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[Buy ICLR report:  2 WLR 672]
[Buy ICLR report:  Ch 194]
||Neutral Citation Number:  EWCA Civ 1797
||Case No: A3 2001 0628 & 0639 CHANFI
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION - Mr Justice Lightman
||Royal Courts of Justice
Strand, London, WC2A 2LL
||30 November 2001
B e f o r e :
LORD JUSTICE JUDGE
LORD JUSTICE JONATHAN PARKER
MR JUSTICE BODEY
|| Chesterfield Properties Ltd
||- and -
||BHP Great Britain Petroleum Ltd
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Kim Lewison QC [Mr Simon Berry QC] and Mr Andrew P D Walker (instructed by Messrs Dechert for the Appellants)
Mr Michael Barnes QC (instructed by Messrs Herbert Smith for the Respondent/Cross-Appellant)
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Jonathan Parker :
This is the judgment of the court
- Before the court are an appeal and a cross-appeal against an Order made by Lightman J dated 27 February 2001. The appellant (the first defendant in the action) is Chesterfield (Properties) Ltd ("Chesterfield"). The respondent and cross-appellant (the claimant in the action) is BHP Petroleum Great Britain Ltd ("BHP").
- The second defendant in the action, Chesterfield (Neathouse) Ltd, is not a party to the appeal or the cross-appeal.
- By its Particulars of Claim, BHP seeks relief against Chesterfield in respect of alleged breaches by Chesterfield of its obligations under an Agreement for Lease made between them dated 30 April 1997 ("the Agreement"). By its Defence Chesterfield denies liability, contending (among other things) (a) that under the terms of the Agreement, on their true construction, its liability for the alleged breaches (which are denied) is materially less than that contended for by BHP, and (b) that it has in any event been released from such liability by the operation of a Notice dated 30 July 1999 which it served on BHP under section 8 of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act"). By its Reply, BHP joins issue on both those contentions.
- Both BHP and Chesterfield applied for summary judgment under CPR Part 24. The applications were heard by Lightman J and led to the Order part of which is the subject of the appeal and cross-appeal. In his judgment, which is reported at  3 WLR 277, the judge determined the issue as to the construction of the Agreement in favour of Chesterfield and the issue as to the effect of the Notice in favour of BHP: that is to say, he concluded that the extent of Chesterfield's liability under the Agreement was as contended for by Chesterfield, and that Chesterfield was not released from that liability by the operation of the Notice. BHP now appeals against the judge's conclusion as to the true construction of the Agreement; Chesterfield appeals against the judge's conclusion as to the effect of the Notice. In procedural terms, as already mentioned, the appellant is Chesterfield and the cross-appellant is BHP.
- Chesterfield appears by Mr Kim Lewison QC and Mr Andrew P. D. Walker of counsel; BHP appears by Mr Michael Barnes QC.
THE FACTUAL BACKGROUND
- By the Agreement, Chesterfield agreed with BHP to undertake certain specified works to a substantial office building at One Neathouse Place, London SW1 and to grant a 20-year Lease of the greater part of the building to BHP. Since it is unnecessary for present purposes to differentiate between the building as a whole and the part of it which was to be leased (and which in the event was leased) to BHP, we will refer to the latter as "the Property". The Agreement contains obligations on the part of Chesterfield (to the terms of which we shall have to return) relating to the making good of defects in the Property and to the repair of physical damage to the Property.
- On 1 July 1997, Chesterfield granted a Lease of the Property to BHP in accordance with the terms of the Agreement. On 9 July 1999 Chesterfield transferred its interest in the Property, subject to the Lease, to Chesterfield (Neathouse) Ltd.
- On 30 July 1999 Chesterfield served the Notice on BHP. By the Notice, Chesterfield applied to be released from "the landlord's obligations under the tenancy" with effect from the date of the transfer of its reversionary interest (9 July 1999), pursuant to section 8 of the1995 Act.
- Section 8 of the 1995 Act (to the detailed terms of which we turn below) entitles a tenant on whom a notice has been served by his landlord under the section to serve a counter-notice on the landlord objecting to the release of the obligations referred to in the landlord's notice. In the event, however, no counter-notice was served by BHP.
- The exterior of the Property is clad largely in units of toughened glass, some of which are fixed in a non-vertical plane. In September 1999 two of the vertical units fractured. In April 2000 two further units fractured, one of which (a non-vertical unit) fell to the ground and injured a passer-by. This led to the service of a dangerous structure notice on 5 May 2000. Since then, two further units have fractured. Neither of these fell to the ground.
- In the action, which was commenced on 10 October 2000, BHP claims that under the terms of the Agreement and in the events which have happened Chesterfield is liable not merely to replace the units which have fractured (that is to say, to repair the physical damage which has occurred) but also to replace all the other non-vertical units in the Property, on the footing that the use of the toughened glass in a non-vertical plane constitutes a defect in the Property which Chesterfield is liable to make good. Chesterfield, on the other hand, contends that on the true construction of the Agreement its liability is limited to replacing the units which have actually fractured, with the further proviso that in the case of each such unit the cost of replacement must exceed £50,000 (excluding VAT). Chesterfield did not contend before the judge that its liability is further limited by the proviso as to cost of replacement (although the point is missed in its application notice), but no objection is taken by BHP to this contention being raised on BHP's cross-appeal. In the alternative, as noted earlier, Chesterfield contends that it has in any event been released from liability by the operation of the Notice. We refer hereafter to the issues as to the true construction of the Agreement as "the Agreement issue", and to the issue as to the effect of the Notice as "the Notice issue".
- As already noted, the Agreement provided that following completion of works of refurbishment to be carried out by Chesterfield, Chesterfield would grant BHP a 20-year Lease of the Property.
