England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
HH JUDGE COWELL
CHY09015

		Royal Courts of Justice Strand, London, WC2A 2LL
		24th May 2013

Lord Justice Patten :

1. This is an appeal by Ms Jo Flores (formerly Ms Jo Gavin) and Ms Chantal Cracy against an order of HH Judge Cowell dated 22^nd September 2010 which was made at the conclusion of proceedings in the Central London County Court.
2. Ms Flores is the tenant of commercial premises at 104, Cromer Street, London, WC1 ("104") under a lease from the Respondent, Community Housing Association Limited ("CHAL"), dated 8^th June 2000. Together with Ms Cracy she is also the tenant of adjoining premises at 106/108 Cromer Street ("106") under a lease from CHAL dated 17^th March 2005. The lease of 104 was granted for a term of 6 years from 8^th June 2000 at an initial rent of £5,500 per annum subject to review. The lease of 106 was granted for a term of two years from 8^th April 2004 and was then extended on 17^th March 2005 for a term until 7^th April 2014 at an initial rent of £9,000 per annum again subject to review.
3. The demise under both leases comprised the ground floor and basement of the premises including internal plaster; ceiling and floor coverings; doors and windows; and all conduits within the demised premises. It did not extend to any part of the upper floors of 104 and 106 which have been converted into residential flats and have been let as such by CHAL. Nor did it include the soil pipes on the rear wall of the building which serve the upper part of the premises.
4. Under both leases the tenants covenanted to put and keep the demised premises in good and substantial repair, decoration and condition (clause 5(6)(b)) and to decorate them every three years (clause 5(6)(c)) but there is no corresponding covenant by CHAL as landlord to repair those parts of the building which it has retained. Instead its only express covenants are that the tenant should have quiet enjoyment of the demised premises (clause 7(1)) and an insurance covenant (clause 7(2)) which (so far as material) is in these terms:

"To insure the Demised Premises and the Development in an insurance office of good repute or at Lloyds against the Insured Risks and in the event of the Demised Premises being destroyed or damaged by any of the Insured Risks the Landlord shall with all convenient speed (subject to the availability of all necessary labour and materials and the obtaining of all necessary permissions) lay out and apply in rebuilding repairing or otherwise reinstating the Demised Premises all monies received by virtue of such insurance other than monies received in respect of loss of rent Provided that the Landlord shall be under no liability to the Tenant hereunder if the insurance money under any policy of insurance effected by the Landlords shall be wholly or partially irrecoverable in the circumstances set out in 5(22) above….".

5. The "insured risks" are defined by clause 1(11) to mean:

"loss or damage by or in consequence of fire and such other risks as the Landlord may deem desirable or expedient including three years loss of rent and architects and surveyors fees and demolition clearance and similar expenses."

6. Clause 5(22) provides that:

"In the event of the Demised Premises or the building in which they are situate or any neighbouring premises or any of them or any part thereof being destroyed or damaged by any of the Insured Risks and the insurance money under any policy of insurance effected thereon by the Landlord being by reason of any act neglect default or omission of the Tenant wholly or partially irrecoverable forthwith in every such case to pay to the Landlord on demand the cost of rebuilding and reinstating the building or buildings so destroyed or damaged such rebuilding works to be carried out by and in accordance with the requirements of the Landlord and the Tenant being allowed towards the expenses of so doing (upon such rebuilding and reinstatement being completed) the amount (if any) actually received by or on behalf of the Landlord (other than in respect of loss of rent) under any such insurance as aforesaid in respect of such destruction or damage."

7. Under the heading "Landlord's Liability" clause 6(5)(a) also provides that:

"In any case where the facts are or should reasonably be known to the Tenant and not reasonably known by the Landlord the Landlord shall not be liable to the Tenant in respect of any failure of the Landlord to perform any of its obligations to the Tenant hereunder whether express or implied unless and until the Tenant has notified the Landlord of the facts giving rise to the failure and the Landlord has failed within a reasonable time to remedy the same."

8. In addition to these provisions clause 6(3) of each lease contains a cesser of rent clause in the following terms:

"If the Demised Premises or any part thereof shall be destroyed or so damaged by fire or any other risk for which the Landlord is indemnified under the insurance of the Demised Premises so as to be unfit for occupation or use then unless the insurance of the Demised Premises shall have been vitiated by the act neglect default or omission of the Tenant the rent hereby reserved or a fair and just proportion thereof according to the nature and extent of the damage sustained shall be suspended and cease to be payable until the Demised Premises or damaged portion thereof shall have been reinstated or made fit for occupation or until the third anniversary of such destruction or damage whichever shall be the sooner."

