the trial revealed a number of minor typographical
errors and misreferences in both the amended statement of claim and the amended
defence. Counsel agreed that it would be convenient for these matters to be
tidied up before the main trial and agreed to exchange re-amended pleadings,
which it is hoped can be accepted by consent, and may clarify remaining issues
for the trial.
In the course
of the proceedings before me the defendant, who had been waiting to confirm the
attitude of the third party, conceded that the effect of SI 1988, No 412 is to
transfer to the defendant all the obligations which the corporation owed to the
plaintiff and which the corporation may have had against the third party. There
is, therefore, no need for me further to consider the third preliminary issue
between the plaintiff and the defendant, nor the first such issue between the
defendant and the third party, nor to set out the statutory provisions which
have that effect.
It also
transpired in the course of argument that the first directed preliminary issue
between the plaintiff and the defendant probably did not arise. I shall, for
the purpose of dealing with the second and only effective issue between these
parties, set out the provisions of the lease agreement at some length. They
include, however, a clause 12, which provides:
Notwithstanding
the execution of the Lease this Agreement shall remain in force with regard to
anything remaining to be done performed or observed hereunder and not provided
for in the lease?
It could
hardly be argued in the face of that provision, nor did Mr Raeside argue that
the lease agreement as a whole merged with the lease. The issue was therefore
whether the particular obligations on which the plaintiff relies in this action
merged.
Those alleged
obligations are to be identified from the pleadings. The statement of claim
alleges breaches of three obligations said to arise under the lease agreement.
Under para 14.1 are set out alleged breaches of clause 3 of the agreement;
under para 14.2 there is alleged a breach of clause 15 and under para 14.3
there is alleged a breach of an implied term set out in para 4. In spite of
some consideration by Mr David Blunt QC, who appeared for the plaintiff, as to
whether to seek leave to amend that para as pleaded, I have to consider it as
expressed, as being an implied obligation ‘by its Architect [to] exercise all
reasonable skill and care in accepting the premises as being practically
complete’.
Clause 2 of the
agreement required the plaintiff to enter into the lease ‘on practical
completion’. There is no doubt that clause 15 of the agreement imposes
obligations on the corporation to make good defects ‘after the date of
practical completion’. Anything that is to be done under that clause is
therefore likely to remain to be done after execution of the lease. It follows
that, by reason of the provisions of clause 12 of the agreement without
considering any other reason, that obligation did not merge. Mr Raeside accepted
that. He likewise accepted that if, as Mr Blunt contends, clause 3 is to be
construed as imposing an express obligation to provide good-quality work and
materials, such obligation would also not merge. If it does not have that
effect Mr Blunt accepts that it does not avail the plaintiff in any case. So
the true issue on this clause is not as to the rules of law covering merger but
as to the construction of clause 3.
It may be that
the position on the possible merger of the alleged implied term is not quite so
simple, but the existence of such term was only faintly argued as an
alternative to Mr Blunt’s construction of clause 3, and on the view which I
have taken it is not necessary for me to consider its possible merger further.
The lease
agreement recites that the corporation ‘is to construct . . . certain buildings
. . . and the Lessee has agreed upon such buildings and . . . being practically
completed (as hereinafter defined) to enter into [the] Lease’. Clause 1 of the
agreement therefore obliges the corporation ‘by its contractors [to] construct’
the buildings in accordance with certain identified drawings and
specifications, which, as Mr Blunt pointed out and I accept, contain little
detail of the proposed manner of construction or materials. That clause defines
‘the premises’ as the land owned by the corporation together with ‘all the
buildings and works constructed or to be constructed thereon’.
Clause 2 of
the agreement obliged the plaintiff to enter into the lease ‘in consideration
of the corporation performing the Corporation’s obligations under clause 1 . .
. on the practical completion of the premises’. In fact, although the last
certificate of practical completion is alleged to have been issued by the
corporation’s architects on December 19 1980, the lease was not executed until
June 10 1987. It is, however, agreed that, in construing the lease agreement as
if executed on December 5 1979, I am to have no regard to whatever may have
happened between such certificate and the execution of the lease and Mr Raeside
specifically accepted that notwithstanding the allegation in para 5A of the
amended defence the lease agreement was not varied. If any other transaction in
that period not involving the variation of the lease agreement gives rise to any
cause of action, it has not so far been alleged nor is it before me.
