Fitzroy House Epworth Street (No. 1) Ltd & Another v The Financial Times Ltd (2005)

Neutral Citation Number: [2005] EWHC 2391 (TCC)
Case No: HT-04-291
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 4 November 2005

Before :

HH Judge Thornton QC
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Between :

Fitzroy House Epworth Street (No 1) Ltd
Fitzroy House Epworth Street (No 2) Ltd
Claimants

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The Financial Times Ltd Defendant

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Mr Mark Warwick (instructed by Kanter Jules, 33 Margaret Street, London, W1G OJJ, DX: 53833 Oxford Circus North (Ref: CH 35152) for the claimants

Mr Paul Morgan QC (instructed by Wragge & Co LLP, 55 Colmore Row, Birmingham, B3 2AS (Ref: 1854338/SLH/DGC) for the defendant

Hearing dates: 15, 16, 19 & 21 September 2005
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JUDGMENT
HH Judge Thornton QC:
Introduction

1. This action is concerned with the lease of commercial premises known as Castle House, 37 – 45 (odd) Paul Street, London, EC2 (“Castle House”). The claimants (Fitzroy) are the joint legal owners of this property. They jointly hold the property for the benefit of Lionsgate Properties LP (“LP”), a limited liability partnership incorporated in Delaware, USA. LP acts through its General Partner, Lionsgate GP LLC (“GP”) and this action was started by REIT (Corporate Directors) Ltd, a director of each of the Fitzroy companies on the instructions of GP that were given on LP’s behalf. The property forms part of the Lionsgate portfolio of properties that was acquired by LP as part of its overall business of investment.

2. The property is a 3-storey office block forming one half of a pair of joined office blocks, being Castle House and Fitzroy House, which are located on the northern fringe of the City of London, south-east of the Old Street roundabout. It was leased by Fitzroy’s predecessors in title, United Newspapers Publications Ltd as lessor, to the defendant (“Financial Times”), as lessee, by a 16-year lease that commenced on 1 April 1994 and expired on 10 April 2010. Fitzroy both acquired the freehold and an assignment of the lessor’s interest under this lease on 8 August 2002.

3. The action is concerned with the break clause contained in the lease. This clause allowed the Financial Times, as tenant, to terminate the lease on notice if that termination notice was served at least 13 months prior to the break date of 1 April 2004 so long as the tenant had materially complied with all its obligations in the lease down to 1 April 2004. The Financial Times served a termination notice on 5 February 2003 seeking to break the lease on 1 April 2004, thereafter undertook substantial works of renovation and repair in an attempt to ensure that it had fully complied with the repairing covenants in the lease and then purported to terminate by vacating the premises on the termination date. Fitzroy immediately contended that the Financial Times was and remained in breach in that the premises remained in disrepair and contended and still contends that the lease was not broken and remains in being. These proceedings require the court to determine whether or not the Financial Times had materially complied with its repairing obligations and whether, in consequence it did or did not successfully terminate the lease. Fitzroy, in addition to claiming that the lease was not terminated, claims unpaid rent and other outgoings for the period since 1 April 2004.

4. A substantial sum turns on this dispute. This is because the unexpired term from 1 April 2004 was 6 years, 10 days if it is held that the Financial Times failed to terminate the lease with effect from that date and the rent passing at that time was £595,000 per annum with a rent review with a possible upwards increase from that date. Indeed, Fitzroy has served notice of an intended rent review if the lease is held still to be subsisting. The premises have remained empty since 1 April 2004 and no rent or outgoings have been offered or collected since then. Furthermore, neither party has sought a new tenant to take either a new lease or an assignment or sub-tenancy of the current lease. Moreover, the commercial lettings market was, in 2004, and remains sluggish so that it might take some time to find a new tenant once a new lease, or the existing lease, is marketed following this judgment. It is also likely that any new tenant, once found, would be able to negotiate a substantial initial rent-free period.

5. It follows that whoever succeeds on the issue relating to the termination of the lease will either recover, or be saved from paying, a very substantial sum. In the proceedings, Fitzroy is claiming unpaid rent and other outgoings to date and the Financial Times is counterclaiming a declaration that the lease was successfully terminated with effect from 1 April 2004 and a small sum which, if the lease was terminated, amounts to an overpayment of an insurance premium for the period after that date. If the lease is held to be subsisting, the Financial Times will remain liable for rent and other outgoings for the whole period up to 10 April 2010.
The Premises

6. Castle House makes up half of the joined pair of two U-shaped office blocks which are linked together to form a hollow rectangular shaped building. The building comprises about 31,050 square feet and is arranged on the ground to second floors on the corner of Epworth, Paul and Clere Streets, London, EC2. Fitzroy House is also U-shaped. The internal hollow of the block has a courtyard at ground floor level which is used as a car park that is shared by both blocks. Vehicular access to the courtyard is obtained via two passages running from the two roads abutting the two longer sides of the rectangle and these passages create the divide between the two blocks at ground floor level.

7. The building was both intended for use and constructed in the 1960s as a warehouse and was, in 2004, about 35 years old. The first planning consent that was granted, in 1968, was for warehouse use. However, that use never materialised and permission from the local Planning Authority for a change of use was obtained in 1970 to allow the building to be used for the preparation, compilation, printing and distribution of statistical and financial information with ancillary offices and storage. In about 1989, the building was substantially remodelled and refurbished by, amongst other features, the installation of air conditioning, so as to convert the building into full office user. Much of the plant dates back to this refurbishment. A further change of use permission was then obtained in 1994 to allow the building to be used as general offices within the uses permitted by Class B1 of the Town and Country Planning (Use Classes Order) 1987, albeit that office use was already permitted by the change of use permission obtained in 1970. This was followed by the lease which was dated 31 August 1994 and which took effect from 1 April 1994. Under that lease, Castle House has been used by the Financial Times as offices.

8. The building is located in a secondary or fringe area of the City of London, albeit within the London Borough of Islington where this borders the City of London. The offices are not usually equipped or finished to the same high standard as is normal for that market and office premises can be expected, on occasion, to revert to a combination of uses such as offices, studio, warehouse, manufacturing or quasi-industrial use. The commercial office rental levels in this area are often significantly lower than would be usual for the general City market. An obvious tenant for this building would have been in 1994, and still remains, an investment bank with prime City office accommodation who wanted cheaper back up offices located reasonably close to its main offices in the City.


The Lease

9. The lease is in standard form and contains no unusual covenants. The clause giving rise to the present dispute was, however, relatively unusual and there did not appear to be any direct authority available which provided clear guidance as to the meaning and effect of its principal provision.

10. The termination clause provided that:
“3(4) The [Financial Times only and not its successors in title] may give not less than thirteen months notice to [Fitzroy] of termination of this Lease on 1 April 2004. If:
(a) The [Financial Times] has materially complied with all its obligations under this Lease down to the date for which notice of termination has been given:
(b) …
then the Term shall cease on that date and (subject as mentioned below) no party has any further rights or obligations under this Lease. Termination of this Lease shall not affect any of [Fitzroy’s] rights in connection with any breach by [the Financial Times] or its successors in title or the Guarantor of their obligations under this Lease which may have occurred before the date on which this Lease terminates.”

11. The relevant obligations all related to the Financial Times’ repairing and redecorating obligations. These were:
“5. TENANT’S COVENANTS
(1) Introduction
The Tenant covenants with the Landlord to comply with its obligations set out in this clause … (4) Repair
The Tenant shall:
(a) put and keep the Property in repair …
(b) replace all The Landlord’s fixtures and fittings in the Property which become beyond repair during the Term with those of no lesser quality;
(c) keep all windows and other glass in the Property (both inside and outside) clean, cleaning them once a month and more frequently where necessary;
(d) keep any open area within the Property adequately surfaced (where appropriate) and in good condition; …
(5) Redecoration
The Tenant shall redecorate the exterior of the Property in every third year and in the last year of the Term and the interior of the Property in every fifth year and in the last year of the Term in colours and patterns which, in the case of external decorations, shall first be approved by the Landlord at all time during the Term and, in the case of interior decorations, shall first be approved by the Landlord in the last year of the Term such approval in every case not to be unreasonably withheld … The Tenant shall also have all parts of the Property requiring treatment for their preservation and protection treated in accordance with approved methods for preserving and protecting them. All works under this sub-clause shall be carried out in a good and workmanlike manner and with suitable, good quality materials. …
(7) Entry by the Landlord
The Tenant shall:
(a) permit the Landlord to examine its conditions and take an inventory;
(b) permit the Landlord to enter the Property to exercise any of the rights reserved to the Landlord reserved by this Lease …
(c) …
(d) furnish all information relevant for those purposes as the Landlord or anyone having a right of entry under this sub-clause may reasonably request. …
(9) Alterations
The Tenant shall:

(c) at the End of the Term, if required to do so by the Landlord but not otherwise, remove any alteration or addition including without limitation demountable partitioning (including any made before the beginning of the Term) and make good any damage caused by the removal. …”
The Applicable Law

12. Repairs. A substantial body of case law was cited in submissions by Mr Warwick and Mr Morgan QC in order to establish what amounted to disrepair and as to the ambit and effect of the repairing covenant governing the Financial Times’ obligations to put and keep in repair. I do not intend any disrespect to these submissions in summarising the relevant and applicable principles without undertaking a detailed exegesis since the law, although not always easy to apply, is now well established.

13. My summary is based, in particular, on Harris v Jones (1832) 1 Moo & R 173; Stanley v Towgood (1836) 3 Bing N.C. 4, Scales v Lawrence (1860) 2 F & F 289, Proudfoot v Hart (1890) 25 QBD 42, Perry v Chotzner (1893) 9 TLR 477, Calthorpe v McOscar [1924] 1 KB 719 and Riverside Property Investments Ltd v Blackhawk Automotive [2005] 1 EGLR 114. Reference was also made to the modern practitioners’ comprehensive reference work on this subject: Dowding & Reynolds, Dilapidations, The Modern Law andPractice, 3rd edition, particularly at paragraph 9.03.