9. There is also the usual proviso for re-entry in the event of rent being unpaid for 21 days or of any breach of the tenant's covenants: see clause 6(1).
10. The appellants fitted out the demised premises at some expense for use as gallery space and, as part of their business, let out part of the area for exhibits and other commercial events. But on at least four occasions between April 2004 and June 2005 the interior of the demised premises was damaged by the ingress of water and on two occasions sewage from the parts of the building retained by CHAL. The judge found that in April 2004 gaps between the glass pavement lights above the basement of 106 let water through. They were repaired in September 2004 and in January 2006 an insurance payment of £150 was made in respect of the damage. In September 2004 one of the soil pipes carrying sewage from the flats above leaked and sewage permeated the rear wall of 104. The leak was remedied by the landlord's contractors on 31^st January 2005 and part of the wall was then replaced. A further insurance payment was made in respect of the damage.
11. On 7^th February 2005 there was then another leak from a stack pipe on the rear wall of 106 which was repaired on 26^th April 2005. Again this would have resulted in an insurance payment but for the excess on the policy of £100. Finally on 24^th June 2005 water from a tap or leaking pipe in one of the flats above 104 inundated the demised premises about a week before an art exhibition was due to be held. It necessitated the replacement of the ceiling (which was completed in October 2005). The cost of those works was met by the insurers and the appellants received a cheque direct from the insurers of £3,141.65 for this leak plus the other matters referred to.
12. The judge found that all of these leaks (including the defective pavement lights) emanated from the premises retained in the ownership of CHAL. But, in the absence of any express repairing covenant in respect of its adjoining premises, CHAL contended that it had no liability to the appellants beyond being required to lay out payments received from the buildings insurance it had taken out pursuant to clause 7(2) of the leases in the repair of the damage to the demised premises which had been caused. It is common ground that this was done.
13. Until June 2008 the appellants continued to pay the rent due under both leases but the rent due on the June quarter day was not paid and, as a result, CHAL served notices in respect of both leases that unless payment was received within 7 days it would proceed to re-enter and forfeit the leases. The rent due on 29^th September also went unpaid and the landlord served further notices of its intention to forfeit the leases. The appellants responded through their solicitors to the effect that they had no liability for rent for those quarters because they had continued to pay rent in 2005 when the demised premises had been unfit for occupation within the meaning of the cesser of rent clause contained in clause 6(3) of the two leases. As a consequence, they contended that they were entitled to recover the rent paid (but not due) during this period and to set off the relevant amount against the rent due in September and October 2008.
14. On 29^th October 2008 CHAL re-entered 104 and 106 and changed the locks. On 4^th November Wilkie J. granted the appellants an injunction ex parte requiring CHAL to allow them back into possession and this injunction was continued until trial by Christopher Clarke J. on 14^th November. The landlord's case at the inter partes hearing (and on this appeal) is that the appellants have no claim in restitution or otherwise to recover the rent which they paid in 2005 even if (which is denied) the premises were unfit for occupation in that period. Judge Cowell found at the trial that the cesser of rent clause had never come into operation because, as he put it, there was never an occasion when the premises were wholly unfit for occupation and use. That conclusion is challenged in one of the grounds of appeal on the basis that the judge failed to give any consideration to whether "any part" of the demised premises became unfit for use.
15. The appellants' claim for damages was issued on 3^rd December 2008 and eventually came to trial on 12^th July 2010. It sought to recover damages for financial loss consequent on the disrepair to their premises caused by the leaks I have mentioned. This was said to have run into many hundreds of thousands of pounds in the form of lost business and at one point the damages claim exceeded £2m. In order to succeed in a claim for this type of loss the appellants must establish a breach of duty on the part of CHAL whether in contract or in tort arising from the various leaks which occurred. The basis of such liability is said to be an implied obligation to keep the retained parts in repair or alternatively a common law duty as adjoining occupier to remedy any defect in those premises which was capable of causing damage to the demised premises.
16. Judge Cowell accepted that there was a duty on the part of CHAL to remedy any defects in the retained premises which would cause damage to the demised premises at 104 and 106. He based this on the decision in Hargroves, Aronson & Co v Hartopp [1905] 1 KB 472 which was approved by this court in Cockburn v Smith [1924] 2 KB 119. The scope of that duty was, he held, to take reasonable care to remedy defects in the retained premises which the landlord knew had caused, or were likely to cause, damage to the premises demised to the tenants. Absent negligence, the duty to repair only arose once the landlord was aware that damage had been caused.
17. The judge found that there was no breach of duty in respect of the leak from the soil pipe at the rear of 104 because the landlord had acted reasonably in attempting to trace the source of the leak once the damage it was causing had been notified. He also found that the flood caused by the leak in the flat above 104 in June 2005 was an unforeseeable accident and that repairs were carried out promptly. But he did hold CHAL liable for breach of duty in relation to the leak from the soil stack pipe at the back of 106 in 2005 not because it ought to have been aware that the pipe was leaking but because, once alerted to the damage, it could and should have remedied the leak by 8^th April 2005 at the latest. Its failure to carry out the repairs until 26^th April was therefore actionable.
18. In relation to the claim based on the leaking pavement lights at 106, the judge was asked to consider three separate periods. The occasion of the first leaks at the time of the grant of the first lease in 2004; a second period of leaks between June and October 2006; and a third period between May and June 2008. The judge accepted that the problems with the pavement lights were covered by the principle of caveat lessee which I will come to later. But if wrong about that he held that the leak in 2004 could have been easily remedied by the tenant and was within their duty to mitigate. The cost of repair was later met by insurance. In relation to the leaks in 2006, the judge held that there was no culpable delay on the part of CHAL and that when it appeared that the repairs would not be covered by insurance then the work was done at the landlord's expense. Again the judge held that the tenants should have carried out repairs themselves earlier as part of a duty to mitigate. The judge also decided that there had been no breach of duty in respect of the leaks in 2008 because at no time did CHAL know or have the means of knowing where the leak was coming from.
19. In summary then the judge found that only one breach of duty sounding in damages had been established and that related only to the three weeks in April 2005 when there was a delay in remedying the leak to the soil stack at 106. For this he awarded the tenants the sum of £100. Since this was obviously insufficient to extinguish the arrears of rent he declared in his order that both leases had been forfeited by the landlord's re-entry on 29^th October 2008 and ordered the appellants to deliver possession of the premises at 104 and 106 forthwith. They were ordered to pay mesne profits in a sum which represents the market rent of the premises from the forfeiture of the leases until possession and to pay the costs of the action to be assessed on an indemnity basis. He also refused permission to appeal.
20. The tenants' original grounds of appeal were based on an alleged breach of the rules of natural justice and/or Article 6. They acted in person at the trial and the judge is said to have failed to ensure that there was a fair trial. They also challenged the judge's formulation of the scope of the landlord's duty. But in November 2012 they secured the assistance of Mr Jan Luba QC pro bono who re-formulated the grounds of appeal and successfully obtained leave from this court on 4^th December 2012 to substitute the amended grounds for those contained in the appellant's notice. Although Ms Flores has argued the appeal in person, we have been assisted by the very full Advocate's Statement first used at the hearing on 4^th December as well as by the submissions which Ms Flores has made. There are now 9 grounds of appeal which can be summarised as follows:

