Breach goes to root of contract and strengthens branch of common law
We look in this article at Ramsbury Properties Ltd v Ocean View Construction Ltd [2024] in which the Privy Council considered whether a tenant was entitled to terminate a lease by accepting the landlord’s serious (repudiatory) breach, that went to the root of the contract.
Although not binding on the Courts of England and Wales, the judgment carries considerable weight. It builds on previous case law in which the courts have found that the law of repudiation applies to leases. Such cases will, however, need to be exceptional to succeed.
Key takeaways:
• It used to be thought that the contractual law on repudiatory breach did not apply to leases, because a lease is not just a contract but also creates a legal interest in land.
• Recent authorities have, however, assumed that leases may be terminated by the acceptance of a repudiatory breach.
• The Privy Council in this case similarly accepted that there was in principle no good reason why the law of repudiation should not apply to leases.
• Although not binding on the Courts of England and Wales, the decision was given by five Justices of the Supreme Court and will be highly persuasive.
• The landlord in this case was found to have been in repudiatory breach of the covenant of quiet enjoyment and implied terms, entitling the tenant to terminate the lease.
• Many questions remain, however, as to how the law of repudiation fits alongside established landlord and tenant law.
What is a repudiatory breach?
A breach of the terms of a contract that gives the aggrieved party the right to terminate is known as a “repudiatory breach”.The terms of a lease are classified (by lawyers at least) as “conditions”, “warranties” or “intermediate” (or innominate) terms.
A breach of a “condition” will normally be repudiatory, meaning that any breach, however small, triggers the right to instant termination.
Breach of a “warranty”, on the other hand, will not trigger termination.
Unless stated otherwise, most contractual terms will, however, be “intermediate” terms. As the name suggests, intermediate terms sit somewhere in the middle - the worst breaches will trigger the right to terminate, but less serious breaches will not.
A breach of an intermediate term is repudiatory if it deprives one party of substantially all the benefit the parties intended they should get under the contract.
It has also been described as a breach that is so serious - so fundamental - that it goes to the root of the contract.
A repudiatory breach does not end the contract automatically, however.
Rather, the innocent party has a choice to make.
The innocent party can either affirm the contract by saying or doing something to show that the contract is continuing, or it can accept the repudiation and tell the other party that it is terminating the contract.
Ramsbury v Ocean View - the background
Hurricane Omar caused damage to the Four Seasons Hotel on Nevis in 2008.
Ocean View was a construction company and had a contract to carry out repairs to the hotel. It needed accommodation for 250 of its workers who would be travelling from Mexico.
In June 2009, Ocean View signed a seven-month lease with a local property owner, Ramsbury, to provide accommodation for the 250 workers.
Ocean View’s workers went into occupation of the premises in late June 2009.
Very shortly after taking up occupation, Ramsbury directed that Ocean View’s workers were forbidden from eating on the premises and from doing laundry.
The workers indicated that this was unacceptable, and a number of them requested their airline tickets back to Mexico.
Ocean View quickly concluded that the situation was untenable and, having found alternative accommodation for the workers, informed Ramsbury in mid-July 2009 that it would be terminating the lease due to Ramsbury’s breach of the covenant of quiet enjoyment.
Ramsbury responded by denying breach of the lease and warning that, if Ocean View proceeded to terminate the lease, it would commence legal proceedings and claim all of the rent due for the whole of the remaining seven-months under the agreement.
That is what ultimately happened.
The workers moved out. Ramsbury sued for the whole of the rent under the lease.
Ocean View defended the claim and brought its own counterclaim seeking the refund of a deposit that it had paid.
Ocean View was successful in the lower courts, and Ramsbury appealed to the Privy Council, being the final court of appeal for St Christopher and Nevis.
What were the issues before the Privy Council?
There were two issues for the Privy Council to consider.
Firstly, it had to consider the proper meaning of a provision in the lease which said that the landlord would provide “sleeping accommodation only”.
Secondly, it had to decide whether there had been a repudiatory breach by the landlord that had allowed the tenant to terminate the lease. This involved, as a preliminary step, determining whether the law of repudiation in fact applies to leases.
The judgment explains that the law in St Christopher and Nevis on these points is no different from the law in England and Wales.
What did “sleeping accommodation only” mean?
Ramsbury sought to argue that the lease was worded such that it was for “sleeping accommodation only,” and therefore excluded eating and doing laundry.
The Court considered that this rather missed the point.
Rather, the critical question was, even if the lease said that it was for “sleeping accommodation only” what was the correct interpretation of that provision?
In their view, the Privy Council considered that, applying the principles of modern contractual interpretation, “sleeping accommodation only” in the lease included being permitted to carry out the basics of life, such as eating, doing laundry, being able to wash oneself and to use the toilet.
Even if that was not the case, a term to that effect could be implied into the lease on the basis that it was necessary to give business efficacy to the contract or because it was so obvious that it went without saying.
The Court considered that it was clear from all of the surrounding background materials that what the parties meant when they used the phrase “sleeping accommodation only” was that Ramsbury, as the landlord, was not itself going to provide meals or cooking facilities – it was merely providing the space, not operating a hotel, restaurant or providing other services.
Does the law on repudiatory breach apply to leases?
The judgment contains a very helpful potted history of the law of repudiatory breach in the context of leases.
The judgment explains that it was at one time thought that the contractual law on repudiatory breach did not apply to leases.
