Landlord responsible for reinstating the glass façade of the iconic Beetham Tower in Manchester.

In a nutshell

Following the recent High Court decision in Blue Manchester Ltd v North West Ground Rents, landlords should be alert to the extent to which a modest ground rental income (£20,000 pa) acquired for a relatively modest payment for the freehold reversion (£400,000) may come with a higher price tag to pay.

The High Court ordered the building's ground rent landlord to replace the glass facades of one of the tallest buildings outside London and to implement an extensive and expensive scheme of works. The landlord's initial temporary fix to hold the panels in place was considered insufficient to discharge the landlord's repairing covenant. A permanent fix that respected the aesthetics and design intent of the original construction was required. Whilst the case serves as a stark lesson to landlords that ground rent investments can give rise to major liabilities, there are other issues which remain to be resolved, namely whether the landlord can recover any of the costs of the works from any contractors, or even any tenants.

Case facts

The Beetham Tower ("Tower") was constructed in 2006. It has 47 floors, the first 23 of which are the Hilton Hotel and the floors above are residential flats. The claimant tenant was the current owner of the hotel held under a 999 year lease. The defendant was the current freehold owner who 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 short-term 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 safety barriers at ground level. A further issue then ensued relating to Carillion, the main development contractor for the Tower going into liquidation before the investigations were completed, leaving the temporary solution in place.

Tenant concerns

Was the temporary solution sufficient to satisfy the landlord's repairing obligation?

Under the terms of the lease, the landlord was responsible for keeping the common parts (which include the external façade) "in good and substantial repair… and, where necessary, to reinstate, replace and renew…" The lease excluded expenditure arising out of the initial construction of the building and incurred in remedying any inherent defect from being recovered under the service charge provisions in the lease. It is unclear whether the landlord can recover such costs from the upper floor apartment leases (the case report does not comment).

The tenant raised three key issues regarding the temporary repairs:

• serious safety concerns
• the detriment to the Tower's appearance and the hotel's ability to market itself as a "destination" venue (Cloud 23 Bar on the 23rd floor with spectacular views of the Manchester skyline draws the crowds in)
• the ground level safety barriers and hoardings negatively impacted guests' "arrival experience" and impeded the operation of the hotel.

The defendant landlord argued that the existing temporary solution was sufficient whilst it pursued an action against Carillion's insurers and the specialist design sub-contractor which designed and installed the façade. The court disagreed.

Held

The defendant landlord was in breach of its repair covenant. The fact that it had paid £400,000 for the freehold reversion (compared to the £45 million paid by the hotel for the 999 year lease) was irrelevant. The landlord had covenanted to keep the property in good and substantial repair during the lease term. An order was granted for specific performance compelling it to replace the panels within a generous 18 month works timetable. The court concluded that from a design, construction and aesthetic perspective, the façade had to be restored to its original condition. 

It should be noted that specific performance is a discretionary remedy which is not widely available. Failure to comply with an order is a contempt of court. In this instance, the judge thought that the works obligations could be defined with specific certainty and damages were not an adequate remedy.

Food for thought

• Landlords purchasing freehold reversions for relatively small ground rents, should be mindful of potential cost implications and the risk they could be ordered to carry out repairs under the lease, the costs of which might not necessarily be recoverable via the service charge. Best practice is for the freehold owner to receive the rents with repairs resting with the management company owned by the tenants but this is not always achievable. 
• The exclusion of inherent defects is not necessarily that common in residential leases and the outcome in the Beetham case would have been different if they were recoverable in the hotel lease.
• It is all very well to rely on a third party such as the contractor in this case, but circumstances change and that third party may no longer exist. Claims should be pursued swiftly. The underlying liability remains despite protections being put in place.
• The landlord's repairing obligations should be balanced against other covenants such as the covenant for quiet enjoyment. The landlord must take all reasonable steps to disturb the tenant as little as possible and such works should not go on for longer than is reasonably necessary.
• As an aside, and this commentary is not on the facts of the case, if this case related to a tenants' repairing liability the position may have been different as there are limitations under the Leasehold Property (Repairs) Act 1938 restricting a landlord's rights to damages against a tenant's repairing obligation. In addition, damages for a landlord in that situation are limited by section 18 (1) Landlord and Tenant Act 1927. A landlord is unable to recover more than the reduction in value of his interest in the property. This reduction in value is difficult to demonstrate while the lease is ongoing and has a few years to run.

One thing is certain. The judgment appears to be an early decision in what may well be a long and complex dispute for the parties involved.