(1) the judge was wrong to hold that the landlord's liability for damage caused by a defect in the retained premises was limited to a liability in negligence and depended on the landlord having notice of the defect and a reasonable opportunity to remedy it. He should have held that the landlord was in breach as soon as the defect occurred and caused damage to the demised premises;

(2) the absolute duty contended for arose as an implied obligation under the lease. The principle of caveat lessee has no application;

(3) the judge misconstrued the rent cesser provisions which were triggered by the damage to part of the premises and the tenants were entitled to recover and set off the rent paid during that period against their liabilities for unpaid rent in 2008;

(4) if the tenants succeed on grounds (1)-(3) they are entitled to substantial damages for loss of profit;

(5) even if the tenants are wrong on grounds (1)-(3) the damages of £100 awarded for the breach which the judge found proved were grossly inadequate;

(6) and (7) if the tenants are entitled to substantial damages for loss of profit in excess of the rent due up to 29^th October 2008 then the landlord was not entitled to forfeit the leases and the tenants' continuing liability is to pay rent at the rate reserved and not mesne profits; and

(8) and (9) the judge's order that the tenants should pay the costs of the action including the reserved costs of all interlocutory applications was clearly wrong.

21. In his Advocate's Statement and at the hearing on 4^th December Mr Luba made it clear that the tenants could not and did not seek to go behind the judge's findings of fact as to the extent of the damage to their premises or as to the cause of that damage. But prior to the hearing of the appeal Ms Flores sought permission to challenge the findings by the judge that there was no negligence by asking this court to find (1) that the claimants had previously asked for the structure to be repaired so as to put the landlord on notice of the defects and (2) that the flood from the upstairs flat was not an accident but was due to disrepair. This application was opposed by Ms Bhaloo QC on behalf of CHAL on the basis that it would necessitate an adjournment of the appeal in order to produce transcripts of the relevant evidence and was in direct contradiction of the basis on which permission to appeal on the amended grounds was granted. In my judgment we should refuse permission to add these grounds of appeal. The judge had all the evidence and the material provided in support of the application has not persuaded me that there is any substance in either point. Moreover permission to appeal was granted on the footing that it was not open to the tenants to seek to go behind the judge's findings as to the circumstances in which the damage came to be caused. The tenants obtained permission to appeal on that basis and I can see no justification for allowing them to resile from that position.
22. The other introductory matter which I need to mention is the respondent's notice. CHAL have served a respondent's notice by which they cross-appeal against the judge's award of £100 for breach of duty in respect of the delayed repair of the external soil pipe at 106. Their case is that the express terms of the lease excluded the duty which the judge found to have been breached so that, regardless of any negligence or breach of duty, the landlord had no liability to the tenants for damage caused to the demised premises by any of the leaks. They also rely on the fact that in the case of 104 Ms Flores failed to apply to the County Court for a new tenancy under Part II of the Landlord and Tenant Act 1954 by the 6^th April 2009 when the landlord's s.25 notice expired. As a consequence, Ms Flores, they say, has lost her right to possession of those premises regardless of whether the lease was forfeited for non-payment of rent in October 2008.

