Replacing carpets owned by landlord was not breach of repair clause, says Court of Appeal

Out-Law News | 21 Apr 2016 | 5:25 pm | 3 min. read

A commercial property tenant did not breach repair covenants set out in the lease when it replaced carpet tiles in the property with strip carpeting, the Court of Appeal has ruled, overturning the High Court's decision.

The court in this case had to decide on the interpretation of two conflicting provisions in the lease: one giving the tenant an apparently unqualified right to make internal non structural alterations, including landlords fixtures and fittings, and the other placing it under a duty to repair and replace the landlord's fixtures and fittings. The wording of the lease in this case meant that the replacement of carpet tiles with strip carpeting could be classed as a 'tenant's alteration', taking it out of the scope of the repair clause, the appeal court said.

The court also overturned the original trial judge's decision to impose extra damages on the tenant, now known as South Essex Partnership University NHS Foundation Trust, to cover the period between the end of the lease and the landlord carrying out the work needed to remedy the tenant's breaches. The landlord, Laindon Holdings Ltd, had argued that it could only carry out the necessary repairs once a new tenant had been found "for good cash flow reasons".

Property law expert Ben Gildea of Pinsent Masons, the law firm behind Out-Law.com, said that the decision should give tenants some comfort "in the knowledge that, once they have placed their landlord in funds for damages arising out of their breach of covenants, they cannot then be liable for any subsequent delay by the landlord in carrying out the repair".

"Landlords should therefore consider the timings of their proposed remedial works in order to ensure that any such works are undertaken promptly so as to avoid the risk of long-term voids given that any loss suffered during the intervening period will not be recoverable from the tenant," he said. "If a landlord makes a commercial decision to delay works the consequent losses are not recoverable from the tenant."

In this case, the court heard that there was a 'void period' of four months between the landlord finding a new tenant, and it being able to complete the necessary repairs before that tenant could move into the property. However, damages caused by the NHS trust's breaches of covenant only accounted for a proportion of these costs, and the trust paid the landlord its share of the bill immediately after the original trial.

The trial judge had ordered the tenant to pay £130,492 in damages to the landlord, including £41,445 to cover the cost of reinstating the carpets. The lease agreement had set out a substantial programme of what were described as 'tenant's fitting out works', to be paid for by the tenant, including installing a lift and internal partition as well as lifting, cleaning and re-installing the existing carpets "as far as possible".

Shortly before the lease ended, the tenant wrote to the landlord to inform it that it would be replacing the tiled carpeting with strip carpeting "of the same colour and specification". When the landlord did not object, it went ahead and did so. After the lease ended the landlord claimed that the re-carpeting breached the repair clause in the lease.

Both the trial judge and the appeal court heard arguments from the parties over whether the previous carpet should be classed as 'landlord's fixtures and fittings', regardless of the fact that they were re-laid at the tenant's cost at the start of the lease term. The landlord argued that the lease obliged the tenant to remove the new carpet on expiry and re-instate the previous carpet. The Court of Appeal backed the trial judge's view that the carpets should be classed as fittings, but added that the alternations clause elsewhere in the lease made this irrelevant.

"It would in my view be a commercial nonsense to construe [the alterations clause] as permitting alteration by replacement of landlord's fixtures, but making no provision for alteration or replacement of landlord's chattels [or fittings] provided within the building for the use of tenant under the lease," said Lord Justice Briggs, giving the judgment of the court.

"The original term was for 19 years (albeit that it was terminated early under the tenant's break clause). Bearing in mind the landlord's qualified right to require reasonable reinstatement of alterations … the only sensible interpretation of [the alterations clause] in the context of this commercial lease was that it provided a right to the tenant to make alterations affecting any of the landlord's property within, or forming part of the building, save for the structure and exterior," he said.

Property law expert Ben Gildea that the case provided "helpful guidance" to landlords and tenants about how to deal with alteration and repair clauses that appeared to conflict.

"The court's decision in this case that a right to undertake internal non-structural alterations extended to all works to the landlord's property within, or forming part of, the building, whether it was to a landlord's fixture or fitting provides further useful guidance on what words may qualify as tenant alterations - depending, of course, on the wording of the clause in question," he said.

"This is another reminder of the importance for landlords of the need to check whether they need to request reinstatement of tenant alterations upon expiry of a lease, but also a cautionary tale about considering potentially conflicting lease provisions and ensuring steps are taken to protect the required remedy on either interpretation of the lease," he said.