This was on the basis that a lease is not just a contract, but also creates an estate in land conferring the right to exclusive possession.
A similar reasoning had been applied in cases that had considered whether a lease could be terminated under the doctrine of frustration (where performance has become legally or physically impossible through no fault of the parties).
However, in National Carriers Ltd v Panalpina (Northern) Ltd [1981], the House of Lords (as it then was) decided that, in exceptional circumstances, a lease can be frustrated.
The House of Lords’ decision in Panalpina meant that it was open to the Courts to revisit the separate, but similar, question of whether the law on repudiatory breach can apply to leases.
Following Panalpina, there was an important County Court decision in a case called Hussein v Mehlman [1992] in which the judge found that, whilst there were some special considerations in the context of leases (notably, the need to take account of the landlord’s rights of forfeiture), there was no good reason in principle why the contractual doctrine of termination following repudiatory breach should not apply to a lease.
In Hussein, the Court found that an assured shorthold tenancy had terminated due to the landlord’s very serious failures to comply with its implied repairing obligations under section 11 of the Landlord and Tenant Act 1985.
The Court of Appeal subsequently assumed that the law on repudiatory breach applied to a lease in Chartered Trust plc v Davies [1997], although the point was not argued. In that case, a landlord’s failure to restrain a nuisance by another tenant in a shopping centre amounted to a breach of the landlord’s implied covenant not to derogate from grant, entitling the tenant to terminate the lease.
The courts had similarly assumed that leases could be terminated by acceptance of a repudiatory breach on several later occasions.
In light of the development of the law of repudiatory breach, the Privy Council accepted that there can be a repudiatory breach entitling the innocent party (including a tenant) to terminate a lease and that there is, in principle, no good reason why that should not be possible.
Was the landlord in repudiatory breach in this case?
The Privy Council went on to find that by forbidding Ocean View’s workers from eating meals and doing their laundry on the premises, Ramsbury had committed a repudiatory breach of the obligation of quiet enjoyment or the implied term that the workers could do those things (which was an “intermediate” term).
Ramsbury had also made it clear that its position would not change, such that the breach would continue.
Ocean View had therefore been faced with the immediate prospect of a large proportion (nearly 25%) of its workforce going back to Mexico which would put the completion of its hotel repair contract in jeopardy with the associated risk of having to pay substantial damages and loss of reputation.
In the Court’s view, those were sufficiently serious commercial consequences as to entitle Ocean View to terminate the lease.
Although the workers could, strictly, still sleep at the accommodation, Ramsbury’s breach, in preventing them from eating and doing laundry, went to the root of the contract and deprived Ocean View of a substantial part of the benefit of the contract.
The purpose of the contract was for the housing of 250 workers who were needed by Ocean View to fulfil its hotel repair contract. That purpose would be defeated if a quarter of the workforce went back to Mexico.
Ocean View could either comply with Ramsbury’s restrictions, which would result in workers leaving and the consequent undermining of the purpose of the contract, or ignoring those restrictions, leaving it exposed to the risk of forfeiture of the lease and being caught up in expensive litigation.
Faced with that choice, Ocean View was entitled to take Ramsbury’s threat of action seriously, and did not have to wait to see if it would in fact carry it out.
Even taking account of the fact that this was a lease, the circumstances of the breach were so exceptional as to amount to a repudiatory breach which Ocean View was entitled to accept as terminating the lease. It was the effect of the breach on the workers, in particular the threat by nearly 25% of them to return immediately to Mexico, that made the facts of this case so exceptional.
Ramsbury had been in repudiatory breach entitling Ocean View to terminate the lease, and Ramsbury’s appeal was dismissed accordingly.
Why is the decision important?
Whilst, as a decision of the Judicial Committee of the Privy Council, the decision is not directly binding on the Courts of England and Wales, it is persuasive authority. It is a judgment by a Board comprising five Justices of the Supreme Court and therefore carries considerable weight.
It is the latest in a line of cases that have concluded that leases can be terminated by accepted repudiation.
This does not, however, mean that it will become easier, or more common, for landlords or tenants to seek to terminate for repudiatory breach.
The Privy Council were at pains to emphasise that the facts of this case were exceptional. The bar for such a successful claim is set very high.
In practice, it will be rare for parties to leases (commercial or residential) to want to terminate for repudiatory breach anyway.
From the tenant’s perspective, for example, a long lease or a tenancy granted for a premium is a valuable asset, so they will ordinarily not wish to walk-away, but will usually prefer instead to seek damages or specific performance to hold the landlord to account. For shorter term lettings, the tenant may be able to serve notice to bring the tenancy to an end or simply wait for the end of the contractual term.
There may, however, still be some circumstances where repudiation could be an option to consider, particularly for tenants of shorter-term lettings who, unlike landlords, do not have a right to forfeit. This decision may assist with such an argument.
This is, however, still a developing branch of the law and some of the finer points as to how the law of repudiation sits alongside landlord and tenant law have yet to be worked out.
One of the main uncertainties is how the law of repudiation fits with the law of forfeiture of leases.
Do landlords really have both a right to forfeit and a separate contractual right to terminate by accepting a repudiatory breach, or does the law of repudiation really only benefit tenants?
Will courts be able to provide relief from termination for repudiatory breach in a similar way that they can grant relief from forfeiture?
What, if any, rights will subtenants and mortgagees have if a lease is terminated by acceptance of a repudiatory breach?
We will need another exceptional case to come along before we know the answer to these thorny issues.
