When do contractual provisions constitute red lines?
Practical completion of a development is generally easier to recognise than to define. Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA Civ 502; [2019] PLSCS 60 concerned an agreement for lease that prohibited variations to the building works that materially affected the size, layout or appearance of new student accommodation in Plymouth. The agreement stipulated that a reduction in size of more than 3% in any distinct area shown on the plans was “material”. Did the fact that any one of rooms was more than 3% smaller than the size shown on the plans automatically preclude practical completion under the building contract? And was this “a material and substantial breach” that automatically enabled the buyer to determine the agreement for lease?
The High Court refused to grant the declarations sought by the buyer, ruling that the fact that there had been a material variation said nothing about the extent or importance of the breach to the property, or to the works as a whole. To say that a breach was material was of no real assistance in saying what the legal result of that breach should be – and the buyer’s argument that a material change in the size of any one room would entitle the buyer to walk away was “so commercially absurd” that it could not be right. But that did not mean that the buyer would not be entitled to a remedy in damages.
The Court of Appeal has upheld the decision. Lord Justice Coulson, who spoke for the court, observed that, under the agreement for lease, what was deemed to be material was the reduction in room size – and not the resulting breach of contract. The parties had not addressed the character of the breach. And, if the buyer was right, one trivial failure to meet the 3% tolerance would have draconian effects, even though the area affected might be a bin store. Clear words would be necessary, if that were the case, and there were no such words in the agreement. Nor could it be said that the principle in Alghussein v Eton College [1988] 1 WLR 587 applied, because the landlord was not relying on the breach of contract in order to seek an advantage.
Practical completion of a development is generally easier to recognise than to define. Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA Civ 502; [2019] PLSCS 60 concerned an agreement for lease that prohibited variations to the building works that materially affected the size, layout or appearance of new student accommodation in Plymouth. The agreement stipulated that a reduction in size of more than 3% in any distinct area shown on the plans was “material”. Did the fact that any one of rooms was more than 3% smaller than the size shown on the plans automatically preclude practical completion under the building contract? And was this “a material and substantial breach” that automatically enabled the buyer to determine the agreement for lease?
The High Court refused to grant the declarations sought by the buyer, ruling that the fact that there had been a material variation said nothing about the extent or importance of the breach to the property, or to the works as a whole. To say that a breach was material was of no real assistance in saying what the legal result of that breach should be – and the buyer’s argument that a material change in the size of any one room would entitle the buyer to walk away was “so commercially absurd” that it could not be right. But that did not mean that the buyer would not be entitled to a remedy in damages.
The Court of Appeal has upheld the decision. Lord Justice Coulson, who spoke for the court, observed that, under the agreement for lease, what was deemed to be material was the reduction in room size – and not the resulting breach of contract. The parties had not addressed the character of the breach. And, if the buyer was right, one trivial failure to meet the 3% tolerance would have draconian effects, even though the area affected might be a bin store. Clear words would be necessary, if that were the case, and there were no such words in the agreement. Nor could it be said that the principle in Alghussein v Eton College [1988] 1 WLR 587 applied, because the landlord was not relying on the breach of contract in order to seek an advantage.
On the question of the issue of a certificate of practical completion, Coulson LJ indicated that, had the contract stipulated that failure to meet the 3% tolerance was a material breach of contract (instead of constituting only a material variation), such a breach might have precluded practical completion. But, in the absence of such a provision, “practical completion” is a state of affairs in which works have been completed, free from patent defects, other than trifling ones that can be ignored. Whether or not an item is trifling is a matter of fact and degree. The mere fact that students could live in the property did not signify that the property was practically complete. Equally, the fact that the defect was irremediable did not preclude practical completion (and this had now occurred).
The real issue was the nature and extent of any relief available to the buyer in circumstances where 56 of the rooms were more than 3% smaller than they should have been. But whether or not those 56 breaches, either singularly or taken together, justified rescission was a matter of fact and degree. And the parties had now embarked on separate proceedings to establish whether the buyer was obliged to complete the agreement for lease or not.
Allyson Colby, property law consultant
