UK & Europe
UK Real Estate Insights
On 25 March 2021, the Court of Appeal dismissed an appeal brought by the Corporation of London (the "Corporation") against a decision of the Upper Tribunal (Lands Chamber), which ruled in favour of the leaseholders of Great Arthur House ("Leaseholders") ( UKUT 341 (LC)). Both decisions concern the interpretation of specific terms of “Right to Buy” leases; specifically whether leaseholders are liable to contribute to the landlord’s costs of repairing structural defects.
Great Arthur House is a Grade II listed building on the Golden Lane Estate, which has suffered from water penetration for many years. Through a number of expert reports commissioned by the Corporation, it has been found that (among other issues) the formation of joints in the building was poor at several locations, and due to a lack in allowance for thermal movement its aluminium frame has deformed. Overall, it cost the Corporation £8m to remedy these and other problems, which it subsequently sought to pass on to Leaseholders in bills of over £172,000 per flat.
The Leaseholders hold 125-year leases granted pursuant to the 'Right to Buy' scheme, which permit a landlord to recover the costs of repairs to the structure and exterior of the building “not amounting to the making good of structural defects”. The extent of the repairs and the meaning of "making good of structural defects" was therefore in focus.
At a high level, the Corporation's argument largely echoed the established and well understood reasoning in Ravenseft Properties Ltd v Davstone (Holdings) Ltd  QB 12 (a commercial Landlord and Tenant case) , whereby: (i) works do not cease to be works of repair merely because they simultaneously eradicate a defect in the building that has been there from the time it was constructed, where that defect has caused damage to the building; and that (by way of contrast) (ii) if works do eradicate a defect which resulted in neither damage to nor deterioration to the building, they are not works of repair. For the avoidance of doubt, the cost of the works are only chargeable to Leaseholders if they are 'works of repairs' under the first limb.
The Upper Tribunal Lands Chamber (Fancourt J, President) rejected the Corporation’s argument. He held that in these “Right to Buy” leases it was necessary to consider the effect of the works. In doing so, he decided that works of repair of the structure and exterior of the building do not constitute 'repairs' if the effect of the works is to make good a structural defect. Further, if works have the effect of making good a structural defect, it makes no difference that the works also remedy damage or deterioration that has occurred over the time that the defect has existed.
Court of Appeal
The Court of Appeal agreed with Fancourt J, dismissing the Corporation’s appeal.
It pointed out that the decision in Ravenseft (as relied on by the Corporation) was subject to refinements introduced by Quick v Taff Ely BC  QB 809 – such that there must be disrepair before it is reasonable to remedy a defect – and Post Office v Aquarius Properties Ltd (1986) 54 P & CR 61 – in that, where defects in the building had existed since the date when it was constructed, but there had been no damage to or deterioration in the condition of the building, a repairing covenant did not require the defect to be eradicated.
The Court explained that works will be chargeable to Leaseholders under the relevant part of the leases only if: (i) they are repairs; (ii) they are carried out in order to keep in repair the structure and exterior of the building; and (iii) they do not amount to the making good of a structural defect. Recognising that works may be both repairs in the conventional sense and also works for the making good of structural defects, to the extent that they do amount to the making good of structural defects, the Court considered them in these cases excluded from charge to Leaseholders under that part.
As to the meaning of works "not amounting to the making good of a structural defect", the Court agreed with the Respondent Leaseholders (and Fancourt J) that what is to be considered is the effect of the works. If their effect is to make good a structural defect, then their cost cannot be passed on. Whether that is the effect of the whole or part of a scheme of works is a question of fact, to be determined on the evidence (including expert evidence where necessary), ordinarily by the First Tier Tribunal ("FTT"). The Court agreed that some parts of a scheme of work may amount to the making good of a structural defect, while other parts may not.
Interestingly, addressing the balance of interests between landlord and tenant, the Court of Appeal noted in its conclusion that it is not as though lessees have "complete immunity". Indeed, under a separate provision in the Right to Buy lease, lessees can be required to contribute to the cost of repairing structural defects (i) of which they were made aware before taking up the lease; and/or (ii) of which a landlord only became aware ten years or more after the grant of the lease. Of course, given the limited instances in which these scenarios will be relevant in reality, the judgment will certainly be of interest to leaseholders occupying premises pursuant to a Right to Buy lease, especially where they may be facing a substantial bill in the guise of repairs.
Whilst the Court of Appeal's judgment may therefore be welcome news to Right to Buy leaseholders, it is important to remain mindful of the decision's reliance on the FTT's ability to determine what the effect of particular works is; a question which is conceivably far from straightforward in many cases and will depend on the expert evidence, and the answer to which could leave leaseholders in significant suspense.