14. In summary:
1. “Repair” means making good damage and the renewal of subsidiary parts.
2. Not every defect, however minor, has to be put and kept in repair. The obligation is to put and keep in substantial repair. Minor defects are not included in the obligation to put and keep in substantial repair.
3. The standard of repair is that to be expected of the reasonably minded tenant on coming into the lease. The critical date for ascertaing and setting that standard is the date of the lease in question, in this case 1994.
4. Regard must be had to the age, type, location and established use of the building at that date in defining the relevant standard of repair.
5. Where there is a range of repair methods, the choice of the appropriate method is to be left to the obligor undertaking the repair, in this case the tenant.
6. The obligation is a continuing obligation and comprises both the obligation to undertake the work and to achieve an acceptable outcome.

15. Material compliance. I was referred to a recent decision of Judge Rich QC sitting as a judge of the Queen’s Bench Division in Commercial Union Life Assurance Co Ltd v Label Ink Ltd [2001] L & TR 29. In that case, the relevant provision allowed the tenant to exercise an option to determine the lease which was subject to a condition that: “there shall not be any material breach of the covenants [by the tenant]” contained in the lease. This condition is, I am satisfied, the mirror image of the condition in this case that provides that the tenant: “has materially complied with all its obligations” contained in the lease. It is, therefore, comparable to this condition and Judge Rich’s views, particularly given his very considerable experience in this area of the law, are entitled to considerable respect.

16. Judge Rich summarised the correct approach to the application and meaning of the condition requiring “material compliance” or no “material breach” in an option or break clause as follows:
“12 In qualifying [the condition requiring compliance or no breach], it is clearly intended to mitigate [the rule requiring strict compliance] as an otherwise trifling breach would disqualify the tenant from exercising the option even though the court might be slow to find such a breach, where it would be unfair to do so.
13 The intention must be to modify that rule to an extent that is reasonably fair to both landlord and tenant. The tenant is given by clause 7.8 the right to break, providing he complies with his covenants to the extent of avoiding any material breach. In my judgment, in that context, the breach is material if, but only if, having regard to all the circumstances, and to the proper efforts of the tenant to comply with his covenants, as well as the adverse effect on the landlord of any failure to do so, it will be fair and reasonable to refuse the tenant the privilege which the lease otherwise grants. The extent of any breach, the practicality of quantifying the damage arising out of it, the efforts made by the tenant to avoid it, the genuine interest which a landlord had in strict compliance are, in my judgment, all material factors in determing materiality.”

17. Fitzroy urged me not to follow this decision, despite its relevance and authority. It contended that the clause in this case appeared in a lease that had been entered into soon after the decision of the Court of Appeal in Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47 and the requirement of “material compliance” was clearly added into the lease as a response to that case. Bairstow Eves had decided that if an option clause allowing the tenant to renew the lease was coupled with a condition requiring performance and observation of the tenant’s covenants, the option could only be invoked if there had been strict compliance. Fitzroy sought to contend that, given that background, the condition in this lease was only intended to provide a modest inroad into that absolute requirement so that only trivial breaches of covenant would allow the modification that the breaches must be material to be given effect to.

18. I cannot accept this reasoning. It is clear that the draftsman of this condition had the Bairstow Eves case in mind since it had been decided so recently prior to the drafting of this condition. However, that provides no guidance as to how to give effect and meaning to this condition. In other words, whether the words are to be construed strictly, naturally or widely is to be gathered from the words of the lease and not from an assumed intention of the draftsman gleaned from his or her drafting exercise being undertaken in the knowledge of the Bairstow Eves case.

19. In my judgment, Judge Rich’s reasoning is to be followed since it cogently gives meaning to the expression “material” in the context of a breach of covenant and its effect on a break or option clause. In asking whether a breach or compliance is material, it is necessary to ask: “material to what”? The obvious answer is: “material to the landlord and to the obligations of the tenant”. The purpose of a clause limiting the right to exercise a break clause is to enable a landlord to preserve his legitimate interest in ensuring compliance with all the tenant’s covenants by the tenant before he departs. The landlord has an interest in ensuring compliance so that he can relet speedily, that the value of his reversion is not jeopardised and in preserving his income stream from the property by way of further rent. Thus, a breach of the repairing covenant will only be material if these interests are jeopardised by that breach.

20. I also follow Judge Rich’s reasoning because it gives effect to the word “material”. If Fitzroy’s interpretation is correct, this word is to be given the meaning of “all but insignificant or minor” whereas it in fact means: “in context and taking all relevant considerations into account”.
The Repair Programme

21. The Financial Times undertook an extensive programme of repairs. Before this was embarked upon, it made reasonable efforts to engage Fitzroy in meetings and discussions to agree upon the works needed to ensure its compliance with all its repairing obligations. This started with a letter from the Financial Times’ solicitors to Fitzroy’s solicitors dated 12 September 2003 inviting a joint surveyors’ inspection to agree upon the necessary works to be carried out by the Financial Times. The Financial Times appointed as its surveyor Mr Nigel Harrison and, subsequently, Fitzroy appointed Mr Scouller. It is clear that Mr Harrison’s instructions were to advise upon and then execute the necessary reasonable repairs to enable the Financial Times to comply with its requirements of reasonable compliance with its repairing obligations. Mr Scouller, however, was not given instructions enabling him to meet with Mr Harrison or to comment upon the Financial Times’s professionals’ proposed work.

22. Mr Harrison prepared a detailed specification of works which he sent to Mr Scouller. This was not responded to by Mr Scouller although he was preparing his own schedule of defects which was not sent to the Financial Times’s advisers until after the break date had passed. Mr Harrison sent the specification out to tender and entered into a contract with Botes on the Financial Times’s behalf. The contract was for £721,439 and it lasted for 10 weeks. Ultimately, the final contract sum was £915,689. Mr Scouller had the opportunity to inspect the works as they were being carried out and to undertake a joint completion inspection but did not take up those opportunities.

23. Following completion of the works, the Financial Times surrendered the keys to Fitzroy who responded, immediately following the break date with a contention that the Financial Times was in substantial breach of its repairing obligations and serving a schedule of alleged defects. Proceedings were started by Fitzroy on 29 September 2004.
Approach of Surveyors

24. The approach to the survey carried out by Mr Scouller was not one that adopted the conventional definition of defect or repair that I have already summarised. Instead, he attempted to find all blemishes, defects, however small or insignificant or potential defects which might emerge in the future. I formed the impression in observing Mr Scouller giving evidence and in showing me the many defects he had, as he saw it, ascertained on site that he saw his role as seeking to identify as many defects as possible so as to enable Fitzroy to hold the Financial Times to the lease because it was not in Fitzroy’s commercial interest to allow the lease to be determined. This approach somewhat clouded his objectivity. On the other hand, I found the Financial Times’s surveyor Mr Day to be fair, open minded and professionally objective in his approach.

25. Following the departure of the Financial Times and Mr Scouller’s inspection, it was suggested by Mr Sinnett, Fitzroy’s mechanical and electrical engineering expert, that representatives of the Financial Times returned to Castle House and undertook further repairs in an attempt to secure compliance with the repairing obligations. This was based on his recollection of what he had seen on his first inspection compared with a later inspection. I am clear that no such return visit occurred and that the Financial Times made no attempt to return and undertake further remedial work. Mr Sinnett’s recollection is mistaken.
The Breaches
1. External Roof

26. Introduction. Castle House is constructed with a flat roof which is covered with rock asphalt. The building was about 35 years old and had been constructed as a warehouse. However, there was a reference in the purchaser’s report for the landlord that had been compiled in 1999 that suggested that the roof coverings had been renewed at some time during the life of the building and the relatively good condition of the covering suggested to Mr Day that it had only been in place for a few years longer than the lease, in other words that it had probably been replaced during the office conversion works in the late 1980s. I accept that view. However, the rock asphalt material is relatively inflexible and it is prone to split, tear and bubble, particularly at points of weakness such as where it is turned upwards or where it has been repaired. The overall test for it being in good repair is whether it is waterproof and weathertight and will remain so for a reasonable period of time. Replacement is only to be regarded as a necessary option when the covering has reached an age or condition when further patching will not ensure a continuing uniform water barrier to rain and moisture ingress into the fabric and interior of the building.

27. Asphalt roof surface. Fitzroy complained that the asphalt weathering layer of the flat external roof was blistered in 106 different locations on both the roof surface and the skirting upstands. The size of the splits varied from 20 to 100 mm in diameter. These were complimented by numerous splits and tears in the asphalt surface. Furthermore, the solar reflective paint finish to the surface of the roof and upstands was worn and uneven. The suggested remedy was to cut out all blisters and tears and repair those areas and the splits and rucks with asphalt repairs and to apply a new solar reflective paint finish to all roof surfaces and upstands. The overall value of these repairs was estimated at £4,625. There is a further asphalt area covering the four separate plant rooms for the passenger lift, the two goods lifts and the tank room. These exhibit blisters wrinkles and other blemishes which in total are estimated to cost £1,060.

28. The two surveyors agreed that there were blisters, splits and wrinkles to the asphalt surface present on the break date and that a solar reflective finish had also been applied to all roof areas. The difference between the parties was that Fitzroy suggested that substantial asphalt patch repairs were required coupled with a further solar reflective paint finish whereas the Financial Times contended that most of the blemishes in the asphalt surface had occurred in the fifteen months since the break date and that the few remaining blemishes were insignificant and not requiring remedy. The reflective paint surface was not defective since, although uneven, it had been adequately applied and was satisfactorily fulfilling its reflective function.

29. The rock asphalt surface, being relatively inflexible, can give rise to potential areas of failure wherever it is repaired since the site of the repair creates a new joint which is susceptible to further failure. The roof covering was not, however, nearing the end of its effective working life since it was no more than about fifteen years old. The surveyors both accepted that the roof covering would require complete replacement at some stage but that that stage was still some distance in the future. Overall, the roof was in good repair in the sense of not admitting water and of being capable of being patched as and when further tears and other areas of weakness opened up. The repairs that had been done during the Financial Times repair programme were regarded as sufficient by the professionals supervising the work at that time and many of the blemishes that I observed had clearly appeared since the break date.

30. The alleged defect in the paint finish was that it had been unevenly applied so that the radiation it was subject to would not be reflected evenly, thereby creating a deleterious effect on the underlying asphalt. However, it was clear from the surveyors’ evidence that this type of coating is typically uneven in application and that the exhibited unevenness was within acceptable limits. The suggested potential long term deleterious effects that it would have on the underlying asphalt were both speculative and unsubstantiated.