- Clause 1.1 of the Agreement contains a number of definitions, of which only the following are material for present purposes:
"1.1.8 "Building Works Defect" any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period and in either case:-
22.214.171.124. which is caused by defective design materials or workmanship in the construction of the Building Works and
126.96.36.199. which one or more of the Warrantors is responsible to the Landlord to remedy pursuant to the provisions contained in any contract appointment or warranty between the Landlord and the Warrantors and
188.8.131.52. the cost of remedying which will in each such case exceed £50,000 (excluding VAT);
184.108.40.206. any such damage which occurs or arises directly or indirectly as a result of any works undertaken by or on behalf of the Tenant to the Demised Premises or the Tenants use of the Demised Premises otherwise than in accordance with the provisions of the Lease and
220.127.116.11. (subject and without prejudice to the provisions of clause 12.2.7) any such damage to the extent that the cost of remedying such damage would result in the Landlord incurring costs and expenses pursuant to clause 12.2 of this agreement in excess of the Maximum Aggregate Sum."
" 1.1.15 "the Defects Period" the period of six years commencing on and including the date of the actual completion of the Lease or if completion of the Lease is delayed otherwise than by reason of the default of the Landlord the period commencing on and including the date upon which the Lease should have been completed pursuant to the provisions of this agreement."
- Clause 1.2 is headed "Interpretation". Clause 1.2.5, under that heading, reads as follows (so far as material):
"References in this agreement to the Landlord are references to Chesterfield Properties PLC and shall not include the Landlord's successors in title. All obligations on the part of the Landlord in this agreement .... are personal obligations of the Landlord".
- Clause 12 of the Agreement is headed "Concrete Frame Defects and Building Works Defects". Clause 12.2 deals with "Building Works Defects". Its opening words are:
"If on one or more occasions during the Defects Period a Building Works Defect manifests itself the following provisions shall apply: ....".
- Clause 12.2.1 provides that BHP shall notify Chesterfield in writing of a "Building Works Defect" as soon as reasonably practicable. Clause 18.104.22.168 is in the following terms:
"the Landlord shall with the minimum practical inconvenience to the Tenant and as economically as reasonably practicable remedy or procure the remedying of each Building Works Defect as quickly as reasonably practicable after obtaining the necessary building consents and after (if reasonably required by the Landlord) the Tenant and all other occupiers shall have vacated the Demised Premises or the part or parts of the Demised Premises affected by such Building Works Defects."
- Clause 12.5 of the Agreement is headed "General Provisions". Clause 12.5.1 provides as follows:
" 12.5.1. For the avoidance of doubt:-
22.214.171.124. the Tenant acknowledges that the obligations on the part of the Landlord contained in this clause 12 are personal obligations of Chesterfield Properties Plc and the Tenant acknowledges and confirms that the Tenant shall have no claim of any nature whatsoever against the Landlords successors in title to the Demised Premises arising out of or otherwise in connection with the obligations on the part of the Landlord contained in this clause 12;
126.96.36.199. the benefit of the provisions contained in this clause 12 shall enure for the Tenants successors in title and the Tenant and the Tenants successors in title shall be entitled to assign the benefit of the provisions contained in this clause 12 to each subsequent assignee of the Lease but not otherwise."
THE 1995 ACT
The previous law
- Prior to the sixteenth century a lease of land was regarded in law as no more than a personal contract, giving rise to no proprietary rights or obligations. In the sixteenth century, however, it was established that on the transfer of the reversion or of the leasehold interest the benefit and the burden of those covenants in the lease which "touched and concerned" the land demised by the lease passed to, and were enforceable by and against, successors in title of the original parties. In the Conveyancing Act 1881 and the Law of Property Act 1925 the equivalent expression to "touch and concern" is "has reference to the subject-matter of the lease".
- So far as transfers of the reversion were concerned, this change in the law was effected by the Grantees of Reversions Act 1540. The law as so enacted was re-enacted in the Conveyancing Act 1881 and in sections 141 and 142 of the Law of Property Act 1925.
- So far as transfers of the leasehold interest were concerned, the change in the law was effected at common law, by Spencer's Case (1583) 5 Co Rep 16a. The principle established by Spencer's Case remained as a common law principle up to the passing of the 1995 Act.
- However, the development of the law as to the transmissibility of the benefit and burden of covenants in a lease did not impinge upon the contractual liability of the original parties to the lease. They remained contractually liable throughout the term of the lease, despite transfers of the reversion and/or of the leasehold interest.
- Hence the law as to the enforceability of covenants in a lease prior to the passing of the 1995 Act depended upon, and was regulated by, the application of the twin concepts of privity of contract and privity of estate. As it was put by the Law Commission in the opening paragraph of its Report on Landlord and Tenant Law: Privity of Contract and Estate ((1988) Law Com. No. 174), published in 1988 ("the 1988 Report"):
"In the law of landlord and tenant privity of contract means that the original landlord and the original tenant normally remain liable to perform their respective obligations for the whole of the period for which the lease was granted, even if they have parted with all interest in the property. Privity of estate means that the landlord and the tenant for the time being automatically assume responsibility for the lease obligations which relate directly to the property for the period during which they own an interest in it, but they are not necessarily bound to comply with all the terms of the lease."
- In Part II of the 1988 Report, under the heading "The Present Law", the Law Commission summarised the law in relation to the enforceability of covenants in a lease (as it then stood) as follows:
"2.1 A lease creates a new legal estate, vesting the property in the tenant for a defined period; it also constitutes a contract between the original parties, who normally undertake liabilities under the covenants for the whole term created by the lease. The direct contractual relationship – privity of contract – between the original landlord and the original tenant means that they remain liable to perform their respective covenants for the whole period of the lease, notwithstanding that they have parted with all interest in the property. Thus, e.g., the original tenant remains liable to pay rent if the person to whom he has assigned the term defaults; "of course the expectation, commercially speaking, is that the assignee will pay, but the assignor does not by assignment get rid of one jot or tittle of his original liability". Although the privity of contract principle applies equally to landlords and tenants, examples of tenants being made liable are more common. The main reason for this is probably that in the majority of leases the tenant undertakes many more obligations than does the landlord.
