Baroque Investments Ltd v Heis & Ors [2012] EWHC 2886 (Ch)

Case No 9339 OF 2008[2012] EWHC 2886 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 22/10/2012
Before
THE CHANCELLOR OF THE HIGH COURT
Between
RE: TEATHERS LTD (No.03019293) (IN LIQUIDATION)ApplicantAND IN THE MATTER OF THE INSOLVENCY ACT 1986BAROQUE INVESTMENTS LIMITED(1) RICHARD HEISRespondents(2) SAMANTHA RAE BEWICK
Daniel Margolin (instructed by Eversheds LLP) for ApplicantMark Sefton (instructed by Nabarro LLP) for RespondentsHearing Hearing date: 16 October 2012
JudgmentThe Chancellor :Introduction
[1]The applicant, Baroque Investments Ltd (“Baroque”), is the owner of the freehold property situate and known as Beaufort House, 15 St Botolph Street, London, EC3. At the material time the fifth floor was let to Landsbanki Securities UK Ltd, now Teathers Ltd (“Teathers”), on the terms of four leases dated respectively 31st July 1991, 7th May 1996, 30th July 1997 and 14th December 2005 made between them or their respective predecessors in title. Each lease was for a term of years expiring on 30th March 2014 and each contained a covenant on the part of the tenant in the terms or to the effect of the following: “to keep the demised premises…in good and substantial repair and condition…and in such repair and condition…to yield up the same at the expiration or sooner determination of the term”.[2]On 14th December 2005 Baroque granted Teathers two licences to make certain alterations to the 5th floor including the infill of an atrium area on terms, in each licence, that:
“Before the end of the Lease the Tenant is to dismantle and remove the Works and reinstate the Premises to the same plan and design as before the carrying out of the Works and as if the Works had not been carried out (unless and to the extent that the Landlord requests that it does not do so).”
[3]On 23rd October 2008 the defendants were appointed administrators of Teathers. On 8th October 2009 Teathers went into creditors voluntary winding up and the defendants were appointed joint liquidators (“the Liquidators”). On 13th November 2009 Teathers, by its liquidators, surrendered each of the leases under which it held the 5th floor of Beaufort House. The terms of the surrender included the following:
“[Baroque] and [Teathers] respectively release each other from the rights and obligations contained in the Lease and from all liability in respect of any breach of those rights and obligations whether arising on or after, but not before, the date of this Surrender.”
On the same day Baroque relet the 5th floor to Instant Offices Management LLP for a term of four years at an annual rent of £706,550 but with an initial rent free period of 19 months.[4]Thereafter Baroque submitted various proofs of debt to the Liquidators of which the highest was for £7,013,964. By a notice dated 30th November 2011 the Liquidators rejected them. On 19th December 2011 Baroque applied under Insolvency Rule 4.83 for an order to vary that decision so as to admit to proof £3,844,831. Subsequently agreement was reached between Baroque and the Liquidators for the admission of the claim in respect of rent, service charges and electricity, leaving outstanding a dilapidations claim of £1,212,395 and a minor issue with which I am not concerned. That claim has two components. The first is the liability to reinstate as provided in the licences referred to in paragraph 2 above. The second is the liability to keep the demised premises…in good and substantial repair and condition as provided in the repairing covenant contained in each lease and quoted in paragraph 1 above. The issue between the parties is whether those liabilities were released by the terms of the surrender quoted in paragraph 3 above.[5]To facilitate the determination of that issue, on 15th June 2012 Registrar Derrett directed the trial of a preliminary issue in the following terms:
“Whether (or to what extent) the liability of Teathers Limited (in liquidation) averred in paragraphs 2.1 to 3.7 of the second witness statement of Jeremy Howard Grey dated 23 April 2012 is a liability which was released by clause 2.1 of the Deed of Surrender dated 13 November 2009, entered into between Baroque Investments Limited and Teathers Limited (in liquidation), and by paragraph 2.4 of section 11 of the Land Registry Form TR1 entered into between the same parties on the same date.”
I will consider the reinstatement and repair liabilities separately and in that order.

