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What happens when a building is built to the wrong size? Confirmation from the Court of Appeal

Earlier this year, we blogged on the High Court decision of Mears Limited v Costplan Services. This case concerned whether an agreement for lease for the development of two blocks of student accommodation could be terminated by the intended tenant, Mears, because a number of rooms had been built outside the agreed size tolerances.

The agreement for lease (“AFL”) stated that the landlord, Plymouth, could not vary the development so as to materially affect the size of any “distinct area” of the development. The parties had agreed in the AFL that a reduction in size of more than 3 per cent of any distinct area would be deemed to be material.

Unfortunately, when the building was built, 56 rooms within the blocks were in excess of 3 per cent smaller than set out in the original plans.

Mears sought a number of declarations from the High Court including that any breach of the agreed tolerances was a “material and substantial breach” of the AFL entitling Mears to terminate the AFL. However, the High Court disagreed concluding that a material variance in size of a distinct area of the development did not necessarily mean that there had been a material and substantial breach of contract allowing Mears to terminate.

Mears appealed to the Court of Appeal. In dismissing the appeal, the Court of Appeal concluded that:

  • although the reduction of more than 3% in the size of any room was to be deemed a material reduction in size, this didn’t mean the resulting breach of contract itself was “material”; and
  • the 56 separate failures to achieve the 3 per cent tolerance amounted to 56 separate breaches of contract; however, “whether or not those breaches, either singularly or taken together, were material or substantial such as to justify rescission, is a matter of fact and degree, not a matter of construction of the AFL”.

The Court of Appeal did point out that “the parties to contracts of this sort are entitled to agree, in advance, that a breach of a particular clause amounted to a material or substantial breach of contract“; however, this had not happened here. If Mears’ absolutist argument” was accepted, “a failure to meet the 3% tolerance in relation to the bin store on the ground floor, even if that failure was trivial, would be said to be a material breach of contract” which would allow Mears to walk away. That construction had to be wrong as a matter of commercial reality”.

This decision serves as an important reminder to parties entering into contracts that they should think carefully about what remedies they want to have available to them for particular breaches of contract. In particular, when dealing with student accommodation, size tolerances are extremely important because a relatively small reduction in size may result in the accommodation being too small to function as student accommodation. In such cases, a party is likely to want to have the option to terminate for breach, rather than relying on other avenues for recourse, such as a claim in damages. It will help to avoid arguments later down the line if, when contracts are being negotiated, the parties expressly state which breaches will give rise to a right to terminate.

Mears Limited v Costplan Services (South East) Limited, Plymouth (Notte Street) Limited, J.R. Pickstock Limited [2019] EWCA Civ 502