31. I conclude that only a few inexpensive patching repairs at most were required to put the roof into a condition which enabled compliance with the repairing covenant at the break date and that nothing further was required to repair or reinstate the paint covering. No substantial defect or breach of covenant was established.

32. Joints. Fitzroy made two series of complaints about various joints in the upstands and copings, being those relating to the poor workmanship to these joints during the repairing programme and to their general deteriorated condition. There were two workmanship complaints. The first related to the lead expansion joint cover on the Paul Street elevation had been overlaid with bitumous felt. This was said to give rise to a temporary solution given that the original cover was made of lead. The second related to the joints between all remaining copings in a number of locations which had been pointed with grey mastic rather than with the original mortar. The mastic was starting to shrink and where this was occurring, a potential path for water ingress had been created. The general deterioration complained of related to isolated locations where the asphalt skirting upstands had cracked and where there were wide open joints and cracking in the pointing between coping stones on the parapet wall. The suggested remedial work for all these complaints was valued at about £1,925. Further areas with similar complaints associated with each of the four plant rooms are also identified with an estimated remedial cost for all such complaints totalling £650.

33. The answer to these complaints was twofold. As to the workmanship complaints, it was alleged that the use of felt overlay over the expansion joint had been a satisfactory way of repairing the cracking around the adjacent cracked asphalt joint. As to the over pointing, it was accepted that there was some evidence of this but this had not given rise to any loose or debonded coping stones and there was no evidence of water ingress through or around the areas in question. As to the general complaints of general deterioration and cracked or open joints, it was said that the overall condition of the areas in question was one of good repair since there was no evidence of water ingress and there were few areas where there was evident joint cracking or openness. Finally, such cracking as was evident had occurred since the break date.

34. Having inspected these areas, I accept the evidence of Mr Day and I conclude that there was no, or only minimal, evidence of continuing breaches of the repairing obligations on the break date in relation to these complaints. Much of the cracking or joint covering loss that was evident was obviously of recent origin and had occurred in the fifteen months since the break date.
2. External Elevations

35. Introduction. Fitzroy made a series of complaints about the state of the external elevations. The principal complaint was that all elevations were so dirty that each required cleaning using jet hosing from scaffolding. The external elevations to Paul Street, Clere Street and Epworth Street were of brick and the suggested cost of scaffolding and cleaning these elevations was approximately £4,600. The cleaning of the internal elevations to the courtyard was costed at approximately £2,100. In addition, much of the proposed cost of scaffolding, a figure of £25,000, is attributable to these cleaning exercises. The other complaints related to two isolated complaints of individual damaged bricks requiring replacement, eleven individual areas of particular staining or localised blemishes and a particular area of badly scoured brickwork. The cost of repairing the scored brickwork was put at approximately £750 and of all the other complaints at approximately £1,735.

36. Brickwork cleaning. The brickwork consists of an engineering brick typical of an industrial-type building in that location. Clearly, the brickwork will slowly darken with age, given its susceptibility to urban pollution. However, any brickwork will do the same. The only difference is that the aged appearance of an industrial brick is more obvious, if only because it is less familiar particularly on office blocks. Therefore, purely cosmetic cleaning of the overall surface would not ordinarily come within the requirements of a repairing covenant. On the other hand, if the surface was stained by water, air conditioning plant emissions, bird droppings or other natural or man-made contamination, cleaning so as to remove such excrescence would usually be required by a repairing covenant both to remove a potential source of contamination of the structure and an obvious and unpleasant eyesore.

37. These considerations are reinforced by the potential problems that high pressure water jet cleaning can cause. This method of cleaning is the usual and most obvious method of cleaning external surfaces since other methods require chemicals which will usually discolour or cause deterioration of the building fabric. The jet hosing can cause deterioration of the brickwork surface by erosion which can leave the cleaned surface both in a worse condition and less sightly than it had previously been. It follows that brickwork cleaning should not be undertaken unless and until there is a structural need for such cleaning to be undertaken.

38. Mr Scouller was of the opinion that the present condition of the brickwork was deleterious to the long term condition of the structure because the dirty surface would contain deposits which will attack the matrix of the brickwork which, in turn, will promote frost action, spalling and other weathering to occur. Mr Day disagreed. He pointed out that an engineering brick, which had been used on all elevations, was a much more durable brick than other bricks more customarily used in urban buildings. I take judicial notice of this obvious feature of engineering bricks since it is demonstrated in the frequent use of engineering bricks, often over many decades, in many locations such as railway embankments. Furthermore, Mr Day could see no evidence of any decay, even in its early stages. His view was clearly summed up in this passage of his evidence:
“… Because what is the repercussion of the staining, and is it having any affect on the brickwork? Therefore, does it mean that we are going to get erosion to the brickwork, or are we going to get some internal penetration through the brickwork, as suggested by Mr Scouller? The answer to both those questions is, in my view, no we do not, and therefore we do not have disrepair and therefore we do not need to do anything.”
Furthermore, Mr Day was clearly of the view that any staining on the surface of the brickwork was purely cosmetic and a consequence of the use and properties of engineering bricks.

39. Mr Scouller was unable to point to any examples of brickwork which had deteriorated due to deposit attack from surface air-borne deposits which had not been cleaned off the surface. He had not seen deterioration of this kind in other buildings. He also accepted that this cleaning work did not come within the ambit of the repairing covenant but, for the first time in the witness box, asserted that it fell within the cleaning covenant of the lease.

40. I conclude that the cleaning exercise suggested is not required of the Financial Times by any covenant in the lease, is not necessary for structural reasons and would be potentially harmful of the building fabric in any event. My inspection of the brickwork also suggested to me that this cleaning is not necessary for purely cosmetic and aesthetic reasons. Therefore, there is no breach of the repairing covenants arising from the uncleaned nature of the brick elevations.

41. Other complaints. The scored brickwork is located adjacent to the electrical sub-station cupboard. Evidently, a small badly scored section of brickwork was replaced during the repairing programme. The bricks about which complaint is made were immediately adjacent to this area and were not so badly scored. Their structural integrity has not been damaged, unlike the replaced bricks and the scoring is purely cosmetic. The issue of whether, and if so which, remaining scored bricks should be replaced could and should have been resolved on site during the repairing programme. The decision as to where to draw the line between replacement and retention was taken by the professionals at the time and is not one which can be seen to have been irrational or unreasonable. Thus, the remaining scored bricks do not constitute a breach of the repairing covenants.

42. The other complaints relate, in part, to the manner in which the repairing programme was undertaken and, in part, to isolated blemishes which are in some instances too trivial to constitute a defect and in the remaining instances minor defects. I would assess the overall value of the defects constituting a breach of the repairing covenant as being about one quarter of the claimed figure of £1,735.
3. Windows

43. Introduction. There are two different complaints. The principal complaint concerns the bomb protection placed on the inner face of all the windows. This protection is provided by a thin plastic sheet which has been stuck onto the inner face of all glass surfaces to prevent splinters and shattered glass from being propelled into the offices if a bomb explodes in their vicinity. This protective coating was removed and replaced with a fresh protective coating during the repair programme and complaint is made that the replacement coating is scratched, bubbled and dimpled in many locations and Fitzroy contends that all the plastic sheeting requires to be replaced. The second series of complaints relate to the dirty nature of many of the windows which have been left with paint and mortar droppings, efflorescence between the frames and displaced gaskets. Fitzroy contends that these problems require all the windows and their surrounding frames, beading and cills to be overhauled and cleaned. The estimated cost of replacing the plastic sheeting is put at £11,400 and of overhauling and cleaning the windows at £9,345.

44. Bomb film. The film coating of about 143 panes was replaced. Mr Scouller contended that many of these panes were replaced with a coating which now contains bubbles and scratches and that the result is unsightly. The bubbles, he suggested, were caused by poor preparation of the glass surface before it was offered up to the plastic coating, particularly dirty and soapy water being left on the surface. The suggested cause of the scratching was hasty cleaning during the suggested rushed final clean before the repair programme works were completed just before the deadline immediately before the break date expired.

45. I carefully inspected many of the windows and could not observe more than a small number of bubbles and blemishes and only saw one instance of a scratched plastic coating. The remaining scratches are, therefore, barely visible. It is therefore not strictly necessary for me to decide whether or not such blemishes fall within the repairing covenant at all. The Financial Times asserted that they did not, on the grounds that they were tenant’s fixtures and in any case did not constitute disrepair but were merely cosmetic blemishes. Fitzroy contended that it was necessary for all blemishes and scratches to be removed by replacement to provide compliance with the repairing covenant.

46. I am satisfied that any significant and readily discernible blemish, if found on a significant number of window panes, could amount to disrepair since they are unsightly and the plastic coating is intended to be laid proud of the window pane. This is so even though the bubbles and scratches do not in any way effect the ability of the shatter protective coating to fulfil its safety function. Had the visual effect been generally of that unsightly kind, Fitzroy would have the beginnings of a case that the result amounted to disrepair. However, the actual effect is such that there are only a handful of unsightly window panes. The two surveyors agreed that there were 17 scratches which penetrated to the window below. However, these are neither unsightly nor detrimental to the safety function of the plastic covering. Thus, there are a handful of windows (I counted six) that can reasonably be said to be in disrepair because they have significant surface blemishes that are unsightly. The reasonable value for the replacement of these coverings is no more than about £300 or £50 per pane, the unit cost that the Financial Times paid to the sub-contractor who replaced the plastic coating during the repair programme.

47. Overhauling and cleaning. The Financial Times accepts that there are some defects amounting to breaches of the repairing covenant left behind after the repair programme had been completed at a value of about £2,000. This sum covered the cleaning needed to remove paint and other splatter and to provide a thorough clean of the windows. This latter exercise was not strictly necessary since the windows had all been thoroughly cleaned using a sugar soap solution at a late stage in the repair programme.

48. The remaining dispute concerned the overhauling of most of the windows. Mr Scouller contended that the splits in the external seals required repairing. This would involve an involved exercise whereby, initially, the internal beading and glazing would have to be removed. This would have to be followed by the fixing of new seals to the base of the external frame. Finally, the removed internal glazing and beading would have to be replaced.

49. The two experts selected at random a sample window and examined it at length. This window had a 3 mm depth split to the left hand end of the external lower seal. The seal had not failed and was still fulfilling its function properly. However, it was agreed that the profile of the seal was in the process of gradual change and that these defects might ultimately lead to a failure of the seal. Mr Day, on that basis, concluded that the seals were not, currently, in disrepair and would only come within the ambit of the repairing covenant when the seal started to fail. Mr Scouller disagreed because he contended that any potential defect could and should be remedied under the requirements of the repairing covenant.