2.2 Privity of estate means that the parties stand for the time being in the relationship of landlord and tenant, which of itself involves certain enforceable obligations. As between the original parties to a lease, there is at first privity both of contract and of estate. However, if either the original landlord or the original tenant parts with his interest in the property, the privity of estate between them comes to an end. There is then privity of estate between the person who is landlord for the time being and the person who is tenant for the time being. The parties currently in the position of landlord and tenant become bound by, and can enforce, certain types of covenant in a lease. The covenants so enforceable are, in general, those which have a direct bearing on their relationship as landlord and tenant - said technically to be, covenants which "touch and concern" the land or have "reference to the subject-matter of the lease", terms which are treated as synonymous. In practice, almost all the most important covenants in a lease fall within this category. Those covenants which impose merely personal obligations bind only the original parties, and not their successors.
2.3 Once the lease is assigned, there will be privity of estate between the landlord and the assignee. When a lease requires the landlord's consent to an assignment by the tenant, it is not uncommon for the landlord to require the proposed assignee to covenant directly with him to observe and perform the tenant's covenants in the lease. In that case, as soon as the assignee covenants directly with the landlord, there will additionally be privity of contract between them. As a result, the new tenant's liability will go beyond the normal privity of estate liability of an assignee in two respects. First, his liability will extend to all the tenant's covenants in the lease and not merely those which touch and concern the land. Secondly, if his covenant is expressed to bind him for the remainder of the lease, he remains liable even if he subsequently assigns his interest."
- Later in the 1988 Report, the Law Commission considered the concept of privity of estate in greater detail, noting that covenants in a lease could be divided into two groups: those which "touched and concerned" the land, and those which did not. It described the latter category as covenants which "impose personal or collateral obligations" (see ibid. para 2.20). The Law Commission went on to refer to the lack of any guiding principle for deciding into which of the two categories a particular covenant fell. In paragraphs 2.21 to 2.23 it said this:
"2.21 Thus, when the original tenant assigns his lease, the assignee (and any subsequent assignee) automatically becomes directly liable to the landlord, with whom he has privity of estate, in respect of those covenants which "touch and concern" the land. Examples of such covenants are covenants to pay the rent; to repair buildings; to insure them against fire; to use the property for domestic purposes only; and a covenant not to assign the lease without the landlord's consent. Similarly, when the original landlord parts with the reversion, his successor becomes responsible for complying with those obligations which have "reference to the subject matter of the lease". Examples of such obligations undertaken by the landlord are covenants to repair or insure the premises, to supply water to the property, and to give the tenant quiet possession of the premises. Personal covenants bind only the original parties, and not their successors. Examples of such covenants are a landlord's covenant not to compete with the tenant's business; a covenant requiring payment of an annual sum to a third party; and one promising to pay the tenant a sum of money at the end of the lease or until a new lease is granted.
2.22 The test for distinguishing between those covenants which touch and concern the land and those which are merely personal has been variously formulated in the decided cases over the years. The covenant will touch and concern the land if it per se affects the nature, quality or value of the land; if it affects the landlord in his normal capacity as landlord or the tenant in his normal capacity as tenant; if the covenant is beneficial to the owner for the time being of the covenantee's land and to no one else.
2.23 The rules concerning covenants which run with the land were criticised some fifty years ago as "purely arbitrary, and the distinctions, for the most part, quite illogical". As we indicated in the Working Paper, there are a number of difficult borderline cases from which it is hard to discern a clear guiding principle. To take a few examples. A landlord's covenant to renew a lease runs with the land, but a covenant that a landlord will make a payment to the tenant at the end of the lease, or in default will grant a new lease does not. A covenant not to employ a named person on business premises binds the tenant's successors; a covenant not to employ a particular class of people on the property does not."
The Law Commission's proposals for reform
- In Part IV of the 1988 Report, under the heading "Reform Proposals", the Law Commission said this:
4.1 Our proposals for reform recognise the importance of two principles:
First, a landlord or a tenant of property should not continue to enjoy rights nor be under any obligation arising from a lease once he has parted with all interest in the property.
Secondly, all the terms of the lease should be regarded as a single bargain for letting the property. When the interest of one of the parties changes hands the successor should fully take his predecessor's place as landlord or tenant, without distinguishing between different categories of covenant.
4.2 The majority of those who responded to the Working Paper believed that the effect of transferring property which has been leased should be the "clean break" which results from applying the two principles. Nevertheless, the consultation convinced us that there are cases in which, for good reason, landlords can only agree to a proposed assignment if they are assured that their existing tenant will continue to be responsible for complying with the lease terms. We are therefore proposing a scheme based on the general abrogation of the privity of contract principle, but which stops short of abolishing it in all cases.
4.3 We propose a general rule that the liability of the original tenant, and his entitlement to benefits under the lease. should not survive an assignment of the lease. For this purpose, we propose that all the covenants in a lease should be treated in the same way, whether or not at present they touch and concern the land. Nevertheless, it would be possible for the landlord, when granting consent to the assignment, to impose a condition that the tenant will be liable to guarantee the performance of some or all of the lease covenants by his immediate successor.
4.4 The Landlord and Tenant Act 1988 implements our recommendations generally to impose a duty on landlords not unreasonably to withhold consent. The effect would be that in cases where the landlord is not entitled to withhold his consent to assign, he would only be able to impose a condition that the tenant have continuing liability where it was reasonable to do so.
4.5 For landlords, we propose a rule that when they part with their interest in the property let by a lease they will escape further responsibility for the lease obligations if, but only if, they comply with the prescribed conditions. These will involve their giving notice to the tenant and his being able to withhold consent if it is reasonable for him to do so. Again, the benefits of being landlord, so far as they can enure to an owner who has parted with the property, would only continue for a former landlord who had continuing liability.