Liability

23. I turn then to the first two grounds of appeal which relate to the nature of the landlord's liability (if any) to repair the retained part of the building. The tenants' case on this depends upon the duty which the judge found to be established by the decision of this court in Cockburn v Smith and on the more general argument that the court should in this case imply into the lease a covenant by the landlord to keep the retained premises in repair at all times. It is, of course, critical to the success of this argument that the legal obligation thereby imposed should be strict and absolute in nature and not (as the judge found) a qualified obligation dependent upon the landlord being negligent in the upkeep of his premises and having notice of the damage which the item of disrepair was causing to the tenant.
24. Contract aside, the owner of adjoining premises does, of course, have a liability in nuisance for damage caused by an actionable interference with his neighbours' enjoyment of their own property. The nuisance may (and usually does) consist of the lawful use of the defendant's own land but matters such as a blocked drain which causes water to overflow on to the neighbour's land have been held to be actionable: see Sedleigh-Denfield v O'Callaghan [1940] AC 880. In principle therefore the blocked soil pipes were capable of amounting to a nuisance to the tenants in this case but a cause of action based on tortious nuisance does not assist them. It is now accepted that liability in nuisance is fault-based and that the defendant must be shown to have used his land in a way which he knows or ought to have foreseen would cause damage to his neighbour. This can include the adoption of pre-existing nuisances but in such cases the defendant must be shown to have failed to remedy the problem once he became aware of it: see Sedleigh-Denfield v O'Callaghan (supra) at page 905.
25. In the course of her oral submissions Ms Flores referred to the rule in Rylands v Fletcher (1866) L.R. 1 Exch. 265 as a possible ground for strict liability on the part of CHAL. The judge was not asked to consider the case on this basis nor does this argument form part of the grounds of appeal. But there are in any event obvious difficulties about it. Liability under the rule in Rylands v Fletcher depends upon the defendant keeping on his land some inherently dangerous thing which poses an exceptionally high risk of damage to neighbouring property should it escape. In Transco plc v Stockport Metropolitan Borough Council [2004] 2 AC 1 the House of Lords resisted the call to integrate this principle of liability into the law of negligence on the basis that the strict liability it imposes can be limited to this category of case. Lord Bingham (at paragraph 10) said that:

"It has from the beginning been a necessary condition of liability under the rule in Rylands v Fletcher that the thing which the defendant has brought on his land should be "something which … will naturally do mischief if it escape out of his land" (LR 1 Ex 265, 279 per Blackburn J), "something dangerous …", "anything likely to do mischief if it escapes", "something … harmless to others so long as it is confined to his own property, but which he knows to be mischievous if it gets on his neighbour's" (p 280), "anything which, if it should escape, may cause damage to his neighbour" (LR 3 HL 330, 340, per Lord Cranworth). The practical problem is of course to decide whether in any given case the thing which has escaped satisfies this mischief or danger test, a problem exacerbated by the fact that many things not ordinarily regarded as sources of mischief or danger may none the less be capable of proving to be such if they escape. I do not think this condition can be viewed in complete isolation from the non-natural user condition to which I shall shortly turn, but I think the cases decided by the House give a valuable pointer. In Rylands v Fletcher itself the courts were dealing with what Lord Cranworth (LR 3 HL 330, 342) called "a large accumulated mass of water" stored up in a reservoir, and I have touched on the historical context of the decision in paragraph 3(3) above. Rainham Chemical Works [1921] 2 AC 465, 471, involved the storage of chemicals, for the purpose of making munitions, which "exploded with terrific violence". In Attorney General v Cory Bros & Co Ltd [1921] 1 AC 521, 525, 530, 534, 536, the landslide in question was of what counsel described as an "enormous mass of rubbish", some 500,000 tons of mineral waste tipped on a steep hillside. In Cambridge Water [1994] 2 AC 264 the industrial solvents being used by the tannery were bound to cause mischief in the event, unforeseen on the facts, that they percolated down to the water table. These cases are in sharp contrast with those arising out of escape from a domestic water supply (such as Carstairs v Taylor (1871) LR 6 Ex 217, Ross v Fedden (1872) 26 LT 966 or Anderson v Oppenheimer (1880) 5 QBD 602) which, although decided on other grounds, would seem to me to fail the mischief or danger test. Bearing in mind the historical origin of the rule, and also that its effect is to impose liability in the absence of negligence for an isolated occurrence, I do not think the mischief or danger test should be at all easily satisfied. It must be shown that the defendant has done something which he recognised, or judged by the standards appropriate at the relevant place and time, he ought reasonably to have recognised, as giving rise to an exceptionally high risk of danger or mischief if there should be an escape, however unlikely an escape may have been thought to be."

26. It is also necessary as part of this test to show that the use by the defendant of his land for the purpose of accommodating the dangerous operation or installation falls within what Blackburn J in Rylands v Fletcher called the non-natural use of his land. The use in question must therefore be extraordinary and unusual in contrast to, for example, a domestic water supply or lavatory which are neither. It is therefore well established that the tenants cannot sue under Rylands v Fletcher for damage caused by defective guttering or leaks in water pipes retained by the landlord in the absence of proving negligence: see Carstairs v Taylor (1871) LR 6 Ex 217; Prosser& Son Ltd v Levy [1955] 1 WLR 1224. The same principle must apply to the soil pipes in this case.
27. Judge Cowell was persuaded that any liability based on the landlord's retention of the external and upper parts of the building depended upon proof of negligence and notice. He based his judgment for the tenants in relation to the delay in repairing the soil pipe at 106 on the legal duty described in Cockburn v Smith (supra) and later considered in Duke of Westminster v Guild [1985] 1 QB 688 and Gordon and Teixeira v Selico Co Ltd (1986) 18 HLR 219.
28. In Cockburn v Smith the landlord was sued for damage caused to a tenant's flat by a leak of rainwater from a defective gutter which was excluded from the demise. The landlord had been put on notice of the defect but failed to take reasonable steps to repair it. Bankes LJ (at page 129) said that:

"It cannot now be suggested that there was any agreement express or implied which can accurately be described as an agreement to repair the roof or the guttering; but there is a line of authorities to show that a landlord is under an obligation to take reasonable care that the premises retained in his occupation are not in such a condition as to cause damage to the parts demised to others. In some of these authorities it was not necessary to decide the point expressly, because in the opinion of the Court there was no want of reasonable care; but three of these cases indicate that if it had been necessary to define the duty of the defendant it would have been defined in the terms I have suggested."

29. He then referred to Carstairs v. Taylor and Hargroves & Co. v. Hartopp and continued (at page 130):

"Whether this duty arises out of a contract between the parties, or whether it is an instance of the duty imposed by law upon an occupier of premises to take reasonable care that the condition of his premises does not cause damage, I prefer not to decide. Lord Buckmaster speaks of it as a contractual obligation (3), and Greer J. as arising out of contract. There is much to be said for that view, but it is an immaterial question. If the duty is imposed by law, the point on which Greer J. decided in favour of the respondent does not arise, and the appellant's right to damages is clear as soon as it is established that the respondents were guilty of negligence."

30. Scrutton LJ (at page 132) thought that liability was tortious and based on a modification of the rule in Rylands v Fletcher to a duty to take reasonable care to ensure that no damage was caused. This is the principle in operation in cases like Carstairs v. Taylor and in Duke of Westminster v Guild this court confirmed that the landlord's liability under the principle applied in Cockburn v Smith was based on a duty to take reasonable care to ensure that the retained premises were not in such a condition as to cause damage to the tenant. It left open the question whether the legal basis for the duty lay in contract or in tort but in Gordon v Selico Co Ltd, Goulding J ([1985] 2 EGLR 79) expressed the view (at page 84) that:

"the better characterisation of the alleged duty of the lessor is as an implied term. Where there are gaps in an instrument expressing the reciprocal obligations of landlord and tenant, it is, in my judgment, more natural to fill them by implication, as the House of Lords did in Liverpool City Council v Irwin [1977] AC 239, than to invoke the law of tort."

31. In the Court of Appeal this passage was referred to by Slade LJ without criticism and it seems to me that we should treat this line of authority as establishing that the obligation on the landlord to repair in these cases is based on an implied term. Ultimately the precise juristic basis of liability may not matter in cases where, as here, the parties have a contractual relationship under the terms of the lease. Whether the duty imposed on the landlord to take reasonable care of the retained premises arises in tort or contract, the court has still to consider whether the express scheme of repair or insurance imposed by the lease excludes any other form of liability which the law might otherwise impose. The tenants' appeal on liability in this case depends not only on establishing that a liability on the landlord to keep the retained parts in repair should be implied or imposed over and above the express terms of the two leases but also that the implied obligation to repair should be absolute in nature in the sense that the landlord became liable for the consequences of the disrepair as soon as it occurred regardless of whether he had or should have had notice of the defect.
32. The second point is not open to the tenants in this court insofar as they base their claim for damages on the line of authority culminating in Gordon v Selico Ltd. The Court of Appeal has decided in those cases that any liability derived from the position of the landlord as an adjoining occupier is based on negligence and notice and we are bound to follow those decisions. If an implied obligation to repair regardless of notice is to be established then it has to be contractual and to be based on some other factors beyond the landlord's control of the external and upper parts of the building in which the demised premises are situated. And in that alternative context (whatever it may be) it is still necessary to consider Ms Bhaloo's argument that the implication of any such term is precluded by the scheme of the lease.
33. Reference was made in the Advocate's Statement to the judgment of Carnwath LJ in Earle v Charalambous [2006] EWCA Civ 1090 who, in the context of a claim for damages for breach of a lessor's covenant to repair the roof of a building containing residential flats, said (at [8] of the addendum) that:

"In applying a standard lessor's repairing covenant, the law draws a distinction between disrepair in the demised premises themselves, and disrepair in other parts of the building within the lessor's control. In the latter case the "general rule" applies: that is, the covenant requires the lessor to keep the premises in repair at all times, and he is in breach immediately a defect occurs (British Telecommunications plc v Sun Life plc [1996] Ch 69). In the former case, by contrast, there is no breach until the lessor has had notice of the defect and a reasonable time to carry out the necessary remedial works (ibid; O'Brien v Robinson [1973] AC 912). In BT (at p 79), Nourse LJ accepted that there might be other exceptions to the "general rule", for example if the defect is caused by an occurrence wholly outside the lessor's control."