Reinstatement liability

[6]The obligation is “Before the end of the Lease…to dismantle and remove the Works and reinstate the Premises…”. Counsel for Baroque accepts that he cannot point to a particular time when the liability arose, but he contends that the liability to reinstate must, in accordance with its terms, have arisen before, not on or after the date of the surrenders. Accordingly, as he submits, the liability was not released by the surrenders. Consequently in relation to that liability Baroque is entitled to prove in the liquidation of Teathers.[7]Counsel for the Liquidators disputes this construction. He points out that, absent the words “Before the end of the Lease..” the tenant would have a reasonable time after its termination to carry out the reinstatement works, see Matthey v Curling [1922] 2 AC 180, 240. The inclusion of these words in the licences was evidently designed to limit the time within which the tenant might carry out the works to the term of the lease. Accordingly, so he submits, there was no breach of that obligation at the time of the surrenders on 13th November 2009 because the term of the leases did not expire until 30th March 2014.[8]I prefer the submissions of counsel for the Liquidators. The licences gave to the tenant the full period of the term created by the leases within which to carry out the requisite reinstatement. Accordingly, as at 13th November 2009, there was no breach of the obligation to reinstate. If the works were not carried out before 30th March 2014 then the tenant would have been in breach but that would have been after, not before, the date of the surrenders. In my view the inescapable consequence is that that potential liability was released by the surrenders. It follows that there can be no provable liability under this head.