4.6 Landlords and tenants will generally have different forms of continuing liability, where they have any at all. Former landlords will be jointly and severally liable with the current landlord, and any other former landlord who is still liable. A former tenant, on the other hand, will normally be guarantor of the current tenant; the only exceptional case is where a tenant only assigns part of the property and remains jointly and severally liable with the assignee for some covenants which affect the whole property. Making former tenants liable as guarantors avoids the major injustice to tenants which can arise where the terms of the lease are, in effect, later varied to increase the tenant's liability. That will now release the tenant, except where the court varies an unsatisfactory lease of a flat."
- Later in the 1988 Report, under the heading "Assignment of whole property by landlords", the Law Commission said this:
"4.16 In relation to the liability of landlords, we should have preferred our proposals to have mirrored precisely our recommendations for tenants' covenants. However, that is not possible because tenants rarely, if ever, have a right to give or withhold consent to dispositions by their landlord. They would therefore not be in a position to require continuing liability after an assignment of the reversion and to block an assignment if the condition is not agreed. Moreover, there is less need here for radical change. In most leases, the landlord undertakes far fewer obligations that the tenant and landlords may not be troubled by the prospect of continuing responsibility.
4.17 For these reasons, we do not propose that an assignment of the landlord's reversionary interest should automatically affect his continuing liability. Rather, we recommend that an assigning landlord should have an option to operate a procedure which could end his liability, and his entitlement to benefits, under the lease. A landlord who wished to escape further responsibility would have to give the tenant notice of his proposal to assign. In the notice the landlord would propose that after the assignment he should no longer have any liability under the lease. It would give the tenant four weeks in which to reply."
- In paragraph 5.1, in Part V of the 1988 Report, the Law Commission summarised its recommendations. The following recommendations are material for present purposes:
" (1) A tenant who assigns all the property let by a lease should generally cease to be liable to comply with the lease covenants, and similarly should cease to have the benefit of the lease. The assignee should become liable to perform the covenants and should have the benefit.
(2) A landlord consenting to an assignment should be able to impose a condition that the tenant guarantees the performance of the lease covenants by his successor, but only until the following assignment.
(3) A landlord who assigns the whole of his reversion should have the option to escape further liability, and to forego benefits, under the lease by serving a prescribed notice on the tenant.
(4) The incoming landlord should be liable to perform all the lease covenants, and be entitled to the benefits of the lease. Any previous landlord remaining bound by the covenants should be jointly and severally liable with the new landlord.
(5) On a later assignment of the reversion, a previous landlord should be able to serve notice to escape further liability, but should have no statutory right to be notified in advance of a proposed assignment.
(10) The distinction between lease covenants which touch and concern the land and those which do not should be abolished."
The 1995 Act itself
- It is common ground that the 1995 Act was intended to implement the proposals made by the Law Commission in the 1988 Report. Its preamble proclaims it to be (among other things):
"An Act to make provisions for persons bound by covenants of a tenancy to be released from such covenants on the assignment of the tenancy ...."
- In paragraph 14 of his judgment the judge said this:
" There were significant intermediate stages between the  Report and the enactment of the 1995 Act which are conveniently referred to in Mr Charles Harpum's sixth edition of Megarry & Wade on the Law of Real Property at 15-064. It is accordingly not possible to assume that the 1995 Act gave unqualified effect to the recommendations in the  Report. There were modifications and additions. But I can find no indication in Hansard or elsewhere of any intention to qualify the adoption of the principle that the release of a landlord or tenant from a covenant was intended to be sequential upon, and only sequential upon, a parting by the landlord or tenant with his interest in the property let and the successor taking his predecessor's place as the party responsible for complying with that covenant".
- No suggestion to the contrary has been made in this court: indeed both sides rely on the 1988 Report as setting the context in which the true meaning and effect of the 1995 Act falls to be considered.
- Section 1(1) of the 1995 Act provides that the provisions relating to the transmission of covenants and to the release of covenants on assignment contained in sections 3 to 8 inclusive apply only to tenancies coming into existence on or after 1 January 1996.
- Before turning to the particular sections which are relevant for present purposes it is convenient to turn first to the definitions in section 28(1). The material definitions are these:
"collateral agreement", in relation to a tenancy, means any agreement collateral to the tenancy, whether made before or after its creation;
"covenant" includes term, condition and obligation, and references to a covenant .... of a tenancy include a covenant .... contained in a collateral agreement;
"landlord" and "tenant", in relation to a tenancy, mean the person for the time being entitled to the reversion expectant on the term of the tenancy and the person so entitled to that term respectively;
"landlord covenant", in relation to a tenancy, means a covenant falling to be complied with by the landlord of premises demised by the tenancy;
"tenant covenant", in relation to a tenancy, means a covenant falling to be complied with by the tenant of premises demised by the tenancy."
- Section 2(1)(a) implements recommendation (10) in paragraph 5.1 of the 1988 Report that the distinction between those lease covenants which touch and concern the land and those which do not should be abolished. It is in the following terms:
"(1) This Act applies to a landlord covenant or a tenant covenant of a tenancy –
(a) whether or not the covenant has reference to the subject matter of the tenancy, ...."
- Section 3 is entitled "Transmission of benefit and burden of covenants". It provides as follows (so far as material):
" (1) The benefit and burden of all landlord and tenant covenants of a tenancy –
(a) shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and
(b) shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them.
(2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee –
(a) becomes bound by the tenant covenants of the tenancy except to the extent that –
(i) immediately before the assignment they did not bind the assignor, or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefit of the landlord covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises.
(3) Where the assignment is by the landlord under the tenancy, then as from the assignment the assignee –
(a) becomes bound by the landlord covenants of the tenancy except to the extent that –
(i) immediately before the assignment they did not bind the assignor, or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefit of the tenant covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises.
(4) In determining for the purposes of subsection (2) or (3) whether any covenant bound the assignor immediately before the assignment, any waiver or release of the covenant which (in whatever terms) is expressed to be personal to the assignor shall be disregarded.