50. I accept the evidence of Mr Day. The tears that were visible were not unsightly nor obviously of concern and since the seal will continue to perform its function for some time to come, the extensive remedial work involved in replacing the seal is not, at this stage, warranted.

51. The overall conclusion is that the established breaches can be valued at no more than about £2,300.

4. Internal Areas

52. Introduction. The repair programme involved extensive renewal, redecoration and repair to the internal finishes including the blinds, partitions, floor coverings and wall surfaces. The complaints made by Fitzroy about this work relate to a long series of complaints about internal doors which were replaced which do not match those that remain; humps in the newly laid carpet; areas of poorly finished, damaged or incomplete paintwork; and floorbox lids which were not left flush with the raised floor around the floor boxes. The overall estimated cost of repairing these items is put at about £7,500.

53. Two more substantial complaints are made. The first is that the ground floor walls have been painted instead of being vinyled as the first and second floor walls have been. This vinyling exercise is estimated as costing £5,910. The second relates to extensive localised damage to and around an area of the suspended ceiling on the second floor which has been badly damaged by water ingress. Further damp patches and the need to eradicate the damp penetration and make good the damage are also complained about. The necessary repairs for all these complaints is estimated to be about £500.

54. Interior decoration. Mr Scouller’s view was that the paintwork in the areas he drew attention to was unsatisfactory and required localised repainting. Mr Day disagreed although there were one or two areas where touching up was desirable. Following my own observations, I agreed with Mr Day.

55. Many of the internal doors were damaged and over painted and it was not possible to match their replacements with the original joinery. A decision was taken to replace all the first and second floor doors and the replacement doors all match each other although they do not provide an exact match with the surrounding architraves and door frames or the adjacent skirting. The doors that did not match were to cupboards and toilets but when these were inspected, it was clear that there was no obvious or jarring mismatch. The complaint was no more than that Mr Scouller would have himself chosen every door to be of the same shade with the surrounding woodwork. The finished effect is not unsatisfactory nor, in consequence, a breach of the repairing, repainting or reinstatement covenants.

56. Mr Scouller contended that the floor carpets, which were made up of carpet tiles, should have been left even. Mr Day contended that any incoming tenant would need to take up the carpet to lay cabling and other fittings and then replace the carpet so that its present somewhat uneven look would disappear once this had been done. Moreover, the tiles would have settled down if they had been subjected to a regular working office heated and air conditioned environment. Again, Mr Day’s views are those that I find to be correct with regard to this series of complaints.

57. Overall, I conclude that an appropriate value to put on those limited number of defects which could be said to constitute a breach of covenant is about one tenth of that placed on them by Fitzroy.

58. Ground floor walls. At the time of the grant of the lease, the ground floor walls were finished in emulsion paint whereas the other walls were finished in vinyl. This was in conformity with the different use then being made of the ground floor to the offices above. No stipulation was placed in the lease that the walls had to be redecorated with vinyl even if they were emulsioned originally. In any case, the finished wall surfaces do not have an unsatisfactory appearance. For both reasons, no breach of the repairing covenant occurred.

59. Damp penetration. The large hole in the suspended ceiling appears to have resulted from water penetration from a storm which entered because the storm led to a lift shaft allowing storm water to enter or a pipe to leak. The building was empty and not subject to regular inspections and when the leak started there was no one on hand to put a stop to the water entry. There was a limited area of dampness which appears to be drying out since successive damp meter readings showed a reduction in dampness in the affected area. This suggested reduction in dampness is disputed by Mr Scouller but the difference between his remedial solution and Mr Day’s remedial solution is £500 against Mr Day’s £180. Whichever view is correct, the defect is insubstantial and, if a breach of the repairing covenant at all, is not to be valued in excess of £500.
5. Sundry Items

60. WCs. In the second floor WCs, Mr Scouller reported 14 cracked floor tiles in the southern male WC; two loose WC seats; 6 cracked edges to mirrors; and unvarnished skirtings. In the first floor WCs, he reported some blown tiling and unvarnished skirtings. Similar complaints were made in relation to the ground floor WCs. These alleged breaches of covenant were valued in total at approximately £1,800.

61. Mr Scouller described these complaints as comparatively minor. Mr Day did not accept that they were breaches of covenant at all. At best they were snagging items following the repair programme which could and, no doubt would, have been put right had the Financial Times been invited to complete the snagging work after the break date. Few of them are significant enough to constitute breaches of the repairing covenant, at best only the item involving blown tiling is in this category. That was valued at £760.

62. Main entrance. Complaint is made of areas of staining and uneven skirtings. These complaints do not constitute defects within the ambit of the repairing covenant or are minor or fair wear and tear items.

63. Main staircase. Complaint is made of marked and scratched areas, a detached tile and uneven paint surfaces. Again, these complaints do not constitute defects within the ambit of the repairing covenant or are minor or fair wear and tear items.

64. Southern fire escape. Complaint is made of paint splashes; a scoured and scratched plastic banister rail and in the plastic glazing of the escape doors; ill-fitting locking mechanism to a fire escape door and gaps in the carpet tiles. Again, these complaints do not constitute defects within the ambit of the repairing covenant or are minor or fair wear and tear items.

65. Courtyard. Complaint is made of pointing to the paving slabs and a crack in the tarmac surface. These are accepted in the combined sum of £225. Complaint is also made of unlevel paving slabs and depressions in the tarmac. Neither is a defect within the ambit of the repairing covenant nor are other than minor or fair wear and tear items.

66. Drainage. Complaint is made that line D from manhole 2 was subject to 25% obstruction and that four manhole covers had not been painted. Mr Day answers by pointing out that line D was neither blocked nor malfunctioning so was not in a state of disrepair. The manhole covers did not require to be painted given their location so, again, no defect was established. I accept Mr Day’s evidence.

67. Asbestos. The building was cleared of asbestos in 1986. Unfortunately, the asbestos survey could not be located so another survey was undertaken by the Financial Times at level 2, the appropriate level of survey, which revealed no asbestos. This enabled the Financial Times to comply with its obligations under the asbestos regulations and, hence, under its repairing obligations in the lease. However, Fitzroy undertook a second level 2 survey which revealed some debris faintly contaminated with asbestos left in a ceiling void in the entrance door. This minor item has been accepted as an item of disrepair which will cost about £2,800 to remove.
6. Mechanical and Electrical Items

68. Air handling plant. The VAV system was upgraded by the repair programme and commissioned just before the break date. The specification of the original plant was not available so that its design rate of air handling was not known. The commissioning test certificate stated that the plant achieved 59% of its design capacity which, if correct, placed the VAV system in breach of the BISRIA recommended 100% - 110% range of design capacity. If the performance rating was in fact as low as 59%, it was suggested that the system would, when operated in an occupied building, fall below the minimum required by Health and Safety legislation. On the basis of this one certificate, Fitzroy contended that the system was defective and might require up to £10,000 being spent to track down the cause of this under performance and then rectify it. This exercise might well involve dismantling the ceiling and entering the ductwork above.

69. The Financial Times disputed this item on the basis that the certificate did not establish a defect. The VAV system would only be defective if it was functioning at 59% of its design and installed capacity but no-one knew what that capacity was. The commissioning engineer probably made his own calculations or assumptions as to the theoretical capacity of the upgraded system, being the original system to which had been added an upgrade some years later, and ascertained what percentage achievement of that hypothetical capacity was being achieved during the commissioning. Thus, the certifier must have made an assumption as to the design capacity of a system which was at least 10 years old and to which an upgrade had been added.

70. However, as the Financial Times pointed out, the system had worked sufficiently and satisfactorily throughout the period of the lease so that, even if it was working at 59% of an unknown rating, it had apparently worked at the required 100% of the original but unknown rating since there had been no evident problem or complaint about its working capacity at any time.

71. I accept the Financial Times’ case. The burden of proving a defect in the system that required to be remedied lay on Fitzroy and this burden was not discharged merely by placing in evidence one commissioning certificate of the upgraded plant which was based on an unstated capacity which did not appear to have any relationship to the original design capacity which was the only relevant capacity for use in determining whether the system was in disrepair. Thus, this item fails on the evidence.

72. Chilled water pumps. Fitzroy contended that the chilled water pumps in the roof top boiler house were rattling. This rattling was observed by Mr Sinnett but not by Mr Eaton since the pumps were not working on the day of his survey. However, the pumps had been commissioned during the repair programme and were observed to be working within normal tolerances. Mr Sinnett could not state what was wrong, if anything, with the pumps. The noise he heard could have been caused by trapped air, which could readily be released, or by faulty bearings requiring replacement. Since the system had been satisfactorily commissioned soon before the break date and had worked apparently satisfactorily before that, I conclude that the noise was caused by trapped air occasioned by the lengthy period of lay off to which the system had been subject. It follows that this is not a breach.

73. Broken and missing Belimo wall controllers. The air conditioning was subject to controllers located on the columns and walls of the open plan offices. Many of the adjustment levers for these controllers had been removed to prevent the occupants from adjusting the air conditioning and thereby putting it out of balance. It would appear that the levers had been removed before the lease had been entered into. It appears that it is no longer possible to buy replacement levers from Belimo since they are now out of production and stock. Fitzroy now seek to have special levers made which are replicas of those still in place at a total cost, for the 37 missing levers, of £5,500. The Financial Times contends that it has no obligation to replace these at all since they were always missing. As an alternative, it accepts the need to replace the levers but contends that clips can be obtained which can be fitted and which will do the same job satisfactorily. The cost of these clips would be about £150. Alternatively, VAV units can be adjusted manually by opening the control cover.

74. The obvious and common sense answer to this complaint is that the means of adjusting the VAV units must be provided but by means of the clips. Thus, this is a minor breach of covenant whose value is about £150 - £300.

75. Ceiling grilles and diffusers. Fitzroy contended that the ceiling grilles were very dirty and required cleaning. The excessively dirty nature of the grilles suggested that there were problems elsewhere in the air handling units and it was also contended that the dirt could cause sick building syndrome in workers working beneath them. The Financial Times contended that the grilles were not dirty but were merely aged albeit not worn out.

