6 February 2019

With ground rent income, comes great responsibility

As Uncle Ben told Peter Parker in the Spiderman comics, "With great power, comes great responsibility."

Following a recent decision of the High Court, landlords may have to consider the extent to which a modest ground rental income acquired for a relatively modest premium may also come with "great responsibility" after the Court ordered a ground rent landlord to design and implement an extensive and expensive scheme of works to replace the glass facades of one of the UK's tallest buildings outside London.

The case is a useful reminder that:

  1. the Courts can and, in appropriate circumstances, will make orders for specific performance of repair obligations; and
  2. even the most seemingly passive of investments can give rise to major liabilities.

While it seems like the case is bad news for the landlord, it is clear from the judgment that other issues remain to be resolved such as whether the landlord can recover any of the costs of the works from any contractors or, possibly, any tenants.

The case is Blue Manchester Limited v North West Ground Rents Limited [2019] EWHC 1142 (TCC) 31 January 2019:

Key facts

  • The Beetham Tower ("tower") in Manchester has 47 floors, the first 23 of which are a hotel and the floors above are residential flats. It was constructed in 2006.
  • The claimant in the case is the current owner of the hotel pursuant to a 999 year lease. The defendant is the freehold owner and acquired its interest from the original developer in 2010.
  • In 2014, a serious problem with the glass panels forming the façade of the tower was discovered. The problem related to a failure of the bond between the sealant and the powder coating applied to the panel frames.
  • A swift temporary solution was implemented to secure 1,350 panels while full investigations were undertaken. This involved screw stitching pressure plates to the panel frames to hold them in place and the erection of various hoardings and safety barriers.
  • Carillion had been the main development contractor for the tower but went into liquidation before the investigations were completed, leaving the temporary solution in place.
  • The tenant raised 3 key concerns about the temporary solution and asked the Court to intervene to require the defendant to address those concerns now rather than at the conclusion of its claims against Carillion's insurers and/or the party who designed the façade.
  • The tenant's concerns were (1) the temporary solution was intended to be temporary so gave rise to serious safety concerns, (2) the solution adversely affected the tower's appearance and (3) the hoardings and barriers impeded the operation of the hotel.
  • The tenant sought orders requiring the landlord to design and implement a permanent solution to the problems with the façade and to pay damages in respect of losses arising from the presence of the hoardings and a water supply issue that was also considered by the Court.
  • The landlord raised a number of arguments in its defence including (1) an order for specific performance in respect of the works should not be made because it was difficult to say what would be involved and (2) that it cannot have been the parties' intention for the landlord to be responsible for repairs of this extent given its limited reversionary interest in the tower and (3) repairs that just related to the aesthetic apprearance of the tower were not justified.

Specific performance

Having undertaken a detailed analysis to establish that the works required fell within the remit of the landlord's repairing covenant, including those that related to just aesthetic appearance, the Judge had to decide whether specific performance would be an appropriate remedy. Specific performance is not a remedy that is widely available because the sanction for non-compliance can be contempt of court and potentially a prison sentence. It only will be granted exceptionally.

Defendants can avoid being ordered to specifically perform obligations if they can show that it would be too difficult, time-consuming or expensive for them do so. They often also argue that Court orders need to be expressed in very specific and clear terms, so an extensive schedule of works may not lend itself to being the basis for a Court order.

While the technical nature and extent of the anticipated works meant that these arguments were very much available to the landlord in this case, the Judge decided that:

"It is not necessary for a detailed schedule of works to be drawn up in a case where it is sufficient for the defendant to be ordered to achieve a clearly specified result and so long as the defendant can be protected against the risk of unforeseen circumstances which render it impossible or impracticable to comply."

The Judge acknowledged that the order for specific performance was draconian in nature but allowed the defendant 18 months to design and implement the works, noting that the timescale appeared generous given the landlord's previous failure to address the problems. The "generous" timescale afforded the landlord time to perform, thus ensuring what was being ordered was in fact possible.

Points to note

  • Orders for specific performance are relatively unusual.
  • Ground rent investors may wish to review their potential repair liabilities and their ability to offset such liability against third parties and/or recover any expenditure via service charges.
  • The judgment appears to be an early decision in what may well be a long and complex dispute for the parties involved.

Please contact Ben Barrison or your usual Forsters Property Litigation team contact(s) for more information.

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