(5) Any landlord or tenant covenant of a tenancy which is restrictive of the user of land shall, as well as being capable of enforcement against an assignee, be capable of being enforced against any other person who is the owner or occupier of any demised premises to which the covenant relates, even though there is no express provision in the tenancy to that effect.
(6) Nothing in this section shall operate –
(a) in the case of a covenant which (in whatever terms) is expressed to be personal to any person, to make the covenant enforceable by or (as the case may be) against any other person; or
- Subsections (2) and (3) of section 3 implement, in part, the recommendations in the 1988 Report (see above) Subsection (6)(a) is material in the instant case, given that the Agreement provides in terms that the obligations of Chesterfield under the Agreement are personal to Chesterfield (see clauses 1.2.5 and 188.8.131.52. quoted above).
- Section 4 deals with rights of re-entry, and is not material for present purposes.
- Sections 5 to 8 inclusive are headed "Release of Covenants on Assignment". Section 5 applies where a tenant assigns premises demised to him under a tenancy. Section 5(2) provides as follows (so far as material):
"(2) If the tenant assigns the whole of the premises demised to him, he –
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment."
- Section 6 applies where a landlord assigns the reversion in the premises subject to the tenancy. Section 6(2) provides as follows:
"(2) If the landlord assigns the reversion in the whole of the premises of which he is the landlord –
(a) he may apply to be released from the landlord covenants of the tenancy in accordance with section 8; and
(b) if he is so released from all of those covenants, he ceases to be entitled to the benefit of the tenant covenants of the tenancy as from the assignment."
- Section 7 deals with the position of a former landlord, and is not material for present purposes.
- Section 8 lays down the procedure for seeking release from a covenant under section 6. It provides as follows:
"(1) For the purposes of section 6 or 7 an application for the release of a covenant to any extent is made by serving on the tenant, either before or within the period of four weeks beginning with the date of the assignment in question, a notice informing him of –
(a) the proposed assignment or (as the case may be) the fact that the assignment has taken place, and
(b) the request for the covenant to be released to that extent.
(2) Where an application for the release of a covenant is made in accordance with subsection (1), the covenant is released to the extent mentioned in the notice if –
(a) the tenant does not, within the period of 4 weeks beginning with the day on which the notice is served, serve on the landlord or former landlord a notice in writing objecting to the release, or
(b) the tenant does so serve such a notice but the court, on the application of the landlord or former landlord, makes a declaration that it is reasonable for the covenant to be so released, or
(c) the tenant serves on the landlord or former landlord a notice in writing consenting to the release and, if he has previously served a notice objecting to it, stating that that notice is withdrawn.
(3) Any release from a covenant in accordance with this section shall be regarded as occurring at the time when the assignment in question takes place.
(4) In this section –
(a) "the tenant" means the tenant of the premises comprised in the assignment in question (or, if different part of those premises are held under the tenancy by different tenants, each of those tenants);
(b) any reference to the landlord or former landlord is a reference to the landlord referred to in section 6 or the former landlord referred to in section 7, as the case may be; and
(c) "the court" means a county court."
- Finally, section 27(1) provides that the form of notice under section 8 shall be prescribed by regulations made by statutory instrument. It is common ground that the Notice was in the prescribed form.
THE JUDGMENT OF LIGHTMAN J
- Addressing the 1995 Act issue, the judge said this in paragraphs 22 and 23 of his judgment:
"22. I turn to the first question. The rival contentions by the parties put the issue into perspective. Mr Berry for [Chesterfield] submits any form of obligation on the part of a landlord in a tenancy or collateral agreement, whatever its character or topic, constitutes a landlord covenant and likewise any form of obligation on the part of a tenant constitutes a tenant covenant. On the other hand Mr Barnes for [BHP] submits that the obligation in either case must be capable of being annexed to the premises demised by the tenancy and the reversion and accordingly transmissible under section 3 of the Act, and that this excludes personal covenants. It is common ground that the Agreement is a "collateral agreement" in relation to the Lease. It is sufficient to say the Agreement is an agreement "running side by side" and "parallel to" the Lease: see the definition of "collateral" in the Oxford English Dictionary 2nd edition. (It is unnecessary for this purpose, though it may be sufficient, that the agreement constitutes the species of contract known as a collateral contract). It is clear that the personal covenant, since it is "a covenant in a collateral agreement", is for the purposes of the 1995 Act (in accordance with the definition of the term "covenant") a covenant of the Lease. The critical question is whether that covenant falls within the definition in section 28 of a landlord covenant. For this purpose it must be a covenant "falling to be complied with by the landlord of premises demised by the tenancy", and the landlord for this purpose means "the person for the time being entitled to the reversion expectant on the term of the tenancy". Focus, as it seems to me, must be placed on the words "for the time being". These words to my mind connote, not merely that the covenant falls to be complied with by the landlord at any particular point in time (as submitted by Mr Berry for [Chesterfield]), but that it falls to be complied with by the person who may from time to time be entitled to the reversion. It may be noted that a tenant covenant is likewise defined as a covenant falling to be complied by the person "so" (i.e. like the landlord in the case of the landlord covenant) for the time being entitled to the tenancy. In short the only covenant that can constitute a landlord or tenant covenant is a covenant which is capable of subsisting (in the language of section 3 of the Act) as a transmissible covenant and accordingly a personal covenant cannot qualify.
23. Mr Berry submitted that this construction could not stand with the two specific references in the 1995 Act to personal covenants. Section 3(6) provides that nothing in section 3 (which is concerned with the transmission of the benefit and burden of covenants) shall operate to make a covenant expressed to be personal to any person enforceable by or (as the case may be) against any other person; and section 15(5) again provides that nothing in that section (which is concerned with enforcement of covenants) shall operate to make a covenant expressed to be personal to any person enforceable by or (as the case may be) against any other person. I do not find any contra-indication to the construction which I have adopted in either of those provisions. They are cautionary provisions designed to prevent any question arising whether the sections might have the unexpected and unintended result there referred to. They do not elevate, or reflect any intention to elevate, personal into landlord or tenant covenants."