The repairing liability

[9]It is common ground that, as held in Ebbetts v Conquest (1900) 82 LT 560, the covenant to repair quoted in paragraph 1 above imposes two distinct obligations. The first is to keep the demised premises in good repair during the term. The second is to yield up the demised premises in good repair at the expiration or sooner determination of the term. It is not disputed that the second was released by the surrenders. The issue between the parties is the extent of the provable liability of Teathers under the first.[10]Paragraphs 2.1 to 3.7 of the witness statement of Mr Grey referred to in the preliminary issue explain how the claim for £1,212,395 is made up. (Seemingly an unquantified part of it relates to the liability to reinstate. To that extent there is some duplication.) In those paragraphs Mr Grey explains that in order to mitigate Baroque’s loss it immediately relet the 5th floor of Beaufort House to Instant Offices Management LLP but due to the poor state of repair it was obliged to give the tenant a rent free period of 19 months and accept a reduced rent for the remainder of the term. He attributes 15 of the 19 months of the rent-free period to the want of repair and reinstatement and quantifies it as £882,812 (para 3.3). In respect of the rent reduction he quantifies the loss incurred by Baroque as £329,583 (para 3.7).[11]The Liquidators accept that whether or not that was a proper way to quantify losses arising from a breach of the covenant to yield up the demised premises in good repair that liability was released by the surrenders. In the case of the covenant to keep in good repair the measure of the landlord’s loss is limited by s.18(1) Landlord and Tenant Act 1927. That subsection, so far as material, provides:
“Damages for a breach of a covenant or agreement to keep…premises in repair during the currency of a lease,…shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid; …”
Accordingly, as the Liquidators maintain, the calculation of the damages necessarily involves the assumption that the lease to which the reversion is subject is continuing. Such claims are relatively rare because their availability is restricted by s.1(2) of the Leasehold Property (Repairs) Act 1938, as amended, to, in effect, the last three years of the term.[12]Counsel for Baroque accepts that the normal date for the assessment of damages is the date of the breach, namely the day before the surrenders on 13th November 2009. He points out that that rule may be displaced if some other date for assessment would more accurately reflect the loss sustained, see County Personnel Ltd v Pulver [1987] 1 WLR 916, 926A. In addition he contends that, in accordance with the principle established in Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426, the court is entitled to have regard to the facts that occurred after the relevant date rather than speculate.[13]Counsel for Baroque relies on the decision of the Court of Appeal of New South Wales in Gagner Property Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413; (2009) 262 ALR 691. It is sufficient to refer to paragraph 54 of the judgment of Campbell JA, with whom Macfarlan JA and Sackville AJA agreed. Having reviewed a number of authorities on the compensatory purposes of damages he said:
“It follows that, even though a cause of action for breach of contract has accrued at the time the breach occurs, it cannot now be said that there is an accrued right at that time to receive any particular sum of damages. That is because it must await the trial to decide what is the most appropriate way, in light of events then known, to give effect to the compensatory principle of damages.”
In the light of these principles, counsel for Baroque contends that the court is not bound to assume the continuation of the leases in assessing the amount of damage to the reversion but is entitled, indeed bound, to have regard to the subsequent events of surrender and reletting.[14]This is disputed by counsel for the Liquidators. He submits that the terms of s.18(1) predicate the continuation of the lease in the valuation of the damage to the reversion during its currency. He relies on the decision of the Court of Appeal in Hanson v Newman [1934] Ch 298, 306 in which Romer LJ said:
“Whatever may be the strict meaning at law of the word "reversion" there can, I think, be no doubt as to the meaning that that word bears in the section of the Landlord and Tenant Act, 1927, with which we are concerned here. The reversion in that section, if it be a freehold reversion, means the freehold subject to the lease, and valuing the reversion for the purposes of the section you must value the freehold subject to so much, if any, of the term of the lease as remains in existence.”
In that case a similar covenant to yield up in good repair was also relied on and the Court of Appeal took account of the fact that the tenancy was forfeited the following day. In the instant case any such liability to yield up in good repair has been released.[15]Counsel for the Liquidators contends that in this case the computation of the claim is inconsistent with both the terms of s.18(1) and the fact of the release of the covenant to yield up in good repair. In relation to the Bwllfa principle he submits that it cannot apply so as to undermine the express terms of s.18(1) requiring a comparison of the value of the reversion with the property in its actual state and in its repaired state. He relies on the decision of HH Judge Finlay QC in Gaze v Holden [1983] 1 EGLR 147 to the effect that the Bwllfa principle does not apply to valuations as at a particular date.[16]Once again I prefer the submissions of counsel for the Liquidators. It is clear from Mr Grey’s description of how he arrived at the figure of £1,212,395 that he did not follow the processes required by s.18(1). He made no attempt to value the reversion to the 5th floor of Beaufort House in either its actual or repaired state but assumed that the difference between those valuations would be equal to the loss sustained by Baroque on reletting the 5th floor to Instant Office Management Ltd. It may or may not be. Accordingly, the Liquidators were right to reject the proof of debt so calculated.[17]That is not to say that there may not be some provable debt if the proper processes are followed. Given the argument I have heard it is appropriate for me to say what they are. First, s.18(1) imposes a limit on what may be recovered to “the amount (if any) by which the value of the reversion is diminished owing to the breach of” the covenant to keep the demised property in repair. Second, the ascertainment of that amount necessarily requires the valuation of the reversion to the property in its actual state and in its repaired state. Third, a valuation of the reversion necessarily assumes that a purchaser will take it subject to the lease with the benefit and burden of all the covenants and other stipulations it contains for the remainder of the term.[18]Given those statutory requirements there is no room for the Bwllfa principle to be applied in the manner for which Baroque contends. In addition, the date as at which the valuations are to be made, whether the date of breach or the date of judgment cannot alter the requirements imposed by s.18(1). As the editors of Dilapidations, the Modern Law and Practice 3rd Ed.para 28.21 observe:
“In these circumstances it may be difficult to prove that the effect of the disrepair has been to cause any diminution in the value of the reversion.”
Finally, by insisting that the debt for which Baroque seeks to prove is calculated in the manner s.18(1) requires the Liquidators are not relying on an ‘accrued right’ such as Campbell JA referred to in the passage from his judgment in Gagner Property Ltd v Canturi Corporation Pty Ltd referred to in paragraph 13 above. They are relying on their statutory right to have the damage sustained in consequence of the breach of the covenant to keep in good repair limited in the way s.18(1) requires.[19]In these circumstances I will declare that:(1) Baroque is not entitled to prove for damage sustained in consequence of the failure of Teathers to reinstate the 5th floor of Beaufort House as required by the Licences; and(2) The alleged debt of £1,212,395 referred to by Mr Grey in his witness statement identified in the preliminary issue has not been calculated in accordance with s.18(1) Landlord and Tenant Act 1927 and, in consequence, is not provable. I invite counsel to consider what other orders or directions I should make and to produce a minute my order.