Wild Duck Ltd v Smith (2018): can a landlord step in to carry out outstanding works following a developer’s liquidation?

4 September, 2018

On 27 June 2018, the Court of Appeal considered an appeal by a management company against a High Court decision in relation to outstanding works to the common parts of a development of holiday homes, following a developer’s liquidation.  Please read on for a summary of the judgment together with our comments on its potential significance.

Background to the case

The claimant (“Wild Duck”) purchased 5 leases for plots of land which were to be developed into holiday homes.  The defendants were the lessors under the lease and their late father entered into a development agreement to build the homes on the site, which provided for the incorporation of a management company responsible for the common parts of the site.  The developer went into voluntary liquidation during which time various parts of the development remained unfinished, with the management company dissolved shortly after.  Each lease provided that in such circumstances the management company would be liable to complete the outstanding works but, if the management company failed to perform any of its obligations, the lessors could perform them instead and recover the cost from the management company.  The lessees of the completed units sought to deal with the day-to-day maintenance and completion of the outstanding works by becoming shareholders of the management company.  The defendants invoked a clause within the leases to carry out the works themselves and recover the costs from the tenants.

The High Court decision

Wild Duck initially sought damages for breach of contract and in tort arising out of the leases, submitting the defendants were in breach of an implied term within the leases not to prevent the management company from carrying out its obligations.  The claim was dismissed, although the judge accepted that there was an implied term in the lease that the defendants would not prevent the management company from performing its obligations.  However, there was no implied term that the defendants had a duty to co-operate with the management company.  Such a term was not necessary to ensure that the lease had commercial or practical coherence.  The judge also held that there was still substantial further process to be made (in the absence of an appointment of a contractor) and the defendants were therefore entitled to conclude that the management company’s failure to perform allowed them to undertake the works themselves.

The appeal

The management company appealed against the High Court decision, claiming that there had been no failure to perform and that the defendants had acted outside the scope of the clause within the leases, by  deferring certain works and requiring payment upfront and declining to connect tenants to the new sewage treatment system until such payment was made.  The Court of Appeal found for the defendants, dismissing the appeal.  Little progress had been made in relation to the outstanding works following the developer’s liquidation.  By appointing a surveyor to prepare a schedule of works and oversee a tender process the management company were, at most, preparing to carry out their obligations; they were not performing them.

The court  also  found that, although the defendants were not strictly entitled to attach conditions to the works being carried out (particularly in relation to the demand for payment with a certain time), the defendants were still acting within the scope of the lease provisions.

Comment

The Court of Appeal judgment illustrates the chaos that can be created where a developer becomes insolvent during construction of a development.  Typically, when a property is sold off plan, an agreement will be entered into with the developer containing build obligations with completion to take place a number of days following practical completion.  However, the Wild Duck case differed as the leases of the units were granted before the construction of the development began.  This meant that a significant cost of carrying out the outstanding works would fall to the tenants of the completed units, impacting the future marketability of the tenants’ property.  The drafting of the term “practical completion” is of the upmost importance as, depending on the wording, this may mean that the landlord/developer can call for completion before the common parts in the development are complete.  It is advised that adequate due diligence checks are carried out on the developers before instruction and that there should be regular dialogue between the tenants and the developer throughout the project.