34. But the general rule referred to is one derived from the construction of a landlord's express covenant to keep the retained premises in repair. The general rule is that this should be interpreted as imposing on the landlord a duty to keep the retained premises in repair at all times so that liability depends upon disrepair and not upon notice of disrepair. But the issue here is not how one construes such a covenant but rather whether a covenant to that effect can be implied into these particular leases.
35. Quite apart from the general point relied upon by CHAL about the scheme of the two leases, there are, I think, obvious difficulties about attributing to the parties an intention to impose on the landlord an implied obligation to repair which is stricter in effect than would be imposed by law based on his control of the building. As already explained, that obligation is based on notice and corresponds in scope to the landlord's obligation to repair defects in the demised premises themselves which only arises when facts come to his attention which would put a reasonable landlord on inquiry as to whether works of repair are needed: see O'Brien v Robinson [1973] AC 912.
36. It is noteworthy that in Liverpool City Council v Irwin [1977] AC 239 the implied contractual obligation imposed on the City Council to repair the common parts which they retained such as the lifts, staircases, rubbish chutes and passages, took the form of an obligation to take reasonable care to keep them in reasonable repair even though they were crucial to the tenant's enjoyment of the building and their own flats. Lord Wilberforce (at page 256) said that:

"It remains to define the standard. My Lords, if, as I think, the test of the existence of the term is necessity the standard must surely not exceed what is necessary having regard to the circumstances. To imply an absolute obligation to repair would go beyond what is a necessary legal incident and would indeed be unreasonable. An obligation to take reasonable care to keep in reasonable repair and usability is what fits the requirements of the case. Such a definition involves - and I think rightly - recognition that the tenants themselves have their responsibilities. What it is reasonable to expect of a landlord has a clear relation to what a reasonable set of tenants should do for themselves."

37. At page 269B-D Lord Edmund-Davies said that:

"The next question that arises is: what is the nature and extent of such obligation? In other words, is it absolute or qualified? If the former, any failure to maintain (save of a wholly minimal kind) would involve a breach of the landlord's obligation, and in Hart v. Rogers [1916] 1 K.B. 646 Scrutton J. considered, at p. 650, that such was the view taken by the court in Miller v. Hancock [1893] 2 QB 177. But later decisions, such as Dunster v. Hollis [1918] 2 K.B. 795 and Cockburn v. Smith [1924] 2 K.B. 119, treat the duty only as one of reasonable care, and such is the conclusion I have come to also. To impose an absolute duty upon the landlords in the case of buildings in multiple occupation would, I think, involve such a wide departure from the ordinary law relating to easements that it ought not to be held to exist unless expressly undertaken and should not be implied."

38. It is said that the judge should have held that the tenants' express obligations under the leases to repair the demised premises were matched by a correlative implied obligation on the part of the landlord to keep in repair the retained parts of the building. Reference was made to the decision of the Court of Appeal in Barrett v Lounova (1982) Ltd [1990] 1 QB 348 where the tenant covenanted to keep the interior of the demised premises in good repair but there were no covenants by either tenant or landlord in relation to the external structure. The court implied a covenant by the landlord to repair the exterior on the basis that, without it, the tenant would over time find it physically impossible to comply with his own covenant. I do not think that we get much assistance from this decision. There is no suggestion that the implied obligation to repair was absolute in nature and the court was not faced (as in this case) with a lease which imposed on the landlord the insurance obligations contained in clause 7(2). In this case it cannot be said that the tenant is left without remedy in the case of any disrepair of the structure. That constitutes an insurable risk and the landlord is required under the terms of the leases of 104 and 106 to apply the insurance monies in making good the damage and disrepair.
39. Of much greater assistance are the decisions of this court in Gordon v Selico (supra) and in Adami v Lincoln Grange Management Ltd [1998] 1 EGLR 58. In Gordon v Selico the court accepted that the imposition on the tenants of a scheme under which they each contributed to a maintenance account to be used in the repair and maintenance of the structure of a block of flats was sufficient to exclude the implication of any obligation on the part of the landlord to carry out such repairs. Slade LJ said that:

"Mr Sunnucks has submitted that, having regard to the comprehensive nature of the provisions of the lease relating to the repair and maintenance of Flat C and of the block, Court Mansions, as a whole, this is not a case where the learned judge was justified in implying any covenants relating to these matters. The lease, he pointed out, is in an unusual form, providing as it does for the repair and maintenance of the building by a system of express covenants and trusts. If the defendants are in breach of any of those express provisions relating to repair and maintenance, the proper remedy, in his submission, is by reference to the agreed system and not by reference to suggested implied covenants to which the parties never agreed.

We think this submission is correct and indeed in this court Mr Brock, on behalf of the plaintiffs, has not sought seriously to challenge it. Where a written tenancy agreement relating to a flat, forming part of a larger building in multiple occupation, manifestly does not embody the complete agreement between the parties the court may well be willing to supplement the written document by implying terms placing obligations on one party or the other. Such a case was Liverpool City Council v Irwin [1977] AC 239, where the "conditions of tenancy" which tenants were required to sign related only to the obligations on the part of the tenants, not of the lessor council. However, as Lord Wilberforce observed in that case (at p 254), "such obligation should be read into the contract as the nature of the contract itself implicitly requires no more, no less: a test in other words of necessity". Lord Cross in the same case said (p 258) that the court "must be able to say that the insertion of the term is necessary to give — as it is put — 'business efficacy' to the contract and that if its absence had been pointed out at the time both parties — assuming them to have been reasonable men — would have agreed without hesitation to its insertion". The repair and maintenance scheme provided by this lease is a very cumbersome one and we agree with the learned judge that, even if the lessors and their agents were duly to carry out their obligations, the scheme might not always suffice to give the lessees necessary and timely protection — for example, as he pointed out, through the continued inability or refusal of other lessees to pay their proper contribution. Nevertheless, on a reading of the lease, we feel little doubt that it was intended, by all parties, to provide a comprehensive code in regard to repair and maintenance of the block. We are by no means satisfied that the implication of any further terms in this respect is necessary to give the lease business efficacy, or that the lessor, assuming it to have been a reasonable person, would have "agreed without hesitation" to the insertion of the suggested implied additional terms relating to the repair and maintenance of the block."

