Emma Humphreys considers a recent decision involving the Welsh government – and wonders how far tenants in particular may be spooked by it.
There are two lessons arising from Pullman Foods Ltd v Welsh Ministers [2020] EWHC 2521 (TCC); [2020] PLSCS 182 that may surprise a number of tenants, and possibly landlords too. The first of these lessons is how far an apparently innocuous obligation to keep or yield up premises in “good and substantial repair and condition” may extend the covenanting party’s liability beyond simple repairs, potentially to include remedying wider defects such as environmental contamination. The second is the suggestion by the judge in Pullman that the identity of the landowner could be a relevant factor when considering the extent of remedial works reasonably required.
Background facts
The details of the Pullman case were summarised recently in the practice point “Was a tenant liable to remove asbestos from land when its lease ended?” (PP 2020/ 139). In brief, the land was originally let in 1972 and used as a cold storage and distribution depot. The lease covenants obliged the tenant to clear the buildings from the site and reinstate it at the end of the tenancy. The tenant failed to remove the entirety of the buildings and left parts containing asbestos. This led to its parent company obtaining permission to undertake the relevant works after the end of the tenancy. Unfortunately, the result of these works was the contamination of the site with asbestos.
These circumstances led to a significant claim against the parent company for the expensive remediation work required, as well as a claim for damages against the tenant for breach of its lease covenants.
What is “good condition”?
The lease obliged the tenant to yield up its premises in “good and substantial repair and condition” to the satisfaction of the landlord “having first (if required… to do so) removed any buildings or works and having made good… all damage occasioned to the demised premises by or in such removal”. The landlord wrote to the tenant before the expiry of the tenancy to confirm that it would require the removal of any buildings by the end of the term.
The court held that the tenant’s failure to remove the remaining asbestos from the site was in breach of its yield-up obligation. In the judge’s view, the presence of the asbestos meant that the site was in a “damaged or deteriorated condition” and therefore not in a good condition when it was returned to the landlord. He therefore concluded that the removal of the asbestos was reasonably required in order for the tenant to achieve compliance with its yield-up covenant.
This is not new law. Guidance in leading textbooks such as Dilapidations: The Modern Law and Practice by Dowding, Reynolds and Oakes (6th edition, 2017) confirms that circumstances of physical deterioration need to be considered in order to assess whether the premises are in the state and condition contemplated by the relevant covenant. This involves identifying the standard required by the covenant and then comparing it with the actual position on the ground.
The judge accepted that the factors for judging “good repair” and “good condition” are often likely to be much the same. However, he confirmed that the use of the word “condition” within the yield-up covenant showed that the tenant’s obligation was capable of extending to works that went beyond pure “repair”. The judge’s conclusion on this point echoed the views reached by courts in a number of cases over recent decades.
In Credit Suisse v Beegas Nominees Ltd [1994] 1 EGLR 78, a landlord had covenanted to keep the structure of a building “in good and tenantable” condition. Lindsay J provided the following neat summary of the position when considering whether works were needed in order to achieve the condition required by the lease:
“Whilst I accept the inevitability of the conclusion of the Court of Appeal in Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055 that one cannot have an existing obligation to repair unless and until there is disrepair, that reasoning does not apply to a covenant to keep (and put) into good and tenantable condition. One cannot sensibly proceed from ‘no disrepair, ergo no need to repair’ to ‘no disrepair, ergo no need to put or keep in the required condition’. Leaving aside cases, such as this, where there is special provision for there to have been prior knowledge or notice in the covenantor, all that is needed, in general terms, to trigger a need for activity under an obligation to keep in (and put into) a given condition is that the subject matter is out of that condition.”
Another illustration of the position – also in favour of a tenant – was shown in the Court of Appeal’s decision in Welsh v Greenwich London Borough Council [2000] 3 EGLR 41. In that case, items within a flat were damaged by mould caused by condensation from a lack of insulation. The council was obliged to maintain “the dwelling in good condition”. It was agreed that the defect did not constitute disrepair and there was no damage to the structure of the building. The court held that the council’s obligation was not restricted to the structure of the premises and that the requirement to keep the premises “in good condition” showed an intention to highlight a different concept to that which would otherwise have been required by way of repair. In the court’s view, this significantly added to the lease obligation to repair and damages were awarded to the tenant.
These cases demonstrate that an obligation to keep premises “in good condition” may involve rather more than might have been initially expected by the covenanting party when it accepted fairly standard lease covenant wording. Given the nature of the particular site and circumstances in Pullman, the potential extent of the liability may not have been unexpected by the tenant in that case. However, there may well be instances where a tenant does not expect the ambit of such a clause to extend to the remediation of contaminated land. Pullman is therefore a timely reminder about the importance of negotiating leases carefully and undertaking surveys before taking on liability for premises.
It is worth noting that the judge in Pullman commented that the presence of the asbestos also meant the site was not returned to the landlord in proper repair. He reminded parties that a covenant to “keep” premises in repair involves a duty to put them into repair in so far as they are out of it (see Quick v Taff-Ely Borough Council [1968] QB 809). Accordingly, although the judge found that the asbestos had arrived on site after the grant of the lease and derived from buildings erected under that lease, the tenant’s liability would have been the same even if the asbestos had already been on the site at the date of the lease.
With these types of environmental issues, tenants may also want to bear in mind the potential argument available to a landlord that vacant possession has not been delivered where premises are not capable of being physically occupied as a result of contamination.
While this point remains open to debate, the decision in Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264 shows that there can be a failure to give vacant possession where there is a substantial interference with the ability to enjoy possession of a property. In that case, warehouse cellars were rendered unusable as a result of rubbish there, including sacks of hardened cement. Of course, the legal position will depend on the particular circumstances of the case; in Hynes v Vaughan [1985] 50 P&CR 444, a different conclusion was reached on vacant possession in relation to the particular debris left by the seller of a property.
Assessing damages
Where a party fails to return premises in the state and condition required by its contractual obligations, the exercise to assess appropriate damages requires the court to consider the nature of the work necessary to achieve compliance. When it came to assessing damages in Pullman for the parent company’s various failures in connection with the works intended to meet the lease’s requirements, the court concluded that the remediation costs incurred by the landlord (the Welsh government) were caused by the parent company’s default rather than any unreasonable conduct on the part of the Welsh government.
The court agreed with the experts’ view that there was no single correct response to the contamination of the site. The judge noted that the Welsh government was not a purely commercial landowner and that it was holding land for the purpose of making it available as part of a scheme of redevelopment and regeneration of an important area of Swansea. He also noted that the land was adjacent to a residential area. Interestingly, he therefore felt that the decision as to appropriate remedial strategy would properly include a range of factors – social, political and environmental – in addition to purely commercial considerations.
The judge accepted that these various factors would not have permitted the Welsh government to act unreasonably at the parent company’s expense. However, he considered them to be relevant matters when assessing the Welsh government’s response to the contamination of the site.
This approach may give some cause for concern, as perhaps allowing too much of a subjective approach to the assessment of the work reasonably appropriate to address the breach and remedy the position. While such factors may form part of the overall circumstances of the case, a covenanting party may well expect the court to review the reasonable response in a more objective manner. Nonetheless, the lessons learned by the tenant and its parent company in this case will no doubt be costly – although damages are yet to be agreed or determined.
Emma Humphreys is a partner in the real estate disputes team at Charles Russell Speechlys LLP
