Essendi v London Property Company: Cladding, lease wording and fire safety obligations

Who pays when a building is found to contain unsafe cladding? The recent decision in Essendi UK Hotels 2 Ltd v London Property Company Ltd illustrates that the issue is not exclusively governed by the Building Safety Act 2022 (the BSA) and may instead be determined by the interaction between lease drafting and fire safety legislation. For owners, investors and asset managers, the case is a timely reminder that significant remediation liabilities can arise from contractual obligations long after a building was constructed.

Background

Essendi originally owned a site and procured a hotel under a design-and-build contract in 2001/2002.  Following completion of the build, several cladding panels became detached, resulting in a cladding replacement programme being undertaken in 2005. The original solid aluminium panels were replaced with what was later discovered to be category 3 ACM cladding (similar to the cladding that was present at Grenfell Tower and many other high-rise blocks). Importantly, it was established in this case that Essendi was not advised at the time that the cladding was category 3 ACM.

In April 2007, Essendi entered a sale-and-leaseback transaction with Wembley Hotels Limited (WHL). WHL acquired the freehold and granted Essendi a 12-year lease. The lease contained specific provisions regarding the building’s cladding, allocating responsibility for remediation to the tenant until May 2017 and thereafter to the landlord. The lease included no service charge mechanism, meaning the landlord had no contractual route to recover the cost of major structural or cladding works from the tenant.  In 2018, London Property Company Limited (LPC) acquired the reversionary interest. A renewal lease was granted in March 2019.

By 2024, evidence commissioned by Essendi, confirmed that the category 3 ACM cladding posed an intolerable fire risk. Essendi requested that LPC undertake remediation works. LPC refused. Essendi subsequently closed the hotel on safety grounds and brought proceedings against LPC, seeking specific performance and damages arising from the closure of the hotel.

The Court’s Decision

At the outset it is important to make clear that as a hotel rather than a residential tower block, the BSA was not engaged.  Therefore, the case was determined on other grounds.  In that regard, Essendi argued that LPC was in breach of two lease covenants:

• the covenant to put and keep the structure and exterior of the building in “good condition“; and;
• the covenant requiring compliance with “legal obligations“.

The “Good Condition” Covenant

There was no dispute that the cladding was not “out of repair”. The Court nevertheless concluded that the circumstances surrounding the sale and leaseback and the terms of the two leases warranted a broader interpretation of that covenant.  Several factors were influential:

• The building was a purpose-built hotel exceeding 18 metres in height.
• The building had already undergone a wholesale recladding exercise shortly after construction.
• The original lease specifically addressed responsibility for cladding remediation.
• There was no service charge mechanism for recovery of costs associated with landlord works to the structure and exterior.
• The rent was entirely turnover based, meaning the commercial bargain between the parties depended on the hotel remaining operational.
• The renewal lease was granted post-Grenfell when industry understanding of category 3 ACM cladding risks had changed significantly.
• Essendi had raised specific pre-contract enquiries regarding the cladding, but the true position was not properly disclosed.
• Had the parties known the true position, the hotel could not reasonably have continued to operate with the specific cladding in place.

Viewed in the context of those circumstances, the Court held that the obligation to keep the property in good condition, extended beyond the conventional repairing obligation. A high-rise hotel could not be regarded as being in “good condition” while clad in materials that created an intolerable fire risk and rendered occupation by guests and staff, unsafe.

The “Legal Obligations” Covenant.

While the interpretation of the good condition covenant may be considered fact specific, the Court also considered LPC to be in breach of the legal obligations covenant, specifically non-compliance with the Regulatory Reform (Fire Safety) Order 2005 (FSO). As the party responsible for the structure and exterior of the building, LPC was the relevant “responsible person” for FSO purposes. In May 2025, the London Fire Brigade issued LPC with a Notification of Fire Safety Deficiencies Notice, identifying failures that required remediation to achieve compliance with the FSO. In particular, the notice highlighted LPC’s failure to plan for or implement remediation of the category 3 ACM cladding. The Court agreed with the London Fire Brigade’s assessment. The cladding represented a fire safety risk that required remediation, and replacement of the cladding was considered reasonably practicable. Mitigation measures alone were insufficient in the circumstances.

While Essendi could not directly enforce the FSO against LPC in the same way as the fire safety regulator could, the lease, in effect, provided a private law mechanism for enforcing compliance with fire safety obligations.

Practical takeaways from Essendi

The decision does not establish a general rule that every inherent defect must be remedied by a landlord. Nor does it mean that every historic building safety issue will trigger liability under a condition covenant. However, the case demonstrates how lease drafting, commercial arrangements and statutory fire safety duties can all combine to create substantial remediation liabilities for landlords, even where a building falls outside the scope of the BSA.

Essendi challenges a common assumption in the market, that a building falling outside the BSA presents limited building safety exposure. The decision demonstrates that fire safety obligations, lease covenants and historic contractual arrangements can produce significant remediation liabilities regardless of whether a building sits within the higher-risk building regime. For owners and investors, the lesson is clear. Building safety risk should be viewed not simply as a regulatory compliance issue but as a fundamental investment risk capable of affecting asset value, income generation and business continuity. In an environment of increasing scrutiny of building safety, understanding where liability sits—and whether the relevant risks have been properly allocated—may prove just as important as understanding the physical condition of the asset itself.