76. I inspected the grilles and they did not appear unduly dirty. I therefore accepted the views of Mr Watkins and concluded that this item had not been proved to be a defect at all.

77. Fire hose reel. Fitzroy contended that the second floor north area fire hose reel was subject to a major leak as shown by the notice it displayed to that effect which it was carrying when Mr Sinnett inspected the building. However, Mr Watkins stated that he had knowledge that the hose reel had been tested satisfactorily during the repair programme and that the notice had been left in error by the commissioning contractor. In the absence of any testing of the hose reel, this item fails on the burden of proof.

78. Floor box switches. Fitzroy contended that the majority of the floor boxes lacked switches and that several boxes had minor defects. The boxes should have switches added and the defects remedied. However, as the Financial Times contended, these items were tenant’s fixtures which could have been removed. Instead, each box was refurbished and left in good condition for the incoming tenant. They never had switches and the other defects were trivial or of recent origin subsequent to the break date. Had Fitzroy wanted these boxes to have switches added, they should have informed the Financial Times of that fact during the repair programme. I accept the Financial Times’ contentions. This complaint fails.

79. Operating and maintenance manuals. Fitzroy contended that the electrical operating and maintenance manuals left by the Financial Times’ commissioning contractor were inadequate and required substantial work to ensure that they were complete. The Financial Times contended, and this was not disputed, that no manuals had been provided at the outset of the lease. When they departed, they left a full set of NICEIC electrical test certificates so that the material complied with current IEE regulations. Furthermore, all distribution board schedules had been installed within the cupboards housing those boards. The other material that was left comprised the best that was available given the age of the installation and the absence of any existing manuals. I accept the Financial Times’ contentions. This complaint fails.

80. Remaining Mechanical and Electrical items. There were a further 12 items which were agreed in a total sum of £1,650 and a further 35 minor items which were all disputed and which totalled, on Fitzroy’s figures, £9,590. These items were, in the main, overstated or not breaches of the repairing covenant but even if they were accepted in full, they constituted no more than insubstantial breaches of the repairing covenant.
7. Overall Costs

81. The overall effect of my findings is that, taking Fitzroy’s approximate figures and applying them to the relatively few and insignificant items which I have found proved, Fitzroy has established a maximum value of defects amounting to breaches of the repairing covenants of no more than £20,000 including supervision fees. This overall figure covers all claimed items including the external, internal and mechanical and electrical items.
The Evidence of the Lettings Market

82. Each party called a lettings and valuation surveyor with a detailed knowledge of the City of London lettings market. These two experts reached substantial agreement as to the relevant factual background. In the light of the relatively limited value of outstanding defects, the two experts’ evidence was broadly agreed. The letting market was almost at its bottom in April 2004, which is why Fitzroy was so keen to hold the Financial Times to its lease if at all possible. At that time, there was a vacancy rate of about 16% of the total stock. If a tenant was found, that tenant might well have negotiated up to a two year rent-free period and might have attempted to secure a longer rent-free period if there were significant defects in the building. However, if the total value of the defects was no more than about £20,000, the effect of their evidence was that there would not have been any substantial effect on the ultimate terms agreed. These defects would not have deterred a potential tenant but it might have taken some months to find one and then there would have been a substantial rent-free initial period.
Conclusion – Material Compliance

83. I conclude that the Financial Times had materially complied with all its obligations on 1 April 2004 and it therefore succeeded in breaking the lease and determining it on that date. I reach that conclusion for these reasons:
1. The number, nature and value of the outstanding defects was insubstantial.
2. The Financial Times had taken all reasonable steps to put and keep the premises into repair, had spent nearly £1 million for that purpose and had followed professional advice as to what was required.
3. The Financial Times made all reasonable efforts to secure the agreement of Fitzroy to what was needed to ensure compliance and it is clear that it would have incorporated any reasonable requirement of Fitzroy into its remedial programme if asked.
4. Fitzroy unreasonably declined to involve itself in the Financial Times’s attempts to agree a remedial programme and adopted an attitude of waiting and seeing whether it could catch the Financial Times out on a technicality so as to prevent it from determining the lease because the market was so soft.
5. The outstanding defects had no effect on the ability of Fitzroy to obtain a further tenant nor on any terms that it could reasonably expect to negotiate. In particular, these defects would not have deterred prospective tenants nor have led to a longer rent-free period or to a lower rent being agreed.
6. It would be most unreasonable to the Financial Times if it was unable to determine the lease and it would also be most unreasonable if Fitzroy, given its behaviour, was able to prevent such a determination from occurring.

84. Fitzroy contended that the effect of the condition that there should be material compliance with the terms of the lease meant that there would not be material compliance unless the only breaches in existence on the break date were trivial and of the kind that would occur if a screw was missing or loose in a particular location.

85. In my view, that interpretation of the condition is unduly narrow even if the expression “materially complied” has a narrow meaning of the kind contended for by Fitzroy. In other words, whatever meaning is given to this phrase, it was applicable so as to allow the Financial Times to operate the break clause successfully.

86. I reach this conclusion for these reasons:
1. Each breach that I have found to have existed was, in itself, either minor or trivial. When taken together, the breaches still amounted to minor or trivial breaches of the repairing covenant.
2. The repairing covenant has two components: namely, firstly, to require the tenant to perform the remedial works so as to put the premises in repair and, secondly, to leave the premises in a repaired state. The Financial Times used all reasonable endeavours to perform its obligations, as is inevitable in a building of any size so it performed and was not in breach of the first part of the covenant. At worst, it left a residual but limited number of limited breaches at the conclusion of the repair programme and was in breach only to that extent.
3. It is clear from the expert valuers’ evidence that the limited nature of the remaining breaches was such that the overall damage to the reversion was negligible or nil. Thus, no recoverable damages, or only trivial damages, resulted from the breaches. If so, the overall effect of the breaches must itself also be minimal or trivial.
Overall Conclusion

87. The lease was determined on 1st April 2004 and the Financial Times is entitled to be repaid its claimed overpaid insurance premium in the sum of £19,058.30. Furthermore, Fitzroy is not entitled to the declarations it seeks nor to the claimed unpaid rent or insurance premiums. I leave for further argument whether it is entitled to any damages for the breaches of the repairing obligations that I have found to exist.
HH Judge Thornton QC
Technology and Construction Court
November 2005

Case No: A1/2005/2588
Neutral Citation Number: [2006] EWCA Civ 329
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT
HHJ THORNTON QC
HT-04-291
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Friday, 31st March 2006

Before :

THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE JACOB
and
LORD JUSTICE MOORE-BICK
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Between :

FITZROY HOUSE EPWORTH STREET (NO. 1) LIMITED
FITZROY HOUSE EPWORTH STREET (NO. 2) LIMITED


Appellants/Claimants
- and -
THE FINANCIAL TIMES LIMITED Respondent/Defendant

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(Transcript of the Handed Down Judgment of
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
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Mr Mark Warwick (instructed by Kanter Jules) for the Appellants/Claimants
Paul Morgan QC (instructed by Wragge & Co LLP) for the Respondent/Defendant

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Judgment
The Chancellor :

1. By a lease dated 31st August 1994 (“the Lease”) the predecessors in title of the appellants (“the Landlords”) demised to the Financial Times Ltd (“the Tenant”) a three storey office block situate and known as Castle House, Paul Street, London, EC2 for a term of 16 years commencing on 1st April 1994. By clause 3(4) of the Lease it was provided that
“The Tenant (here meaning the Financial Times only and not its successors in title) may give not less than thirteen months previous notice to the Landlord of termination of this Lease on 1 April 2004. If:
(a) The Tenant has materially complied with all its obligations under this Lease down to the date for which notice of termination has been given;
[(b)...
(c)...
(d)...]
then the Term shall cease on that date and (subject as mentioned below) no party has any further rights or obligations under this Lease.
Termination of this Lease shall not affect any of the Landlord’s rights in connection with any breach by the Tenant or its successors in title or the Guarantor of their obligations under this Lease which may have occurred before the date on which this Lease terminates.”

 

2. On 5th February 2003 the Tenant gave notice under clause 3(4) to terminate the Lease on 1st April 2004. The Tenant was then and on 1st April 2004 up to date with the rent of £595,000 per year. Between 14th January and 26th March 2004 the Tenant undertook a substantial repair programme in order to comply with the various tenant’s covenants contained in clause 5. They offered facilities for inspection to the Landlords before, during and after the works were carried out but the Landlords did not take them up. On the termination of the works the Tenant duly vacated Castle House.

3. Immediately after 1st April 2004 the Landlords claimed that the Lease was still subsisting because on that date the Tenant had “materially failed to comply with” its repairing and other obligations under the Lease. It commenced proceedings in the Technology and Construction Court seeking declarations to that effect on 29th September 2004. The Tenant contended that it had materially complied with all its obligations under the Lease. The proceedings were heard by HH Judge Thornton QC from 15th to 21st September 2005. By his order made on 4th November 2005 he declared that the Lease had been terminated on 1st April 2004 pursuant to the notice dated 5th February 2003 given by the Tenant to the Landlords.

4. This is the appeal of the Landlords from that order. They contend that the judge misdirected himself as to the test of material compliance to be applied by reference to the judgment of HH Judge Rich QC in Commercial Union Life Assurance Co Ltd v Label Ink Ltd [2001] L & TR 29 (“Label Ink”). They accept the judge’s findings of primary fact but contend that the evidence did not warrant some of the inferences he drew as to the immateriality of the breaches of the tenant’s covenants which he found.

5. It is convenient to start with the decision of HH Judge Rich QC in Label Ink. In that case an industrial warehouse was let for a term of 15 years from November 1993. Clause 7.8 contained an option for the tenant to determine the lease on 1st January 1999 on one year’s written notice on condition that:

“There shall not be any material breach of the covenants on its part herein contained.”

But
“Without prejudice to any remedy available to the landlord in respect of any breach of covenant on the part of the tenant or the conditions herein contained.”