40. Similarly in Adami the tenants of various blocks of flats were required under their leases to repair the demised premises and to maintain an insurance policy against risks to be specified by the landlord. The landlord maintained a block policy for the development which included the risk of subsidence. When this occurred the issue arose as to whether the landlord was required to do more than to lay out the insurance monies to repair the damage caused by the insured risk.
41. The court rejected the submission that an obligation by the landlord to repair the structure of the building should be implied into the lease. Vinelott J said that:

"In my judgment, the contention that it was an implied term of the 1990 lease that the lessor would be liable to make good any damage to the structure of the block whatever might be the cause of the damage, is simply untenable. The lease contains an elaborate scheme under which exceptional damage to the structure is to be covered by insurance effected in the joint names of the lessor and the lessee and maintained at the expense of the lessee; similar obligations are to be imposed upon the lessee of every other maisonette or flat in the block. The lessor is given power to enlarge the scope of the policy beyond fire and damage by aircraft, so as to enable the insurance to be extended at the expense of the lessee if it becomes apparent that damage to the structure may result from other causes. After 1971 damage by subsidence following a succession of dry summers became a common experience and it was, no doubt, for that reason that the lessor (who by this time had effected insurance in its own name under a block insurance policy with the consent or acquiescence of the lessees) extended the insurance to cover subsidence. In so far as damage to the structure results from an insured risk, there is simply no ground for importing any implied obligation to do more than lay out any insurance moneys coming into the hands of the lessor, in making good that damage (any deficiency in the insurance moneys being made good by the lessees).

More generally, I can see no ground for importing any obligation on the part of the lessor to carry out works of repair to the block from causes which are not covered by an insurance policy effected pursuant to the terms of the lease (modified in practice by the substitution of a block policy and its extension to cover damage by subsidence), in particular damage which might result from the gradual deterioration of the structure during the term of the lease. In Duke of Westminster v Guild [1985] QB 688, Slade LJ, at p697, approved a passage in Woodfall, Landlord and Tenant 28th ed (1978) vol I, para 1/1465 p618 in these terms:

In general, there is no implied covenant by the lessor of an unfurnished house or flat, or of land, that it is or shall be reasonably fit for habitation, occupation or cultivation, or for any other purpose for which it is let. No covenant is implied that the lessor will do any repairs whatever …

In the context of a lease for a term of some 260 years at a nominal rent granted by a corporate lessor originally incorporated as a management company, in which shares are held by the lessees of all the maisonettes and flats comprised in the development and which contains detailed provisions governing the repair of the individual maisonettes and flats, the levying of a service charge to meet the costs of the maintenance of the community land and for insurance to be effected and maintained at the expense of the lessees to cover damage from any catastrophe affecting a block as a whole so far as reasonably foreseeable, it is, in my judgment, impossible to presume an intention that the cost of maintaining the structure of each block should fall on the lessor. No such implication can be founded on the obligations on the part of the lessee under clause 9(b)(iv) to permit the lessor to view the property and to effect work necessary for upholding the building (see Sleafer v Lambeth Borough Council [1960] 1 QB 43) and the same principle must apply also to the covenant by the lessee in clause 9(b)(ix) to co-operate with the lessor and other lessees in carrying out repairs to the block.

Mr Marshall relied on the decision of the Court of Appeal in Barrett v Lounova (1982) Ltd [1990] 1 QB 348.

…

The decision of the Court of Appeal in Barrett v Lounova is, of course, binding on this court. However, in my judgment, it must be taken as decided upon the special facts of that case and no principle can be discerned which requires the implication of an obligation on the part of the lessor to keep the structure of the block in good repair. I would dismiss the appeal."

