It’s not uncommon for tripartite leases to include a provision which enables the landlord to “step in” and perform obligations that would normally be down to the management company to perform where that management company is failing to do so.

And although most leases contain this kind of clause, it’s fairly unusual that a landlord would seek to exercise it against a management company. There are certain situations, for example if the management company has been struck off and simply isn’t performing, that a landlord may step in and do what needs to be done. What, in my experience, is altogether rarer is a situation where the management company are in existence, are performing certain functions, but where the landlord still seeks to exercise their “step in” right.

And this was the situation under consideration by the Court of Appeal in the matter of Wild Duck Limited v Smith and Others [2018] EWCA Civ 1471.

 

Background

Waters Edge is a nature reserve comprising more than 150 lakes. In 2002, planning permission was granted to erect 40 holiday homes.

It was intended that each home would be sold “off plan” and subject to a 999 year lease. The leases were intended to be tripartite and incorporate a management company, who would deal with the management of the common parts, and the provision of services to the holiday homes.

Issues arose in relation to the development, not least because the developer went into voluntary liquidation in May 2009 and, at that time, parts of the development remained unfinished. These included accessways, a sewerage treatment plant, communal lighting, landscaping and the installation of entrance gates to the site. Collectively, these were referred to at trial as “the outstanding works”.

Matters were not helped either by the striking off of the management company in December 2009. The leaseholders of the holiday homes formed a “management committee” to deal with the day to day maintenance of the site and the completion of the outstanding works. In doing so, they assumed the role of the dissolved management company. The management company was eventually restored to the register in May 2011.

So far as relevant chronology is concerned:

  1. In November 2010, the management committee held a meeting at which the committee agreed to arrange for the completion of the outstanding works.
  2. In March 2011, they appointed a quantity surveyor to provide a schedule of works and oversee the tender process for the outstanding works.
  3. In September 2011, the quantity surveyor made recommendations to the management company in relation to engaging contractors to undertake the outstanding works. It was the surveyor’s view that the works would take approximately four to five months, and could be completed by early 2012.

However, on 1 September 2011 (and before the management company had received their surveyor’s recommendations) the landlord wrote to the management company, pointing out that, in the view of the landlord, the management company were not complying with their obligations. The landlord therefore invoked a provision in the lease which enabled it to undertake the works and recover costs from the management company.

 

The lease

Each of the 999 year leases contained a covenant on the part of the management company to:

  1. Maintain, repair, redecorate and renew, amongst other things, the accessways and the common parts.
  2. So far as practicable to keep the grounds in good order and condition, including being cultivated and lit.
  3. The lease also contained a covenant which enabled the landlord to undertake performance of the management company’s covenants in the event the management company failed to do so itself.

“Provided that if at any time the company shall fail to perform any of the obligations comprised in the foregoing covenants on its part then without prejudice to any other right or remedy of the landlord in respect of such failure the landlord may (but without being obliged to do so) undertake the performance of the same and in that event the cost and incidental expenses of doing so shall be repaid by the company to the landlord on demand…”

 

Had there been a failure to perform?

The management company’s position was that it “close to being in a position to perform” and that it had “nearly completed a tender process through [their quantity surveyor]”.  However, the Court noted that there was substantial further progress to be made in that no contractor had been appointed, and there were no arrangements in place for funding the work.

The question for the Court of Appeal was whether the management company was performing its obligation to complete the outstanding works in September 2011. If it was, then the landlord was not entitled to invoke the “step in” proviso. The management company argued that the Court should focus on their activities as at September 2011, because they showed that in September 2011 the management company was performing (not failing to perform) its obligations.

The Court of Appeal considered whether or not there had been a failure to perform, and decided that this was essentially a question of fact.

It was accepted that the management company had undoubtedly put in train a process by asking a surveyor to draw up a schedule of works and seek bids. But, even when their surveyor reported back in September 2011, he didn’t itemise the bids he’d received, didn’t recommend any one contractor, but said merely that it was necessary to take up references. Accordingly, there was no contractor appointed, no agreement as to the terms of any building contract, and not even a detailed specification. Moreover, the management company had not collected the money which would be required for the work to be done.

Accordingly, the Court determined that the management company was not performing its obligation to undertake (or do) let alone complete, the works. At most it was preparing to undertake the works, which is entirely different from performing them.

Close to being in a position to perform is not the same as performing its obligations.

This justified the landlord in invoking their step in right under the lease.