6. It was common ground that a breach could not be material if it was not a subsisting breach on the termination date. Judge Rich then considered various authorities, including the decision of the Court of Appeal in Finch v Underwood [1876] 2 Ch. 310 and continued in paragraphs 12 and 13:
“12. In qualifying clause 7.8 that the breach must be material, it is clearly intended to mitigate that rule as an otherwise trifling breach would disqualify the tenant from exercising the option even though the court might be slow to find such a breach, where it would be unfair to do so.
13. The intention must be to modify that rule to an extent that is reasonably fair to both landlord and tenant. The tenant is given by clause 7.8 the right to break, providing he complies with his covenants to the extent of avoiding any material breach. In my judgment, in that context, the breach is material if, but only if, having regard to all the circumstances, and to the proper efforts of the tenant to comply with his covenants, as well as the adverse effect on the landlord of any failure to do so, it will be fair and reasonable to refuse the tenant the privilege which the lease otherwise grants. The extent of any breach, the practicality of quantifying any damage arising out of it, the efforts made by the tenant to avoid it, the genuine interest which a landlord had in strict compliance are, in my judgment, all material factors in determining materiality.”

7. Counsel for the Landlords contends that the interpretation put upon the words “material breach” is wrong in law, creates uncertainty and unnecessarily extends the range of issues thereby increasing the evidence required. He suggested that the decisions of Judge Rich and Judge Thornton in the instant case had been widely publicised and, in some quarters, criticised. He referred us to a number of authorities in an attempt to satisfy us that the approach of Judges Rich and Thornton was inconsistent with previous authority and wrong. I will deal with them in chronological order.

8. In Finch v Underwood [1876] 2 Ch. 310 the landlord had covenanted with the tenant, on receipt of notice from the latter, to renew the lease “in case the covenants and agreements on the tenants’ part shall have been duly observed and performed”. Notice was duly given but the landlord refused to renew the lease because the interior of the property needed repairs at a cost of £13. Vice-Chancellor Malins decided that the landlord was obliged to renew the lease because the want of repair was “trifling”. The Court of Appeal disagreed. James LJ considered that the case was one of compliance with a condition precedent. He held that the tenant had lost his right to a renewal of the lease by breach of the covenant to repair. He added (p.315):
“No doubt every property must at times be somewhat out of repair, and a tenant must have a reasonable time allowed to do what is necessary: but where it is required as a condition precedent to the granting of a new lease that the lessee's covenants shall have been performed, the lessee who comes to claim the new lease must shew that at that time the property is in such a state as the covenants require it to be. He can easily send in his builder, get a report of what repairs are necessary, and do them before he applies for the lease. There is no hardship in requiring this of him, and I think he is not entitled to excuse himself by saying that the want of repair is trifling. The answer to that is, "No matter; your bargain was to leave the property in thorough repair." If he has not fulfilled his legal bargain, which is also his bargain in equity, he cannot sustain his claim for a lease.”

Mellish LJ was of the same view. He pointed out that equity could not relieve the tenant from the consequence of failing to comply with the condition precedent. He added (p.316):
“In a case like this, if a tenant wishes to claim the benefit of such a covenant he should send in his surveyor to see what repairs are needed, and should effect the repairs which the surveyor certifies to be requisite. The Court would be inclined to give credit to a survey thus honestly made, and would lean towards holding the condition precedent to have been complied with. But in the present case it is admitted that there was an existing breach of the covenant to repair.”

Baggallay LJ agreed because the condition had not been performed.

9. In the light of certain submissions, to which I shall refer later, I do not understand Mellish LJ to be suggesting that reasonable conduct of the tenant can justify a finding that a condition precedent has been satisfied notwithstanding the existence of a relevant breach of covenant. Rather he is pointing out that in the circumstances he postulates the court would be likely to accept the evidence of the surveyor for the tenant to the effect that the covenant had been duly performed by the material time.

10. The second authority to which we were referred is Simons v Associated Furnishers Ltd [1931] 1 Ch. 379. In that case buildings had been demised for a term of 17 years on terms that the tenant might terminate the lease at the expiration of the first five or ten years of the term if it gave notice to that effect and if it “shall up to the time of determination...perform and observe the covenants...but without prejudice to the remedies of either party against the other in respect of any antecedent claim or breach of covenant”. The tenant duly gave notice to terminate. The tenant admitted that there was some want of repair at the time he gave notice. Clauson J found that at the time the notice expired the covenants had been duly performed. The issues were whether compliance was required at the time the notice was given as well as at its expiry and whether the provision was a condition precedent notwithstanding the concluding words. Clauson J answered the first question in the negative and the second in the affirmative. He observed (p.384):
“That clause is in an exceedingly familiar form. Such a form - or one so closely resembling it as to be practically indistinguishable - has been in common use for more than a century past. It has been before the Court many times, and it would be dangerous to depart a hair's breadth from decisions upon it in former cases.”

As counsel for the Landlords pointed out this case was not cited to either Judge Rich or Judge Thornton. He suggested that they wrongly failed to observe the dictum of Clauson J.

11. In Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch. 493 the tenant had the option to take a further lease on giving written notice of their desire “if it shall have....performed and observed the several stipulations on its part to be performed and observed up to the date of [the notice]”. The question was whether the form of condition imported that past or spent breaches of covenant would preclude the exercise of the option. The Court of Appeal reviewed the authorities extensively. Kerr LJ summarised the position in a series of propositions. The first two were (p.518):
“(1) The first question is whether, on the true construction of the proviso in question, the absence of any material breaches of covenant by the defendants is a condition precedent to the exercise of the option, as well as the giving of the requisite notice purporting to exercise the option. Generally, and admittedly in the present case, the proviso contains a double condition precedent, viz. (i) the absence of any material breaches of covenants and (ii) compliance with the requirement as to notice.
(2) That, however, leaves the crucial question whether the condition precedent (i), that there must be no material breaches of covenant by the defendants, applies to spent as well as to subsisting breaches. This question is covered by dicta in numerous cases, going back in particular to Grey v. Friar (1854) 4 H.L.Cas. 565, and by the decision of Clauson J. in Simons v. Associated Furnishers Ltd. [1931] 1 Ch. 379. The upshot of these authorities is that spent breaches will not destroy the tenant's right to exercise the option, but subsisting breaches will. As shown by the passages to which I refer below, the reasoning is in effect as follows. First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent, then the option would in practice be worthless or merely at the mercy of the landlord. Therefore the parties cannot have intended that the absence of spent breaches should be a condition precedent. Secondly, however, it is natural and sensible that the landlord should require the tenant not to be in breach of any covenant on the operative date and that all outstanding claims for breach of covenant should have been previously satisfied, so that the lease is then effectively clear. The proviso is therefore to be construed as intended to apply to subsisting breaches, with the result that the relevant condition precedent is the absence of any subsisting breach.”

12. Later (p.524) Kerr LJ quoted with approval from the judgment of Coleridge J in Grey v Friar 4 HLC 565, 608
“...the covenants must have been strictly kept, or, if broken, must have been satisfied for. So understood, the words import a condition precedent neither impossible nor unreasonable; and where that is clearly the case, the mere difficulty of performance, from the number or nature of the covenants to be performed, - a fact which must have been perfectly within the knowledge of the party contracting, - seems to me a very unsatisfactory reason for holding it to be otherwise.”

13. Both Nicholls and Bingham LJJ, as they then were, commented on the commercial purpose of break clauses. Nicholls LJ (p.531) observed that:
“With such a clause the commercial purpose achieved by a condition construed as meaning "no subsisting breach" is readily apparent: before the lease can be ended prematurely all the rent due must have been paid, the property must have been put into a proper state of repair, and the other covenants must have been observed and performed in the sense that all liability in respect of any previous breaches must be at an end. What commercial purpose, in such a case, would be served by the "never any breach" construction of the condition precedent is not so readily apparent.”

Bingham LJ commented (p.538):
“Where a tenant wished to take advantage of a break clause, the landlord was not greatly concerned with the history of the tenant's performance before the break. The worse the tenant's performance, the readier the landlord might reasonably be to get rid of him. But whatever the tenant's defaults in the past, the landlord would be very much concerned that at the time of the break the rent should be fully paid (because he could no longer distrain) and the covenants fully observed (so that the property could be re-let or sold without delay or additional expenditure).”

14. Four years later the Court of Appeal had occasion to consider the matter again in Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47. In that case a lease conferred on the tenant a right to renew on notice “if the tenant shall perform and observe all the covenants and obligations herein on the tenant’s part contained”. Counsel for the tenant submitted that the condition precedent should be regarded as satisfied unless at the relevant date there were breaches of covenant for which substantial damages would be recoverable. For that proposition he relied on the decision of the Court of Appeal in Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch. 493. That submission was rejected. Scott LJ (p.49M) said:
“There is no authority that permits the court to rewrite the condition precedent so as to exclude from account a subsisting breach on the ground that only nominal damages are recoverable.”

Later (p.50C) he observed that:
“The court is not entitled to rewrite that covenant [to paint the premises in the last year of the term] or to presume to inform Mr Ripley that the breach of the covenant was only trivial and should be ignored for the purposes of the condition precedent.”

Sir Michael Kerr and Parker LJ agreed.

15. Counsel for the Landlord contended that this case brought home to those concerned that conditions precedent to a break clause were indeed absolute in the sense that even trivial breaches would prevent its operation. He suggested that the draftsman of the lease in this case, executed two years after the decision in Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47 must have inserted the word “material” to avoid the severity of a condition in the unqualified form. Accordingly, so he submitted, the word “material” was intended to permit trivial breaches but no more. I shall return to that submission in due course but first I should return to the decision of Judge Rich QC in Label Ink.

16. I have quoted the material passages from his judgment in paragraphs 5 and 6 above. I can agree that the insertion of the word “material” must have been in order to mitigate the requirement for absolute compliance with all covenants at the relevant time then to be found in conventional break clauses. Other variations, now common, are “reasonable” and “substantial”. But I cannot agree that it must have been the intention to modify the rule to the extent that it is reasonably fair to both landlord and tenant. The word “material” is susceptible to a number of nuances but what is fair and reasonable between landlord and tenant is not one of them.

17. It may be that Judge Rich had in mind the observations of Mellish LJ in Finch when suggesting that the efforts made by the tenant to avoid a breach could be relevant. If so, for the reason I have already given, I consider that he misunderstood the import of the observation. In my view the test imported by Judge Rich is not only not warranted by the wording but ignores the recognition in Finch that such provisions have to be strictly complied with because equity has no power to relieve a party in breach, the warning in Simons of the need for consistency and the insistence in Bairstow Eves that the court should not rewrite the parties’ contract.