- The judge went on to observe that he was relieved to reach the conclusion he had, for a number of reasons. In the first place, his conclusion accorded with the recommendations in the 1988 Report. Secondly, the judge pointed out that one of the consequences of a contrary conclusion would be that a tenant (who is automatically released from "tenant covenants" on an assignment: see section 5(2)) would thereby be automatically released from any obligation owed to his landlord under an agreement collateral to the tenancy, notwithstanding that such obligation might be wholly unconnected with the tenancy.
- The judge accordingly held that the personal obligations of Chesterfield under the Agreement survived, and were unaffected by, the service of the Notice.
- Addressing the Agreement issue, the judge said this (in paragraph 28 of his judgment):
"28. The tenant maintains that under clause 184.108.40.206 of the Agreement he is entitled to require [Chesterfield] to remedy, not merely the physical damage that has occurred by reason of the building work defect (i.e. replace the windows if the total cost exceeds £50,000) but also the underlying defect, namely the use of the wrong and untested glass. This claim turns on the definition of Building Works Defect in clause 1.1.8 namely:
"any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period."
"[BHP] cannot say that further physical damage will result from this defect, nor could he say that further physical damage would result when [BHP] gave notice of the defect between the date of the resultant damage to the second and third window. All he can say now is, and all he could say then was, that the defect gives rise now and gave rise then to a significant risk of further damage. But Mr Barnes for [BHP] submits that the issue whether there is a defect which will cause damage (and accordingly requires remedying) must be looked at as at the date of the Agreement: looked at from that viewpoint it can now be seen and said that the defect would result in physical damage. It is however clear (most particularly from clause 12.2 of the Agreement) that the situation must be looked at as at the date of [BHP's] notification of the defect. Accordingly [BHP] cannot require [Chesterfield] to remedy the alleged defect: he can only require remedy of the accrued physical damage and then only if the cost of the remedy exceeds £50,000. Any complaint about this on the part of [BHP] must be in respect of the negotiation or drafting of this term of the Agreement."
THE 1995 ACT ISSUE
- Mr Lewison QC, for Chesterfield, submits that the Agreement is a "collateral agreement", and that the obligations in question constitute a "landlord covenant", within the definitions of those expressions in section 28(1) of the 1995 Act. Accordingly, he submits, by virtue of section 3(1) of the 1995 Act the burden of those obligations passed to Chesterfield (Neathouse) Ltd on the transfer of the reversion, notwithstanding that the obligations are expressed to be personal to Chesterfield (see clauses 1.2.5 and 220.127.116.11 of the Agreement, quoted earlier). Similarly, he submits, it was open to Chesterfield to serve a notice under section 8 seeking to be released from its obligations under the Agreement. It follows, he submits, that since no counter-notice was served Chesterfield was released from those obligations with effect from the date of the transfer of the reversion.
- Mr Lewison submits that the effect of the judge's decision is to reinstate the distinction between covenants which "touch and concern" the land demised on the one hand, and personal covenants on the other: a distinction which Parliament, on the recommendation of the Law Commission, set out to abolish when it passed the 1995 Act.
- He also relies on the fact that the benefit of the obligations in question was intended to pass to assignees of the Lease (see clause 18.104.22.168. of the Agreement, quoted earlier).
- As an illustration of the way in which the 1995 Act operates, Mr Lewison takes the example of obligations entered into by a management company. He submits that in virtually all cases where a lease imposes obligations on a management company such obligations will be personal to the management company, but by virtue of the 1995 Act the benefit and the burden of such obligations will be nevertheless be transmissible. By contrast, he submits, if the judge is right neither the benefit nor the burden of those obligations will be transmissible.
- Mr Lewison cites the decision of the Court of Appeal in System Floors Ltd v. Ruralpride Ltd  1 EGLR 48 (decided before the coming into force of the 1995 Act) as an example of a case in which the burden of a personal covenant has been held to be transmissible, notwithstanding that the benefit of it was not. In that case the landlord agreed, by a side-letter which was expressed to be personal to the tenant, to accept a surrender of the lease on certain terms. The landlord subsequently transferred the reversion to a third party who took without notice of the side-letter. The court at first instance held that the terms of the side-letter were not binding on the new landlord. On appeal by the tenant, the Court of Appeal (Leggatt, Millett and Morritt LJJ) held that the side-letter was drafted in terms which indicated that it was intended to be binding on those entitled to the reversion for the time being and was accordingly enforceable against a successor in title to the reversion pursuant to section 142 of the Law of Property Act 1925, notwithstanding that the benefit would not pass to any subsequent tenant. In the course of his judgment, Morritt LJ said (at p.50L):
"I do not see why the transmission of the burden should depend on transmissibility of the benefit if all the other conditions are satisfied when, as the decision in P & A Swift Investments v. Combined English Stores Group plc [ AC 632] shows, the transmission of the benefit does not depend on the transmissibility of the burden."
- Mr Lewison submits that, by analogy with the P & A Swift Investments case, under the old law the obligations of Chesterfield under clause 12.2 of the Agreement would have been regarded as touching and concerning the Property, since the benefit of the obligations was transmissible notwithstanding that the burden of the obligations was not.
- Mr Lewison stresses the width of the definitions in section 28(1) of the 1995 Act. He submits that, in passing the 1995 Act, Parliament cannot have intended to exclude obligations such as those contained in clause 12.2 of the Agreement from the rules applicable to "landlord covenants", and that to exclude such obligations from the definition of "landlord covenants" would be contrary to the whole scheme of the 1995 Act.
- Mr Barnes QC, for BHP, submits that the requirement under the old law that, in order to be transmissible, the benefit and burden of covenants in a lease should "touch and concern" the land did not affect the freedom of the original contracting parties to agree that the benefit or the burden of an obligation should be personal to one or other or both of them.