Clause 6(1)
defines the expression ‘practical completion of the premises’ for the purpose
of the agreement. It does not depend just on the corporation’s architect’s
certificate. It means:
. . . the
handing over of the premises by the contractors to the corporation as complete
(and accepted as such by the Architect after consultation with the Lessee or
its architect who shall be invited by not less than seven days notice to attend
the practical completion examination) and in a fit state for immediate use and
occupation without reference to the maintenance period within which the
contractors may be called upon to remedy any defects which may become apparent
or to execute such matters as ought to have been executed under their contract
with the Corporation . . .
Whether the
procedure of notice to the plaintiff was followed, I do not know. I do know
that the premises were accepted for occupation by the plaintiff in parts, long
before the execution of the lease. This may affect whether practical completion
of the premises has ever, in fact, been achieved. It does not, however, affect
the construction of clause 3 of the agreement in which the expression
‘practical completion’ also appears.
Clause 3
provides that:
The
corporation shall . . . by the Corporation’s contractors proceed diligently
with the construction of the . . . premises in a good and workmanlike manner
and with good quality materials so as to achieve practical completion thereof
as soon as may be reasonably practicable.
Mr Raeside
accepts that this clause imposes a duty to proceed diligently such that if the
corporation was responsible for delay the lessee would be entitled to claim
damages; and since, of course, the delay is unlikely to be fully ascertainable
until after practical completion, and since the lessee’s obligation to enter
into the lease arises on practical completion, there is no argument but that
such claim would survive the execution of the lease. The issue between the parties
is whether the obligation to proceed with the construction ‘in a good and
workmanlike manner and with good quality materials’ (which I shall call ‘the
quality obligation’) is such that the lessee could likewise complain of
breaches of that obligation after practical completion.
As I have
already pointed out, clause 15 does entitle the lessee to notify the
corporation of defects ‘on or after the date of practical completion’ and
obliges the corporation to make good any defect so notified ‘which the Corporation’s
contractors shall then remain liable to make good during the said maintenance
period’. That limitation is claimed by the defendant to limit the corporation’s
liability to defects which appear during, and are notified during, the
contractor’s defects’ liability period under the appendix to their JCT
contract. I am not asked to determine whether ‘the said maintenance period’ is
the same period as is referred to in the JCT contract as the defects’ liability
period. That may be a matter which will fall for consideration in determining
in the main trial whether the plaintiff can, on the facts, rely on a breach of
clause 15.
I do, however,
think it relevant to my reasoning as to the construction of clause 3 of the
lease agreement to note that it appears to me that there may be obligations on
the contractor, even after practical completion within the meaning of clause 15
of the JCT contract, which are not in respect of defects which ‘appear’ only
within the defects’ liability period. Indeed, clause 6(1) of the lease
agreement seems to assume that the contractors could be called upon at any rate
during ‘the maintenance period’ not only ‘to remedy any defects which may
become apparent’ but also ‘to execute such matters as ought to have been
executed under their contract with the corporation’. Thus, clause 15 of the
agreement needs, in order to be comprehensive, to be concerned also with
defects other than those appearing for the first time during the defects’
liability period.
But even if
clause 15 does provide a machinery for the lessee to require the remedying of
all such defects and a matching obligation to provide access, it does not, in
my judgment, deprive the plaintiff of other even overlapping rights to be
derived from clause 3 if, on a proper construction of that clause, such other
rights exist. I would refer in support of such conclusion, first, by way of
analogy, to the observations of Judge Newey QC on the effect of clause 15 of
the JCT Contract in H W Nevill (Sunblest) Ltd v Wilham Press &
Son Ltd (1982) 20 BLR 78 at p88. I also find helpful the comments of
Diplock LJ in Hancock v B W Brazier (Anerley) Ltd [1966] 1 WLR
1317 on the interplay of two clauses in the contract there under consideration.
