There is often uncertainty as to what action a tenant can take where it considers that the landlord has breached the terms of the lease. It is generally accepted that it is possible in principle for a tenant to terminate a lease for repudiatory breach if the landlord's breach is sufficiently serious. A repudiatory breach is one that is so serious that it strikes at the root of the contract, and it has generally been difficult for tenants to show that landlord breaches meet this criteria. There has been limited case law in this area and judgments have tended to be very fact specific.
In Ramsbury Properties Ltd v Ocean View Construction Ltd, the Privy Council considered whether a landlord had breached its obligations and, if it had, whether these were sufficiently serious to constitute a repudiatory breach entitling the tenant as innocent party to terminate the lease.
Facts
The parties entered into a 7 month lease of premises to house construction workers employed by the tenant while they worked on a hotel. The lease provided that the property demised to the tenant was to be used for the purpose of providing "sleeping accommodation only" for 250 workers. The lease contained a number of typical provisions, including a quiet enjoyment covenant on the part of the landlord.
The dispute between the parties arose when the landlord informed the tenant that its workers would be forbidden from eating meals and doing their laundry on the premises. In response to this, and following concerns that a significant proportion of the workforce would leave as a result of the landlord's policy, the tenant took other premises and informed the landlord that it was terminating the lease in response to the landlord's repudiatory breach. In response, the landlord commenced proceedings claiming specific performance and damages for breach of contract (being the outstanding rent for the remainder of the term of the lease).
The landlord's position was that, on a strict interpretation of the wording of the lease, the tenant's employees were to use the premises for sleeping accommodation only and that any other use of the premises would not be permitted. Accordingly, the landlord argued that it was the tenant who was in breach of lease and had no right to terminate.
The Privy Council found that there was an implied term that the tenant's employees would be permitted to eat meals and do laundry on the premises. Their view was that such a term was necessary for business efficacy and/or it was so obvious that it went without saying. Having found this, the Privy Council then needed to decide whether there was a breach that was sufficiently serious to entitle the tenant to terminate the lease. They held that the purpose of the lease from the tenant's view (as known by the landlord) was to accommodate the tenant's employees so that the hotel repair work that the tenant was contractually bound to carry out could be fulfilled. The consequence of the landlord's breach was that the tenant was faced with the immediate prospect of up to a quarter of its employees leaving their position which would be likely to seriously impact the tenant's ability to complete its hotel repair contract on time. If it could not do so, it faced the prospect of having to pay substantial damages for breach of that contract and would possibly suffer other loss, for example, loss of reputation.
In the Privy Council’s view, those were sufficiently serious commercial consequences of the breach by the landlord as to entitle the tenant to terminate the lease. Whilst the tenant's employees could still sleep at the accommodation, the breach of the implied terms by the landlord went to the root of the contract, depriving the tenant of a substantial part of the benefit to which it was entitled under the lease.
Conclusion
Whilst the decision provides a useful analysis as to the circumstances in which a tenant may be entitled to terminate its lease following a landlord's breach, the Privy Council were keen to point out that exceptional circumstances will need to exist before a tenant has such a right.
The Privy Council stressed that the nature of a lease, and the fact that it grants exclusive possession, means that it may be rare for there to be a repudiatory breach of a lease entitling the tenant to terminate. Whilst the facts in this case were said to be so exceptional to warrant such a finding, the short term of the lease and its specific purpose clearly had a bearing on the decision. It remains to be seen whether the same decision would have been reached had the lease been for a longer term or was entered into for general purposes. The bar to demonstrate repudiatory breach of a lease remains high.
Whilst the decision does not represent new law as such, it is a helpful reminder for landlords of the need to adhere to their obligations set out in leases and for tenants to be aware of possible remedies in the event of breach.
