True Intentions or Business Necessity: when is it appropriate to imply a term into a lease?

News - 06/04/2018

Adam Waters, a Litigation Executive in our property disputes team in Redhill, discusses the recent case of J N Hipwell & Son v Szurek [2018].  In this case the Court of Appeal considered whether or not a term should be implied into a lease imposing an obligation on the landlord to keep electrical installations in the premises safe.

Background

The tenant entered into a lease of commercial premises with the landlord in 2012. It contained a clause stating that the lease was the “entire agreement and understanding of the parties relating to the transaction contemplated by the grant of this Lease and superseded any previous agreement between the parties relating to the transaction” (“the Entire Agreement Provision”).

In 2013 the tenant began experiencing electrical problems in the premises, which resulted in, amongst other issues, a small fire and caused the tenant to close her business. She claimed that there was an implied term within the lease that the landlord was to be responsible for maintenance and/ or repair of electrical installations and/ or there was an implied warranty within the lease that the electrical installation was, at the date of the lease, safe. As a result of the problems that occurred, it was alleged that the landlord was in breach of the lease.

The County Court Decision

The County Court Judge found that the parties’ expectations were that the landlord “was considered to bear responsibility for the keeping in repair the structure and exterior of the premises and installations for the provision of e.g. water and electricity”, that a term should be implied into the lease to reflect that intention and this should not be prevented by the Entire Agreement Provisions. Further, she found that the landlord was in breach of the implied term and the tenant was entitled to terminate the lease and sue for business losses.

The landlord appealed on seven grounds, but the meat of the appeal was that:

  1. the Judge failed to give effect to the Entire Agreement Provisions; and
  2. the Judge was wrong to imply a term that the landlord “would keep the electrical installations safe” because this flew in the face of express terms, was impractical because the tenant had installed her own kitchen and could not properly be said to be essential for the efficacy of the agreement.

The Appeal Decision

The Court of Appeal Judge saw that the County Court Judge had applied a common sense approach, but there were problems with the decision. Namely that, although described as an implied term, the Judge’s rationale for the introduction of a fresh provision was more like a collateral warranty or contract and the general rule is that evidence is not ordinarily admissible to vary or contradict the terms of a contract.  This rule is re-enforced by the Entire Agreement Provisions, which under English law would be given full force.

However, it is well established law that a term may be implied where it is necessary to give business efficacy to a contract and such a term would not be affected by the Entire Agreement Provisions. The question was then, whether an implied term placing an obligation on the landlord to ensure that the electrical installation and supply at the Premises was necessary in order to give business efficacy to the lease.

The Judge found that there was a clear and obvious gap in the lease in relation to the repair and maintenance of the electrics and was in no doubt that to ensure the lease was coherent, the gap should be filled by implying a covenant on the part of the landlord that the electrical installations and other service media provided was safely installed. Therefore, the appeal was dismissed.

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