- Mr Barnes submits that the effect of the 1995 Act is essentially twofold. In the first place, it abolishes the former rule that an original tenant remains liable on the covenants of his tenancy notwithstanding an assignment of the tenancy. In the second place it deals with the unsatisfactory former rule that, in order to be transmissible, a covenant had to "touch and concern" the land. Nothing in the 1995 Act, he submits, fetters the freedom of the original landlord and the original tenant, as the contracting parties, to provide that the benefit and/or the burden of a covenant shall be personal and not capable of transmission on a disposition of the relevant interest.
- Mr Barnes denies that the exclusion from the definition of a "landlord covenant" of a covenant the burden of which is expressed to be personal to the landlord involves reinstating the former distinction between covenants which "touch and concern" the land and those which do not. He points out that there is no necessary contra-distinction between covenants which "touch and concern" the land on the one hand and personal covenants on the other. He gives as an example a covenant by a tenant to carry out improvements to the land. Such a covenant plainly "touches and concerns" the land, notwithstanding that it may be expressed to be personal to the tenant.
- Turning to the definition of "landlord covenant" in section 28(1) of the Act, Mr Barnes submits that it is clear from the definition of "landlord" as "the person for the time being entitled to the reversion expectant on the term of the tenancy" that a "landlord covenant" does not include a covenant the burden of which is personal to the original grantor of the tenancy.
- He tests this submission by considering the situation where a tenant has assumed a personal obligation to the landlord. If Chesterfield's interpretation of the 1995 Act is correct, the tenant will be automatically released from that obligation on an assignment of the tenancy (see section 5(2)), and the assignee of the tenancy will not become liable to perform it because section 3(6)(a) will apply. So, on that basis, the obligation will terminate on the first assignment of the tenancy.
- In resolving the 1995 Act issue, we do not find it necessary to have recourse to the recommendations of the Law Commission in the 1988 Report. In our judgment the 1995 Act issue can readily be resolved by reference to the provisions of the 1995 Act itself.
- The crux, as we see it, is the definition of "landlord" in section 28(1) as meaning "the person for the time being entitled to the reversion expectant on the term of the tenancy" (my emphasis). We find it impossible to read that definition as meaning only the original landlord. In agreement with the judge (see paragraph 22 of his judgment) we consider that those words clearly connote the person who may from time to time be entitled to the reversion on the tenancy. It follows that, transposing that definition into the definition of the expression "landlord covenant", what one has is an obligation "falling to be complied with by [the person who may from time to time be entitled to the reversion on the tenancy]". An obligation which (that is to say, the burden of which) is personal to the original landlord is, by definition, not such an obligation, since it does not fall to be performed by the person who may from time to time be entitled to the reversion on the tenancy.
- It follows that in our judgment Chesterfield's obligations in clause 12 of the Agreement, being expressed to be personal to Chesterfield, are not "landlord covenants" within the meaning of the 1995 Act, and that the Notice was accordingly ineffective to release Chesterfield from such obligations.
- With respect to Mr Lewison, Chesterfield's argument on the 1995 Act issue seems to us to be based on the fallacy that there is a direct antithesis between a personal covenant (that is to say a covenant which is personal in the sense that the burden of it is expressed to be personal to the covenantor) on the one hand and a covenant which "touches and concerns", or which relates to, the land on the other. As Mr Barnes correctly submits, there is no such direct antithesis. A covenant which relates to the land may nevertheless be expressed to be personal to one or other or both of the parties to it. That is a matter for the contracting parties.
- Nor can we see anything in the 1995 Act to fetter the freedom of contracting parties to place a contractual limit on the transmissibility of the benefit or burden of obligations under a tenancy. On the contrary, that no such fetter was intended by Parliament is clearly demonstrated, in our judgment, by section 3(6)(a) (quoted earlier).
- Nor do we find the two authorities on which Mr Lewison relies (System Floors and P & A Swift Investments) to be of any assistance in the instant case. The fact that the transmissibility of the burden of a covenant does not depend on the transmissibility of the benefit of it does not seem to us to throw any light on the meaning and effect of the 1995 Act.
- Accordingly, we conclude that the judge was right to resolve the 1995 Act issue in favour of BHP.
THE AGREEMENT ISSUE
- Mr Barnes repeats the submission which he made to the judge, to the effect that the fact (which is to be assumed for present purposes) that physical damage to the property has resulted from the use of defective materials means that the conditions for the application of the second limb of the definition of "Building Works Defect" in clause 1.1.8 of the Agreement have been fulfilled. He submits that, at whatever point in time one is required to consider whether physical damage "will result" from such a defect - whether the appropriate point in time be the date of the Agreement or the date when notice is given under clause 12.2.1 of the Agreement or some other point in time - the (assumed) fact that physical damage has resulted from the use of defective materials proves that, viewed as at the appropriate point in time, physical damage would, as a matter of certainty, result therefrom. Accordingly, he submits, Chesterfield is obliged to remedy the defect by replacing all non-vertical units of toughened glass.
- As an alternative submission, prompted by the court in the course of argument and adopted by Mr Barnes (albeit with, perhaps, less than complete enthusiasm) Mr Barnes submits that under the second limb of the definition of "Building Works Defect" it is the defect which has to manifest itself within the six-year period, not the physical damage: in other words, that for the purposes of clause 12.2 of the Agreement it is enough if BHP can point, within the six-year period, to a defect which "will" at some time in the future (not necessarily within the six-year period) result in physical damage.
- If, however, the court were to hold that the physical damage which has occurred falls within the first, but not the second, limb of the definition of "Building Works Defect", with the consequence that Chesterfield's obligation is limited to replacing the four units which have fractured, then Mr Barnes submits that the proviso in clause 22.214.171.124 of the Agreement that the cost of so doing will "in each such case" exceed £50,000 (excluding VAT) refers not to separate items of damage but to damage resulting from separate causes. Hence, he submits, the fact that the cost of replacing a single fractured unit may not exceed the specified figure will not avail Chesterfield if the total cost of replacing all four fractured units exceeds that figure.