18. I turn then to consider the judgment of HH Judge Thornton QC in this case. After describing the facts and circumstances of the case, the terms of the Lease, and the relevant law as to repairing covenants he turned in paragraph 15 to the question of “material compliance”. He considered that the relevant provision in this case is to all intents the same as the relevant provision in Label Ink. He quoted paragraphs 12 and 13 of the judgment of Judge Rich. He referred to an argument for the Landlords based on the decision of the Court of Appeal in Bairstow Eves which he rejected on the grounds that the construction of the Lease depends in its wording not some preconception of what the draftsman must have thought of the decision of the Court of Appeal. In paragraphs 19 and 20 Judge

Thornton said:

“19. In my judgment, Judge Rich’s reasoning is to be followed since it cogently gives meaning to the expression “material” in the context of a breach of covenant and its effect on a break or option clause. In asking whether a breach or compliance is material, it is necessary to ask: “material to what”? The obvious answer is: “material to the landlord and to the obligations of the tenant”. The purpose of a clause limiting the right to exercise a break clause is to enable a landlord to preserve his legitimate interest in ensuring compliance with all the tenant’s covenants by the tenant before he departs. The landlord has an interest in ensuring compliance so that he can relet speedily, that the value of his reversion is not jeopardised and in preserving his income stream from the property by way of further rent. Thus, a breach of the repairing covenant will only be material if these interests are jeopardised by that breach.

20. I also follow Judge Rich’s reasoning because it gives effect to the word “material”. If Fitzroy’s interpretation is correct, this word is to be given the meaning of “all but insignificant or minor” whereas it in fact means: “in context and taking all relevant considerations into account”.

19. Judge Thornton then considered the repair programme and the offer by the Tenant to the Landlords to permit inspection of the premises. In that context he considered that the objectivity of the surveyor for the Landlords had been “clouded”. In paragraphs 26 to 80 he considered the various breaches of repairing covenants the Landlords alleged to have existed at the relevant date. Some he rejected altogether. Others he found proved. In those cases it is necessary to have regard to his description of them. Thus in the case of roof repairs he said (para 31)
“I conclude that only a few inexpensive patching repairs at most were required to put the roof into a condition which enabled compliance with the repairing covenant at the break date and that nothing further was required to repair or reinstate the paint covering. No substantial defect or breach of covenant was established.”

The removal of certain residual traces of asbestos was described in paragraph 67 as a “minor item” which would cost £2,800 to remedy. Complaints in respect of mechanical or electrical items were described in paragraph 80 in the following terms:
“There were a further 12 items which were agreed in a total sum of £1,650 and a further 35 minor items which were all disputed and which totalled, on Fitzroy’s figures, £9,590. These items were, in the main, overstated or not breaches of the repairing covenant but even if they were accepted in full, they constituted no more than insubstantial breaches of the repairing covenant.”

20. Judge Thornton’s overall conclusion on the alleged breaches of covenant was expressed in paragraph 81 in these terms:
“The overall effect of my findings is that, taking Fitzroy’s approximate figures and applying them to the relatively few and insignificant items which I have found proved, Fitzroy has established a maximum value of defects amounting to breaches of the repairing covenants of no more than £20,000 including supervision fees. This overall figure covers all claimed items including the external, internal and mechanical and electrical items.”

21. Judge Thornton then turned to the evidence before him as to the letting market. I shall have to refer to this in greater detail later. Both parties called an expert. The expert for the Landlord was Mr Michael Baker, the expert for the Tenant Mr Colin Manders. Each of them made an expert witness report. The two of them provided a joint report. Both were cross-examined. Judge Thornton’s conclusions on this evidence were expressed in paragraph 82 of his judgment in the following terms:
“Each party called a lettings and valuation surveyor with a detailed knowledge of the City of London lettings market. These two experts reached substantial agreement as to the relevant factual background. In the light of the relatively limited value of outstanding defects, the two experts’ evidence was broadly agreed. The letting market was almost at its bottom in April 2004, which is why Fitzroy was so keen to hold the Financial Times to its lease if at all possible. At that time, there was a vacancy rate of about 16% of the total stock. If a tenant was found, that tenant might well have negotiated up to a two year rent-free period and might have attempted to secure a longer rent-free period if there were significant defects in the building. However, if the total value of the defects was no more than about £20,000, the effect of their evidence was that there would not have been any substantial effect on the ultimate terms agreed. These defects would not have deterred a potential tenant but it might have taken some months to find one and then there would have been a substantial rent-free initial period.”

22. The judgment of Judge Thornton took two forms. The first handed down on 4th November did not have paragraphs 84 to 86 both inclusive in the version subsequently sent to the parties on 7th November. These three paragraphs were added in the light of submissions made to the judge by counsel for the Landlord seeking permission to appeal on 4th November. It is not suggested that the judge was not entitled to do so but the history explains certain inconsistencies and misnumbering of paragraphs. The conclusions of Judge Thornton and his reasons are contained in the following paragraphs taken from the final version:
Conclusion – Material Compliance
83. I conclude that the Financial Times had materially complied with all its obligations on 1 April 2004 and it therefore succeeded in breaking the lease and determining it on that date. I reach that conclusion for these reasons:
(1) The number, nature and value of the outstanding defects was insubstantial.
(2) The Financial Times had taken all reasonable steps to put and keep the premises into repair, had spent nearly £1 million for that purpose and had followed professional advice as to what was required.
(3) The Financial Times made all reasonable efforts to secure the agreement of Fitzroy to what was needed to ensure compliance and it is clear that it would have incorporated any reasonable requirement of Fitzroy into its remedial programme if asked.
(4) Fitzroy unreasonably declined to involve itself in the Financial Times’s attempts to agree a remedial programme and adopted an attitude of waiting and seeing whether it could catch the Financial Times out on a technicality so as to prevent it from determining the lease because the market was so soft.
(5) The outstanding defects had no effect on the ability of Fitzroy to obtain a further tenant nor on any terms that it could reasonably expect to negotiate. In particular, these defects would not have deterred prospective tenants nor have led to a longer rent-free period or to a lower rent being agreed.
(6) It would be most unreasonable to the Financial Times if it was unable to determine the lease and it would also be most unreasonable if Fitzroy, given its behaviour, was able to prevent such a determination from occurring.
84. Fitzroy contended that the effect of the condition that there should be material compliance with the terms of the lease meant that there would not be material compliance unless the only breaches in existence on the break date were trivial and of the kind that would occur if a screw was missing or loose in a particular location.
85. In my view, that interpretation of the condition is unduly narrow even if the expression “materially complied” has a narrow meaning of the kind contended for by Fitzroy. In other words, whatever meaning is given to this phrase, it was applicable so as to allow the Financial Times to operate the break clause successfully.
86. I reach this conclusion for these reasons:
(1) Each breach that I have found to have existed was, in itself, either minor or trivial. When taken together, the breaches still amounted to minor or trivial breaches of the repairing covenant.
(2) The repairing covenant has two components: namely, firstly, to require the tenant to perform the remedial works so as to put the premises in repair and, secondly, to leave the premises in a repaired state. The Financial Times used all reasonable endeavours to perform its obligations, as is inevitable in a building of any size so it performed and was not in breach of the first part of the covenant. At worst, it left a residual but limited number of limited breaches at the conclusion of the repair programme and was in breach only to that extent.
(3) It is clear from the expert valuers’ evidence that the limited nature of the remaining breaches was such that the overall damage to the reversion was negligible or nil. Thus, no recoverable damages, or only trivial damages, resulted from the breaches. If so, the overall effect of the breaches must itself also be minimal or trivial.
Overall Conclusion
85. The lease was determined on 1st April 2004 and the Financial Times is entitled to be repaid its claimed overpaid insurance premium in the sum of £19,058.30. Furthermore, Fitzroy is not entitled to the declarations it seeks nor to the claimed unpaid rent or insurance premiums. I leave for further argument whether it is entitled to any damages for the breaches of the repairing obligations that I have found to exist.”

23. In addition to the submission to the effect that the principle enunciated by Judge Rich in Label Ink is wrong in law counsel for the Landlords submitted that the introduction of what he called a subjective element in paragraphs 83(2)-(4) and (6) and 86(2) was not justified by the relevant provision in the Lease. He relied on the decision of the Court of Appeal in Chapman v Honig [1963] 2 QB 502 for the proposition that a contractual right may be exercised for any reason good, bad or indifferent and the motive with which it is exercised is irrelevant to its validity. Thus Pearson LJ (p.520) said:
“There is a special difficulty in the present case. The act complained of, the service of the notice to quit, was on the face of it a lawful exercise of a contractual right, duly implemented in accordance with the provisions of the tenancy agreement and effective to terminate the tenant's estate and to convert the landlord's interest from an estate in reversion to an estate in possession. Common experience is that, when the validity of an act done in purported exercise of a right under a contract or other instrument is disputed, the inquiry is limited to ascertaining whether the act has been done in accordance with the provisions of the contract or other instrument. I cannot think of any case in which such an act might be invalidated by proof that it was prompted by some vindictive or other wrong motive. Motive is disregarded as irrelevant. A person who has a right under a contract or other instrument is entitled to exercise it and can effectively exercise it for a good reason or a bad reason or no reason at all. If the rule were different, if the exercise of such a right were liable to be overthrown, in an action brought at any time within the limitation period, by proof that the act was done with a wrong motive, there would be a great unsettlement of property titles and commercial transactions and relationships.”

Davies LJ agreed with Pearson LJ.

24. I did not understand counsel for the Tenant to submit that the test was subjective, though he did suggest that the conduct of the parties may have some evidential value in determining the issue. It cannot, I think, be seriously disputed that the issue of “material compliance” whatever it involves must be determined on an objective basis. This was the view of the Court of Appeal in Fortman Holdings Ltd v Modem Holdings Ltd [2001] EWCA Civ 1235 per Judge LJ (para 26) and Pill LJ (para 7) when considering a similar provision in a loan note.

25. It follows from my rejection of the principle enunciated by Judge Rich QC in Label Ink and my conclusion that the test of material compliance must be an objective one that I would accept the contentions of counsel for the Landlord to which I have referred in paragraph 23 above. In my view, therefore, the matters referred to in paragraphs 83(2)-(4) and (6) and the second sentence in paragraph 86 (2) of the judgment of Judge Thornton are irrelevant to the question of whether the Tenant had materially complied with the tenant’s covenants in the lease on 1st April 2004.

