It’s commonplace for the floor area of a proposed development to be set subject to certain agreed tolerances. These provide an amount of flexibility to a developer and are usually set out in the development agreement. But what happens if these tolerances are not met? You might think that this should entitle the parties to bring the agreement to an end. Interestingly, the High Court recently decided not, in Mears Limited v. Costplan Services (South East) Limited, Plymouth (Notte Street) Limited and J.R. Pickstock Limited.
The case concerned the development of two blocks of student accommodation which Mears (the tenant) intended to manage following construction. Mears entered into an agreement for lease with Plymouth (the landlord) which required Mears to take a lease of the blocks following practical completion. The agreement for lease specified that Plymouth could not vary the development so as to make any “distinct area” more than 3 per cent smaller than the size set out in the agreement. It transpired that many of the rooms within each block were in excess of 3 per cent smaller. Mears sought declarations from the High Court including: that any breach of the agreed tolerances enabled Mears to terminate the agreement for lease.
In effect, Mears’ argument was that any breach of the agreed tolerances was, by its very nature, sufficiently material to enable Mears to wipe its hands of the transaction.
The High Court held that each room within the development was a “distinct area” for the purpose of applying the tolerances. The Court then made an important distinction between the materiality of the variation in the size of a room and the materiality of the resulting breach of contract. The former is purely a case of arithmetic whereas the latter requires an appreciation of the context of the development – how important is the breach to the property in question? For example, even if a room was 5 per cent smaller than stated in the agreement for lease and, despite this, could still be let at a similar rent, it would be unlikely that the resulting breach of contract would be sufficiently serious so as to enable Mears to terminate the agreement. This was so even though the breach in this case was irremediable (the rooms could not be altered to make them any bigger).
The Court refused to make the declaration requested by Mears. It held that a breach of the tolerances did not always equate to a breach sufficiently serious to permit Mears to terminate. However, notably, the Court refused to address the question of whether the extent of the actual breach in this case was sufficiently serious to enable Mears to terminate. This was because it was not necessary to answer that question in order to decide whether or not to grant the declaration.
This case emphasises the importance of being clear as to the consequences of particular breaches of contract. If either party is intended to have a right to terminate for a breach, then this should be expressly stated so as to avoid the lottery of the courts. Claimants may have other avenues for redress (including claims for damages against the professional team engaged in procuring the development) but they may not be attractive – particularly given the risk of contractor insolvency and the application of extensive exclusions of liability. As always, the best policy when it comes to drafting remains that if there is any doubt, it is prudent to spell it out.