Agreements for Lease: when do material variations to building works give rise to a termination right

Thursday 25th April, 2019

The Court of Appeal has upheld a decision in the Technology and Construction Court (TCC) refusing to grant declarations in a dispute over an Agreement for Lease (AfL).

Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA Civ 502 involved an AfL which prevented variations to building works materially affecting the size, layout or appearance of purpose built student accommodation in Plymouth.

The Court upheld the finding of the TCC that it was a breach of contract to construct rooms that were more than a tolerance of 3% smaller than those stipulated in the drawings in the AfL but that this was not a “material and substantial” breach of contract that entitled Mears to terminate the AfL.

In the absence of an express clause in the AfL that such a breach would give right to a termination right, it was a question of fact and degree whether the 56 separate breaches of contract were “material and substantial” and each case had to be considered on its own merits.

The Court also found that, in the absence of any express contractual definition in the AfL, Practical Completion (PC) under the AfL and the building contract meant the same thing and that it a question for the certifier whether PC had been achieved or not.

The fact that the property was habitable did not, by itself, mean it was practically complete nor did the fact that the breaches could not be remedied economically did not mean that PC had not been achieved – a question that went instead to the measure of loss.

The case serves as a useful reminder to:

  • think carefully about your spatial requirements;
  • include a termination right in the agreement where the development (in whole or part) falls below a pre agreed tolerance and the impact on you is potentially material; and
  • where appropriate, refine the definition of PC in the agreement to “sweep up” any building requirements which are important to you but which may be omitted from the building contract.

Negotiating these points at the heads of terms stage will help to ensure the parties and their lawyers are on the same page at the outset of the transaction.

Marriott Harrison is experienced in acting for both developers and corporate occupiers in relation to these issues and would love to hear from you if there is anything we can assist you with.

This article is current as of the date of its publication. The information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice.  Marriott Harrison LLP does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.