26. Counsel for the Landlords also contended that the finding of Judge Thornton in paragraph 83(5) that the “defects would not have led to a longer rent-free period...being agreed” was not supported by sufficient evidence. To deal with that submission it is necessary to consider what the evidence on that point was. I have already referred in general terms to the evidence given by the experts. Their Joint Report is dated 18th August 2005. They were asked six questions. The sixth question was:
“If a prospective tenant discovered any deficiencies in the Property how would these have been dealt with?”
The answer was:
“A prospective tenant would have commissioned both structural and mechanical and electrical surveys. If the reports disclosed deficiencies these would have been the subjects of further discussion with the landlord. The number and nature of any deficiencies, together with the anticipated cost and time of remedying these, might have resulted in renegotiation of the terms, depending on their extent. If an adjustment was agreed to be appropriate this would probably have been by way of an extension to the rent free period, which would have been granted as part of the heads of terms already agreed.”

27. Mr Baker, the expert letting agent for the Landlords, assumed for the purposes of his report dated 26th August 2005 that the cost of rectifying the defects specified in the Scott Schedule provided to both experts would be in the order of £211,000. He expressed the view in paragraph 4.3 that the state of the market at the relevant time was such that rent free periods were being allowed to tenants of 12 months for a five year term and 24 months for a ten year term. In paragraphs 4.10 and 4.11 of his report he stated:
“4.10 In my experience, the extent to which the Landlord would be prepared to acknowledge these deficiencies and meet the cost would be dependent on the strength of the market, the seriousness of the negotiations and the status of other interest in the building at that time. As previously stated, the market as at 1st April 2004 was extremely weak and it is my view that the tenant would have been in a strong negotiating position and would have probably been able to negotiate a contribution by the Landlord of in the order of 75% of the cost. It is likely that this cost would be passed on to the tenant rather than the landlord carrying out the work himself and this would have resulted in an extension of the rent free period already agreed to take this into account.
4.11 In summary therefore I do not believe that the deficiencies listed in the Scott Schedule would have had an effect on the rental value or the time taken to let the building but I do believe approximately 75% of the cost would have been met by the Landlord as a result of further negotiation which would have been reflected by an extension in the rent free period.”


28. In cross-examination by counsel for the Tenant Mr Baker confirmed his opinion whether the cost of compliance was £211,000 or £14,000. In each case he considered that 75% of such cost would be allowed by way of an increase in the rent free period. But he accepted that in the context of this building worth about £12m and a rent of £750,000 dilapidations of about £50,000 would be regarded by the Landlord as “pretty insignificant”.

29. Mr Manders, the expert witness for the Tenant, made his written statement dated 31st August 2005 in response to a request to deal with the sixth question in more detail. In paragraphs 4.19 and 4.20 he indicated that the landlord would have had to concede a rent free period having regard to the length of the tenant’s commitment and to permit him to carry out his own fitting out works. He considered that in the market conditions prevailing at the relevant time a prospective tenant for a fifteen year term would expect a rent free period of at least three years. In paragraph 4.26 he concluded that:
“The landlord would be keen to re-let his building but there were no reasons for him to concede significantly in order to achieve a letting at a building on which a substantial sum of money had been spent and the result of which produced a product, which would have been attractive to the market. The signs for an improving market were evident and the landlord’s willingness, or otherwise, to conclude a deal would have been tempered by an expectation that delay or a lost deal would not ultimately be detrimental.”

30. Mr Manders was cross-examined by counsel for the Landlord. He considered that the market was weak so that a prospective tenant was in a reasonably strong position at the relevant time. If the prospective tenant was a very strong covenant then he would expect him to use the existence of defects to his advantage in negotiations with the landlord, but if he was a weak covenant he might not. But there comes a point at which reliance on a number of small points can be counterproductive. He considered that in the context of this building a defects bill of £25,000 was trivial. The views of Mr Baker expressed in cross-examination, which I have summarised in paragraph 28 above, were put to him. He replied:
“It would depend on the overall balance of the parties’ positions in negotiations. I come back to the length of commitment, whether there is a break clause, the tenant’s covenant that is being offered, all these factors. In those circumstances if it got down to a sum of maybe £5,000/£10,000, I am not sure it would be raised at all. If the sum was, I think the figure has been mentioned of £211,000/£216,000, and that was proven...and related to major factors, possibly a percentage of that would be given. It would still, I reiterate, depend on the overall mix so it is not a straight yes or no.”

31. Given that evidence I do not agree that the conclusion to which Judge Thornton arrived in paragraph 83(5), which I have quoted on paragraph 26, was not one to which he was entitled to come. On any view 75% of £20,000, namely £15,000, when expressed as a rent free period for this building comes to a matter of days. In the context of the opinions of the experts as to the length of the rent free period being measured in years it is a perfectly tenable view that the prospective tenant would not have raised the point in the first place for fear of creating the wrong impression. Mr Baker thought that a defects liability of £50,000 would be “pretty insignificant”. Mr Manders described one of £25,000 as trivial. Their opinions are clearly made out by the calculation of a rent free period appropriate to 75% of a defects liability of £20,000 in respect of a passing rent of £595,000, it is 9 days.

32. Counsel for the Landlords also criticised the judge’s conclusions expressed in paragraphs 86(1) and 86(3). The first was said to be inconsistent with the earlier paragraphs I have quoted. The latter was criticised as not being supported by the experts’ evidence. I do not accept either submission. The various descriptions given by the judge in paragraphs 31, 67 and 80 of his judgment, which I have quoted in paragraphs 19 and 20 above, are in broadly similar terms to those used in paragraph 86(1) of his judgment. The latter is certainly not inconsistent with them. Similarly the evidence of experts, which I have quoted in paragraphs 27 to 30 above, did suggest that the damage to the reversion was negligible or nil. Thus the first sentence in paragraph 86(3) is justified by the evidence. The second and third sentences are inferences or conclusions of the judge arrived at from his decisions on the primary facts. I see no ground for criticising either of them.

33. Accordingly I come back to the central question on this appeal. Given the conclusions of the judge as expressed in paragraphs 83(1) and (5), supplemented if necessary by his further comments in paragraph 86(1), (2)(except the second sentence) and (3), had the Tenant “materially complied with all its obligations under the Lease” as at 1st April 2004? Counsel for the Landlord submits that the meaning of material compliance is something less than ‘substantial’ or ‘reasonable’ compliance. He suggests that the qualification to the absolute rule indicated by the authorities to which I have referred denoted by the word “material” enables the court to ignore trifling or trivial breaches but no others. He submits that the conclusions of Judge Thornton in paragraph 83(1) and (5) are only consistent with breaches which are more than trifling or trivial.

34. Counsel for the Tenant accepts that in the absence of the word “material” the strict rule would apply because of the breaches of covenant found by the judge. He points out that the word “material” has at least two senses, namely relevance and substantiality. The first sense prompts the question ‘material to what?’, the second ‘material to what extent?’. He suggests that the test propounded by counsel for the Landlords is inconsistent with the wording of the Lease and illogical. Why, he submits, should a breach of covenant which is more than trivial but has no effect on the landlord’s ability to relet the premises fail to meet the standard of material compliance? In the end the difference between counsel was slight because counsel for the Landlords appeared to accept in his reply that so long as the breach had no effect on the landlord’s ability to relet the premises then there was material compliance.

35. The point is a short one. In my view the commercial context in which the provision is to be interpreted and applied is that described by Bingham LJ in Bass at page 538, quoted in paragraph 13 above. Materiality must be assessed by reference to the ability of the landlord to relet or sell the property without delay or additional expenditure. Where the provision is absolute then any breach will preclude an exercise of the break clause. But I see no justification for attributing to the parties an intention that the insertion of the word ‘material’ was intended to permit only breaches which were trivial or trifling. Those words are of uncertain meaning also and are not the words used by the parties.

36. Nor is it, in my view, of any assistance to consider whether the word ‘material’ permits more or different breaches than the commonly used alternatives ‘substantial’ or ‘reasonable’. The words ‘substantial’ and ‘material’, depending on the context, are interchangeable. The word ‘reasonable’ connotes a different test. The issue here is whether, notwithstanding the breaches found by the judge the Tenant had, nevertheless, “materially complied” with its obligations. The application of an ordinary English word to a set of primary facts is itself a question of fact, see Cozens v Brutus [1973] AC 854, 861. As Lord Reid warned in relation to the construction of a statute
“The meaning of an ordinary word of the English language is not a question of law.....It is for the tribunal which decides the case to consider, not as law but as fact, whether in the whole circumstances the words of the statute do or do not as a matter of ordinary usage of the English language cover or apply to the facts which have been proved. If it is alleged that the tribunal has reached a wrong decision then there can be a question of law but only of a limited character. The question would normally be whether their decision was unreasonable in the sense that no tribunal acquainted with the ordinary use of language could reasonably reach that decision. Were it otherwise we should reach an impossible position. When considering the meaning of a word one often goes to a dictionary. There one finds other words set out. And if one wants to pursue the matter and find the meaning of those other words the dictionary will give the meaning of those other words in still further words which often include the word for whose meaning one is searching. No doubt the court could act as a dictionary. It could direct the tribunal to take some word or phrase other than the word in the statute and consider whether that word or phrase applied to or covered the facts proved. But we have been warned time and again not to substitute other words for the words of a statute. And there is very good reason for that. Few words have exact synonyms. The overtones are almost always different.“

37. The judgment of Judge Thornton cannot stand because, for the reasons I have already explained, in adopting the principle enunciated by Judge Rich in Label Ink he applied the wrong test. In addition he took into account the irrelevant considerations to which I have referred. But the consequence is that this court must apply what it conceives to be the right test to the facts as found by Judge Thornton. Thus the question is quite simply whether in the light of the findings of Judge Thornton set out in paragraph 83(1) and (5) supplemented as necessary by his further observations in paragraph 86 (1) to (3)(excluding the second sentence of paragraph 86(2)) the Tenant had on 1st April 2004 materially complied with its obligations. As Lord Reid pointed out in Cozens v Brutus, that is a question of fact. I would answer it in the affirmative. If the other members of the court agree, the consequence is that the appeal is dismissed.

Jacob LJ

38. I agree.

Moore-Bick LJ

39. I also agree.