42. I take the same view in relation to the leases of 104 and 106. Although there is no express repairing covenant imposed on the landlord, the repair of the structure of the building is catered for through the provisions of clause 7(2). In the face of these provisions there is no reason based on necessity or business efficacy to alter the balance of the scheme by imposing an implied covenant to repair on the landlord, let alone one under which his liability to repair is made absolute. If one applies the modern approach to the implication of terms as a process of construction (see AG of Belize v Belize Telecom [2009] 1 WLR 1988) to do so would be to seek to improve the contract from the point of view of the tenant rather than to give it the meaning and effect which both parties must have intended given the terms and structure of their contract. The reasonable man looking at the matter with all the relevant background information would not in my view assume that the only meaning which could reasonably be given to the contract was that CHAL should be responsible for any defects in the repair of the retained parts irrespective of any negligence on its part.
43. For much the same reasons, the existence of what the parties obviously intended should be a comprehensive scheme for the repair of both the demised and the retained parts of the building is sufficient to exclude from their legal relationship any liability at common law in tort which the landlord might otherwise be subject to in relation to its retained premises.
44. It follows from this that the judge was wrong in my view to have held that CHAL even came under a duty to repair the retained parts including the stack pipes and the pavement lights and therefore to award the tenants damages of £100 for the breach which he found to be proved. In these circumstances, it is unnecessary to consider the landlord's alternative argument in relation to the pavement lights that they were covered by the principle of caveat lessee. The issue of quantum does not therefore arise but I observe that although the judge is criticised for his award of a nominal £100 for loss of profit in the three week period in April 2005, the independent joint expert (Mr Hall) reported that there was no evidence that, but for the delay in repairing the leak, the tenants' business would have earned income in the relevant period.

Cesser of rent

45. This point is now only relevant to the amount of arrears of rent for which the tenants are liable. Absent any liability on the part of CHAL for substantial damages for loss of profits, there were outstanding arrears at the time when the landlord re-entered in October 2008 and both leases were therefore validly forfeited on that date. It follows that CHAL is entitled to possession as ordered by the judge and to mesne profits in the sums he awarded.
46. The cesser of rent clause is only triggered when the demised premises "or any part thereof" are destroyed or damaged so as to be "unfit for occupation or use". Although the judge is criticised in the grounds of appeal for concentrating on whether the demised premises as a whole were ever unfit for occupation or use, this was because a case based on partial unfitness was never pursued at the trial. The tenants' case was that the demised premises had become wholly unfit for use and their damages claim was based on that factual premise. Since both experts were agreed that this was not the case, it was obviously open to the judge to reject the contention that clause 6(3) had come into operation. There is nothing in this ground of appeal.

Costs

47. The judge ordered the appellants to pay the costs of the action on an indemnity basis including the reserved costs of the hearing before Christopher Clarke J. and various pre-trial interlocutory hearings before Judge Cowell himself. Two points are taken in the amended grounds of appeal. It is said that the case did not justify the exercise of the exceptional power to award indemnity costs particularly in relation to the period before CHAL made various offers to settle. The tenants also say that they should not be required to pay the reserved costs of all the interlocutory applications given that in a number of them they were successful.
48. In ordering the appellants to pay the costs on an indemnity basis the judge took into account a number of factors. The claim had at one stage been put as high as £2m but in the end resulted in an award of £100. The precise nature of the claim was never made clear in the pleadings and the defendants incurred expense in, as the judge put it, fighting in the dark. As to the starting point for indemnity costs, the judge had to consider whether they should commence from the date of a Part 36 offer on 16^th July 2009 when CHAL offered to pay to the appellants £25,000 and their costs or from the start of the proceedings. In relation to that, the judge took into account the fact that in 2007 the landlord had offered to continue the lease of 104 at the same rent for another five years. Although not a Part 36 offer, this was influential in persuading the judge to order indemnity costs from the start.
49. The appellants are right, of course, to submit that the judge's power under CPR 44.4(3) to award costs on the indemnity basis is exceptional in the sense that the circumstances relied on to justify the order must take the case out of the norm. But it is not necessary to show some kind of misconduct on the part of the paying party and unreasonable conduct on the part of the tenants, coupled with their refusal of reasonable offers to settle, can in my view engage the court's power and make the exercise of it proportionate. The reality of the claim in this case is that it was always exaggerated. Although the incidents of water and sewage leaking into the tenants' premises were undoubtedly distressing and inconvenient, they never justified a claim for damages in excess of £2m and were, for the reasons I have given, in fact legally unfounded. Mere failure in the action is not enough to justify an award of costs on the indemnity basis but here the inflated nature of the damages claim was matched by a failure to limit the basis of the claim both factually and legally so that the judge was required, as he put it, to conduct a kind of inquiry instead of trying a case based on defined issues. Although some allowance has to be made for the fact that the tenants acted in person, that does not justify a complete disregard of procedural rules or the making of unfounded and exaggerated claims.
50. I therefore consider that it was within the legitimate ambit of the judge's discretion for him to make an award of indemnity costs in this case and to do so from the start of the proceedings. The only remaining question is whether the order should have included the reserved costs.
51. It is, of course, true that the appellants were successful before both Wilkie J. and Christopher Clarke J. in being restored to the premises and resisted a subsequent attempt to vary those orders. But the judges who decided those applications reserved the costs to the trial so that the ultimate burden of the costs would be decided having regard to the outcome in the action. Had it been appropriate for the tenants to receive the costs of the applications regardless of that, an order would have been made in their favour at the time. As things have turned out, the landlord's re-entry into the premises was lawful and the appellants had no right to remain in possession thereafter. In these circumstances it was within the trial judge's discretion to direct that the costs of those applications should follow the event.

Conclusion

52. For these reasons, I would dismiss the appeal and allow the Respondent's cross appeal against paragraph 2 of the judge's order.

Lady Justice Black:

53. I agree.

Lord Justice Mummery :

54. I also agree.