He said at p1328D:
Clause 11
creates rights by providing that the defendants will make good any structural
defects which are discovered within 6 months. If that clause is to take away
the rights of the plaintiffs which normally follow at common law in the case of
a breach of contract it must do so in very clear terms if the court is going to
give it that effect.
The question
to which I must return is whether clause 3 in the lease agreement creates an
obligation whose breach would normally create rights at common law. I shall,
however, first consider further the other clauses in the agreement under which
the plaintiff might have sought to have any defects in the building works
remedied.
Under clause 5
of the agreement the lessee had the right to inspect during the works not only
the works but also the detailed plans forming part of the JCT contract and not
referred to in clause 1 of the agreement. The lessee was then entitled to
complain to the corporation’s architect, who presumably would give appropriate
instructions to the contractor if the contractor was failing to comply with his
obligations under the JCT contract. That contract incorporated not only more
detailed plans than are referred to in clause 1 of the lease agreement but also
similar express quality obligations to those found in clause 3. Clause 5,
however, provides only that ‘if . . . such defect is reasonably remedied the
premises shall be deemed as between the Corporation and the Lessee to be
properly constructed as to that defect’. There is no other express means of
enforcement of remedies for defective work in that clause.
If no such
complaint is made and remedied during the progress of works the lessee can make
representations under clause 6 at the so-called ‘practical completion
examination’. If the parties are then in dispute, clause 18 provides for
arbitration, among other things, as to the date of practical completion. But
the lessee may be willing to accept practical completion subject to the
contractor executing, in the words of clause 6(1), ‘such matters as ought to
have been executed under their contract with the corporation’. That is wide
enough to include both defective and incomplete works. If the lessee accepts
practical completion, one would expect him to have some right to require such
outstanding work, ‘without reference’ to which he has accepted it, to be
executed. Clause 6 contains no such provision.
The defendant
would say that his sole remedy is then under clause 15. Even if he can acquire
such right by due notification under clause 15, ‘of any damage defect omission
or other fault in the . . . buildings’, the subject-matter of complaint becomes
a defect or fault only if there is somewhere an obligation on the corporation
to procure the proper carrying out of the works. That seems to me to be provided
by the express words of the ‘quality obligation’ in clause 3. Mr Raeside has
sought to negative that construction by saying that it is inconsistent with
clause 13 of the agreement, which says that the corporation is not to be deemed
to be an expert or to warrant the suitability of the premises. That does not,
however, appear to me to be inconsistent with the corporation’s binding itself
to procure that its contractor abides by its obligations as to quality of work
and materials.
If, therefore,
clause 3 has to be construed as imposing such an obligation on the corporation,
it would then be wholly illogical for it to be construed as leaving no
outstanding obligation if a breach has not been remedied by the date when
practical completion is accepted. And if that must be the case in regard to any
known defect there are no words which can prevent the quality obligation being
equally breached even if the defect was not observable at the date of practical
completion.
Thus, I
construe what I have called the quality obligation as an express obligation on
the corporation to procure that the work was carried out by the contract ‘in a
good and workmanlike manner and with good quality materials’. In so far as work
remained to be done or defects to be remedied after practical completion,
because of a breach of that obligation, that was something remaining to be done
under the agreement and not provided for in the lease. I conclude, therefore,
that the plaintiff is at liberty to sue for damages for breach of such obligation,
notwithstanding the execution of the lease.
Mr Blunt put
forward the alleged implied term in case he failed on the construction of
clause 3. If he had done so, I do not think that such implied obligation would
have been sufficient to found any claim, because, first, the plaintiff accepted
practical completion and, second, the plaintiff had its rights under clause 15.
But that is not for me to decide. In my judgment, there is no such implied
term, because the agreement provides for the protection of the lessee by
requiring him to be invited to attend the practical completion examination and
to have the right to arbitration. It is not, therefore, necessary for business
efficacy as claimed by the plaintiff.
Accordingly, I
would determine the preliminary issues between the plaintiff and the defendant
by answering the first question in the negative and holding that, of the
obligations upon whose breach the plaintiff relies, the corporation owed to the
plaintiff the express obligations set out in clauses 3 and 15 of the lease
agreement. I would answer the third question ‘YES’.