- Mr Lewison submits that in construing the definition of "Building Works Defect" in clause 1.1.8 of the Agreement it is relevant to bear in mind, as part of the commercial context in which the Agreement was concluded, that in assuming the obligations in question Chesterfield was in effect providing BHP with protection against the insolvency of the professional team which was contracted to carry out the works of refurbishment. Reading the definition in that context, it is clear (he submits) that for the purposes of the second limb of the definition it is the physical damage, not the defect, which has to manifest itself within the six-year period.
- In support of this submission, Mr Lewison relies on the definition of the expression "Concrete Frame Defect" in clause 1.1.12 of the Agreement, which refers expressly to ".... any defect in the concrete frame which will result in physical damage to the Concrete Frame manifesting itself during the contractual term of the Lease ....". Mr Lewison submits that there is no commercial reason why Chesterfield should undertake to make good a "Concrete Frame Defect" which has not given rise to any physical damage prior to the expiry of the Lease.
- Mr Lewison submits, therefore, that in order to bring the second limb of the definition into play BHP cannot rely on physical damage which has already occurred: rather, it has to establish that physical damage (that is to say, in a case where some physical damage has already occurred, further physical damage) will as a matter of certainty occur before the expiry of the six-year period.
- As to clause 126.96.36.199, Mr Lewison submits that the clause means what it says, and that in the instant case the words "in each case" refer to the replacement of each fractured unit.
- For convenience, we will begin by setting out once again material part of the definition of the expression "Building Works Defect" in clause 1.1.8 of the Agreement. The material part of the definition reads as follows:
".... any physical damage to the Demised Premises manifesting itself during the Defects Period or any defect in the Demised Premises which will result in physical damage to the Demised Premises manifesting itself during the Defects Period ...."
- Given that it is extremely difficult, if not impossible, to prove as a matter of absolute certainty that, for example, the use of defective materials "will" result in physical damage occurring – let alone within a specified period of time – Mr Lewison's interpretation of the definition of "Building Works Defect" seems to us to place the tenant in something of a straitjacket. If the tenant considers that there is a defect in the demised premises as a result of, for example, the use of defective materials, it is faced with a choice. If it gives notice of the alleged defect before any physical damage has occurred, it will (on Mr Lewison's interpretation) be faced with the well-nigh impossible task of establishing that the defect will cause physical damage to manifest itself prior to 30 June 2003 (the end of the six-year period). If, on the other hand, it waits until some physical damage has occurred before it serves a notice, it will (on Mr Lewison's interpretation) be met with the response that under the first limb of the definition the landlord is only obliged to repair the physical damage which has actually occurred (subject always to the proviso as to cost), and that so far as the risk of any further damage is concerned, the tenant must establish that further damage will occur prior to 30 June 2003.
- We cannot believe that the parties to the Agreement could have intended such an unworkable, unfair, and indeed irrational, result. Accordingly we look to see whether there is some legitimate way of construing the definition in a more sensible and workable way.
- In our judgment there is. Despite Mr Barnes' lack of enthusiasm for the point, it seems to us that the words "manifesting itself during the Defects Period" in the second limb of the definition of "Building Works Defect" apply not to the physical damage but to the defect. In our judgment, in order to bring the second limb of the definition into play BHP has to be able, prior to 30 June 2003, to point to a defect in the Property (e.g. the use of defective materials) which "will" result in physical damage to the Property at some time in the future - not necessarily prior to 30 June 2003.
- We do not find a comparison with the terms of the definition of "Concrete Frame Defect" to be of assistance on this point, given that Chesterfield's liability in respect of such a defect is not limited to the six-year Defects Period. The existence of the cut-off date of 30 June 2003 seems to us to be of crucial importance in considering the extent of Chesterfield's liability for Building Works Defects. In the context of that cut-off date it seems to us to make complete commercial sense that Chesterfield's liability in respect of such defects should not be limited to making good physical damage which has occurred prior to that date but should also include making good defects the existence of which has come to light prior to that date, provided that the tenant can establish that such defects will result in physical damage occurring, whether before or after the cut-off date.
- Further, where the defect relied on has in fact resulted in physical damage, it seems to us to fly in the face of common sense to construe the word "will" as requiring BHP to establish that further damage will occur in the future. We accept Mr Barnes' submission that, as a matter of construction of the second limb of the definition, the requirement of establishing that an alleged defect "will" result in physical damage is met by establishing, with the benefit of hindsight, that it has in fact resulted in physical damage. Otherwise, the tenant will be in a worse position if physical damage has in fact occurred than if it has not, in that the existence of actual physical damage will preclude it from requiring the remedying of the underlying defect unless it can prove that further physical damage will result from the defect.
- In our judgment, therefore, the first limb of the definition is directed at physical damage which has actually occurred, whereas the second limb is directed at the existence of an underlying defect which either has caused or will cause physical damage. Under the first limb, Chesterfield's liability is limited to repairing the damage which has actually occurred (subject to the proviso as to cost): under the second limb, its liability extends to remedying the underlying defect by not merely repairing any damage which has already occurred but also ensuring that the defect is remedied, so that it will not result in physical damage (or, as the case may be, further physical damage) occurring in the future.
- Accordingly, in disagreement with the judge, we would resolve the Agreement issue in favour of BHP.
- In the light of our conclusions, it is unnecessary to address the arguments as to the true construction of the proviso as to cost contained in clause 188.8.131.52 of the Agreement.
- In the result, therefore, we conclude that Chesterfield's liability under clause 12.2 of the Agreement is as contended for by BHP, and that Chesterfield was not released from such liability by the operation of the Notice.
- We would accordingly dismiss Chesterfield's appeal and allow BHP's cross-appeal.
Order: Appeal dismissed. Cross appeal allowed. Costs order as per schedule submitted by the parties. Application for permission to appeal to the House of Lords refused.
(Order not part of approved judgment).
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