Background

The landlord, UBS Assets, entered into an Agreement for Lease with Office Depot in relation to a warehouse in Manchester. AMEC were appointed as the contractor and engaged FK Facades as the roofing sub-contractor. AMEC provided collateral warranties to both the landlord UBS Assets and the tenant Office Depot.

Completion of the warehouse took place in 2005 and UBS Assets granted the lease to Office Depot as arranged. This lease included a tenant's repairing covenant.

Settlement with landlord

The roof leaked and eventually the landlord brought a claim against the contractor under its collateral warranty. This was settled and the contractor agreed to pay damages, passing some of these on to their subcontractor. As part of the settlement agreement the contractor also obtained an indemnity from the landlord as a precaution in case they later invoked a repairing covenant in Office Depot's lease triggering in turn a claim by Office Depot under their collateral warranty from the contractor.

The landlord did not use the settlement monies to repair the roof, instead waiting to see what their tenant would do. The landlord did not chase the tenant's repairing obligation as this would trigger the indemnity agreed in the settlement agreement.

Action by tenant

Office Depot, instead of claiming under the collateral warranty in their favour from the contractor, asked the TCC for a declaration as to what works were needed under their repairing covenant and that any such works would be the contractor and sub-contractor's responsibility. This declaration was refused by the Court as the tenant's obligation is to keep the premises in a specified standard of repair. The landlord does not have an obligation to specify the works that are needed, they are entitled simply to have the standard of their property maintained.

The contractor and sub-contractor argued that they were not liable to the tenant at this stage. The tenant had not yet incurred any remedial costs and their liability is dependent on whether works are indeed required. Further, the sub-contractor is liable only to the contractor under the roofing sub-contract and does not guarantee the tenant's repairing obligations. The court concluded that the tenant should be given a further opportunity to plead a proper case and the contractor then indicated it may bring both the landlord and the successor landlord into the proceedings by way of contribution claim.

Unjust enrichment

This case provides an interesting discussion in terms of looking at the approach the tenant perhaps should have taken; instead of seeking a declaration for works due they could have brought a claim directly under the contractor collateral warranty in their favour. If they were able to prove the contractor and sub-contractor's breach caused loss for which the tenant was liable under their repairing covenant, it is not obvious how the parties would avoid liability. However, it must not be forgotten that the landlord has already received damages towards the repair of the roof under the settlement agreement. Surely it must be right that they must use the damages they received towards the repair? This point was addressed in the judgment:

"it doesn't feel right that AMEC and FK should have to pay twice to repair the same defect. Equally, it isn't immediately obvious how to unravel the double liability problem [perhaps] the answer lies again in the unjust enrichment point."

Next steps

The tenant has been given another opportunity to plead its case so it remains to be seen how this issue will be dealt with. Perhaps the point of unjust enrichment will be addressed, but until this is resolved it would be prudent to ensure the terms of any settlement place an obligation to use the proceeds for their intended use.

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