The remaining
question for determination between the defendant and the third party is:
Can the
defendant claim an indemnity against the third party in respect of the claim
brought by the plaintiff as contained in the Amended Statement of Claim?
As I have
already noted that depends on the construction of the deed of transfer from the
corporation to the third party, dated December 31 1987, whereby as is
undisputed the freehold reversion of the plaintiff’s premises was conveyed to
the third party.
By clause 3 of
that deed, the third party, as transferee, covenanted:
(ii) that the Transferee will at all times
hereafter keep the Transferor and its estate and effects indemnified against
all rights or claims whatsoever of lessees . . . and occupiers of the property
. . .
It is accepted
by Mr Philip Boulding, who appears for the third party, that there is no
problem as to the identity or capacity of the claimant. The plaintiff is lessee
of relevant property and even if it could be said that the indemnity provided
by the clause related only to claims by the lessee in its capacity as such and
the subject claim was in its capacity as party to the lease agreement, there is
a second relevant capacity, namely as occupier. When I was first shown this
clause, therefore, once that concession had been made, I could see no ambiguity
in it as to whether it included the claims now made by the plaintiff.
Mr Boulding,
however, forcefully submitted that the use of the word ‘hereafter’ raised an
ambiguity as to whether the indemnity applied to claims made before the date of
the deed. Since the word is not strictly necessary if it is speaking as to the
date of commencement of the indemnity, as opposed to the date of any relevant
claim, I was persuaded to accept that it could just be said to be ambiguous in
that it might be intended to mean ‘transferee will at all times keep the
transferor indemnified against all rights or claims whatsoever hereafter
arising . . .’. As soon, however, as one tries to formulate the grammatical
construction which would have that effect and notes the need for some
additional word to complete the sense and looks at the context of the clause,
which includes the previous subclause in which the draftsman used the simple
and obvious word ‘future’ when he wished to restrict the indemnity thereby
granted to future breaches, any doubt that might arise from the necessity to
treat the word as mere emphasis and therefore, perhaps, strictly surplusage is dispelled.
Nevertheless,
on the basis of this supposed ambiguity, I allowed myself to be referred to the
antecedent agreement dated December 10 1987 which the deed of transfer
performed. The relevant clause in the deed fulfils the agreement at clause 9(3)
of the agreement that: ‘Each . . . Transfer shall also contain a covenant . . .
that the Purchaser will at all times thereafter keep indemnified . . .’. Since
the obligation of indemnity was not to arise until the date of transfer
irrespective of the scope of the indemnity, the use of the word ‘thereafter’ to
express the date from which the obligation should arise was, if not essential,
at least natural. If anything can be derived from study of this clause it
reinforces the construction of the clause as having the meaning which I first
gave it.
Nevertheless,
Mr Boulding did give me a moment’s doubt when he took me to clause 12 of the
agreement. This provides in very clear terms for the purchaser to indemnify the
vendor ‘from the 31st December 1987 from and against all actions . . . claims .
. . (except any existing prior to 31st December 1987 or arising out of any
event prior to that date . . .) . . .’. If that contractual provision was to
have been given effect to by the deed of transfer it would have been at least
the probable intention of the parties that the indemnity granted by the deed
should not include indemnity against matters specifically excluded from
indemnity in clause 12. In fact I am satisfied that that was not the intention
of the transfer. Clause 12 provides for indemnity in respect of a wider range
of possible claims than does clause 3(2) of the deed. Clause 19 of the
agreement therefore prevents the provisions of clause 12 merging with the
transfer. Again, analysis shows that when the draftsman wished to limit the
scope of the indemnity by reference to the date at which the claim arose, he
used apt language. This reinforces the construction of clause 3(2) of the deed
as having the meaning which I first gave it.
Mr Boulding
also took me through the many provisions of the agreement which allow for an
apportionment of liabilities as at December 31 1987. Again, clear words
elsewhere do not persuade me to doubt the natural meaning of the words used in
clause 3(2) of the deed.
Accordingly, I
would determine the remaining preliminary issue between the defendant and the
third party by holding that the defendant can claim an indemnity against the
third party in respect of the claims brought by the plaintiff in the amended
statement of claim.
