We often receive enquiries from commercial tenants who feel their landlord is failing to honour their obligations under a fixed term lease.
In this scenario a tenant will face a difficult decision over whether to uproot the business and vacate the premises (potentially attracting a significant liability under the lease) or stay and try to make the best of a bad situation. The case of J N Hipwell & Son v Mrs Clare Szurek [2018] EWCA Civ 674 should be of interest to both commercial landlords and tenants in this respect.
The Facts
The tenant signed a three-year lease of recently re-wired premises following the landlord’s assurances that the works had passed an electrical inspection and were certified as safe. After a year or so, issues with the electrics arose and there was a minor fire in the distributor board damaging the circuit breaker. Following the tenant’s request for a copy of the safety certificate, the landlord failed to produce it.
About a month later, an electrical socket started to spark and the tenant, concluding it was unsafe to stay, closed her business and vacated the premises. Unfortunately, the lease in question did not clearly state which party was responsible for repairing or maintaining the electrical supply.
The High Court Proceedings
The tenant, relying on her pre-contract conversation with the landlord regarding the electrical inspection, commenced proceedings against the landlord for damages for loss of profits, contending that, inter alia: -
The landlord’s pre-contract statements to her were false and amounted to a misrepresentation entitling her to void the lease, or alternatively
A term should be implied into the lease stating that the landlord accepted responsibility for the repair, maintenance and safety of the electrical supply and had acted in repudiatory breach of the lease.
Entire Agreement and Non-Reliance Clauses
The landlord defending the action sought to rely on the following clauses within the lease designed to block the tenant’s claim.
1) An Entire Agreement Clause stating the lease: -
"constitutes the entire agreement and understanding of the parties relating to the transaction contemplated by the grant of this Lease and supersedes any previous agreement between the parties relating to the transaction"
2) A Non-Reliance Clause stating the tenant was: -
"not relying on, and shall have no remedy in respect of, any statement or representation made by or on behalf of the [landlord]".
High Court Judgment
Following a two-day trial, the High Court judge found in favour of the tenant and awarded her damages of £22,750. The judge stated that: -
The lease did not "adequately reflect the understanding and expectation of either party" and the Entire Agreement clause was "manifestly incorrect" as the parties’ true shared intentions were that the landlord was responsible for ensuring the electrical installation was maintained and certified as safe, and such a term should be implied into the lease.
The landlord’s conduct following the fire was to deny there had been a fire and to deny that they were responsible for addressing any electrical issues, which amounted to a repudiatory breach entitling the tenant to accept the breach, vacate the premises and claim damages.
The Court of Appeal
The landlord appealed the High Court decision on the following ground, inter alia, that the judge was wrong to imply the landlord’s obligations in respect of the electrical works into the lease as this was contrary to the express terms of the lease.
The Court of Appeal judge disagreed with the High Court Judge’s interpretation of the case law to support a finding that a “common subjective intention” between the parties, suggested the lease was incomplete as drafted, and was sufficient reason to circumvent the entire agreement clause and imply such a term.
He considered that the agreement regarding the electrical works was more akin to a collateral contract or warranty and the Judge’s interpretation of the case law went against the parole rule that evidence is usually inadmissible to vary the terms of a written contract, especially where an entire agreement clause is present.
All was not lost for the tenant however, as the Court of Appeal judge went on to note that “a term may be implied where it is necessary to give business efficacy to the contract in question” and an entire agreement clause would not prevent this.
Was the term necessary to give business efficacy to the lease?
To answer this the Judge reviewed the following relevant principles set out by the Supreme Court in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and anr [2016] AC 742: -
The starting point is to determine whether there is any provision in the agreement in question…which expressly covers the point: only if there is not can the implication of a term be appropriate
The Court must take into account the possibility that the parties deliberately decided not to include the term sought to be implied
The question whether a term is to be implied is to be judged at the date when the contract is made
The test is necessity, not reasonableness; but "absolute necessity" may put the bar too high
The process of implication involves a rather different exercise from that of construction, and calls for strict restraint
Applying the law to the facts
There was no express term in the lease stating who was responsible for the electricity installation and supply, but the judge noted there was a clause requiring the tenant to provide the landlord access for the purposes of maintaining and repairing “Service Media” which included by definition the electrical cables and conduits serving the premises.
The judge considered the lack of any express clause regarding electrical installation and supply an “obvious gap” in the lease, inconsistent with the “objective intention” of the parties in view of the evidence given at trial and landlord’s reserved right of re-entry to maintain or renew the electrical supply, which obviously suggested that the landlord had assumed these obligations and also therefore an obligation as regards the safety of any such works.
The judge held the following landlord’s covenant should be implied into the lease: -
"that the electrical installation which serves the Premises (including all wires, ducts, cables conduits or other channels through which electricity is conveyed) is safe and the subject of a current Electrical Safety Certificate".
Further to the above finding the landlord’s appeal was dismissed.
Take Aways
Not every breach by a landlord will be considered repudiatory in nature. It is always best to seek specialist legal advice regarding the terms of the lease, the parties’ obligations, and the nature of any alleged breaches before making any decisions about how to proceed.
Whilst the tenant may have ultimately ‘won’ in the case above, the legal fees of litigating a two-day trial and subsequent appeal could easily have exceeded the damages awarded and may not have been recovered in full from the landlord.
A tenant’s ability to pursue a landlord for damages arising from a repudiatory breach of a lease can be used as leverage to negotiate an early exit of the lease (with the assistance of solicitors) as part of a legally binding settlement agreement to avoid exposure to the risk of future court proceedings entirely.
If you require any advice in connection with a commercial lease dispute please contact our dispute resolution team by emailing anna.barnes@salehs.co.uk and carly.borne@salehs.co.uk, or by telephoning 0161 434 9991.