Is specific performance an option for landlords?

Feature | 1 November 2012
Refurbishment

The strict conditions set out by the courts for landlords to be able to rely on the 
equitable remedy shouldn’t discourage potential applicants, says Emma Hatfield

The equitable remedy of specific performance has been available for decades as a solution to many legal disputes but its availability to landlords as a remedy has not. It is only in the past thirteen years following the case of Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch 64 that landlords have been able to consider specific performance to compel tenants to fulfil their obligation under their repairing covenant. Despite this development it is still not commonly used.

Until then the law was to be found in Hill v Barclay (1810) 16 Vesey Junior 402 which had ruled against specific performance on the grounds it had “no mutuality.” The judges held that “tenant[s] cannot be compelled to repair.” Hill’s rationale for this was on the basis that as tenants were not entitled to relief from forfeiture, landlords should not be entitled to specific performance. To do so would place the parties in an unequal position and in conflict with general equitable principles.

Equal footing

The Tokenhold case reversed this position. The High Court ruled that the mutuality argument could no longer be sustained given legislative changes in favour of tenants. Such changes included relief from forfeiture and protection under section 1 of the Leasehold Property (Repairs) Act 1938. Additionally specific performance had been made available to tenants in relation to a landlord’s repairing covenant (see section 17 of the Landlord and Tenant Act 1985). This statutory ability to use specific performance by tenants reinforced the case law position in Jeune v Queen’s Cross Properties Ltd [1974] Ch 97 which had allowed specific performance against a landlord’s repairing obligation, compelling him to carry out “specific work.” Tokenhold redressed the balance for landlords in accordance with general equitable principles.

On the surface, the Tokenhold decision appeared to change the position for landlords. Restoring the balance between the landlord and tenant and bringing common sense to this area of law which had previously been criticised for being complex and inconsistent. On closer examination however it is clear this remedy is not widely used by landlords seeking redress for a tenant’s repairing obligation.

Unusual circumstances

Tokenhold had a number of “unusual circumstances” which set it apart from other cases. Firstly the leases granted to the defendants omitted forfeiture clauses or express rights of re-entry in favour of the landlord. As such, neither forfeiture or self-help remedies were available to the landlord to remedy the breach. While landlords have implied rights to enter property to comply with their own repairing obligations, express provisions are required to enable a landlord to enter to carry out a tenant’s repairing obligations and reclaim the costs from the tenant as a debt due. Given that most well drafted commercial leases contain such clauses in reality very few landlords would be in a similar position.

Secondly, pursuing the remedy of damages was not a realistic option. 
The defendants’ financial positions were either limited or unknown and repairs had been assessed in the region of £300,000. In the circumstances damages would be worthless with no prospect of the defendants ever paying.

Thirdly, with the landlord’s property in a state of serious dilapidation, action to repair was vital. The situation was compounded by the local authority serving a number of statutory notices pursuant to the Housing Act 1985 and the Environmental Protection Act 1990, including an abatement notice. As non-compliance would result in the council completing repair works and securing a charge over the property until the costs had been recovered, it was imperative that the court made a decision.

Lawrence Collins QC in his judgment however warned of the need for “great caution in granting the remedy against a tenant”, pointing out that it would only be appropriate in rare cases as landlords would “normally have the right to forfeit or to enter and do the repairs at the expense of the tenant.”

Further complications

Tokenhold came at a time when others were reassessing the use and availability of specific performance.

The Law Commission in its report ‘Landlord and Tenant: Responsibility for State and Condition of Property’ (Law Com No 238) believed the remedy should be available to both a landlord and a tenant for a breach of repairing covenant. It did however express concerns that the use of specific performance by landlords left tenants vulnerable as the remedy fell outside of the 1938 Act’s jurisdiction, which aims to protect tenants.

Tokenhold took on board these concerns. It identified the need to ensure tenants were not harassed or pressurised and that any oppression by landlords was prevented. While the court was not in a position to extend the 1938 Act to cover specific performance, Lawrence Collins QC held that courts “may take into account considerations similar to those it must take into account under the 1938 Act to avoid injustice.” Luckily the landlord in Tokenhold satisfied three of the five grounds under section 1(5).

Any landlord considering specific performance must therefore be mindful of the same criteria considered when granting leave to pursue claims for damages or forfeiture against a tenant.
Here leave is not granted unless the landlord can prove that the immediate remedying of the breach is necessary: -

to prevent substantial diminution in reversionary value;

to comply with a property owner’s 
legal requirements;

in the interests of the occupier;

as the expense is relatively small compared to that of postponing the work;

and/or due to other special circumstances are just and equitable.
 

A landlord must therefore justify the need for specific performance on the same basis.

Proportionate use?

While the Law Commission may have supported the use of specific performance, the courts generally are not comfortable in granting it to either party, as the case of Newman v Framewook Manor Management Co Ltd [2012] EWCA Civ 159 recently demonstrated. Here the tenant sought specific performance and damages against the landlord in respect of breaches of 
lease covenants.

The Court of Appeal held the original judge had been right to refuse an award for specific performance. Arden LJ ruled the costs involved in complying with such an order would be “excessive and disproportionate when compared with the loss of amenity” and compared to the alternative remedy of damages. This case relates to a landlord’s breach of covenant rather than a tenant’s, but Arden LJ’s comments are still pertinent.
Clearly landlords not only have to demonstrate other remedies are not available or not appropriate but additionally that the cost of specific performance can be justified in comparison to the loss incurred by the tenant’s breach of repairing covenant. The court may feel it more cost effective for the landlord to undertake repairs at the tenant’s expense.

Clarity is key

Resistance to the use of specific performance has in part been due to the difficulty in clarifying any order granted. Exactly what is required of the tenant? As orders for the enforcement of building contracts have succeeded where works were sufficiently defined (see Wolverhampton Corp v Emmons [1901] 1 K.B. 515 CA) this has allowed for the availability of specific performance to compel landlords to perform “specific work” (see Jeune v Queen’s Cross 
Properties Ltd [1974] Ch. 97). This in turn led to the Tokenhold decision.

Landlords need to ensure they can clearly identify what obligations have been breached and what they are asking the courts to enforce. In turn courts will be more confident in granting specific performance as they will be in a position to produce clear orders, minimising the need for court supervision.
The perception of constant court supervision has previously prevented specific performance. The ruling in Co-operative Insurance Society v Argyll Stores (Holdings) Ltd [1998] AC 1 distinguished between orders requiring defendants to carry out an activity, requiring repeated applications for rulings on compliance, and those requiring defendants to achieve a result, such as a building contract or repairing covenants.
In cases of those designed to achieve a result, less court involvement is required and as such costs and delays reduced (see Co-Operative Insurance Society v Argyll Stores (Holdings) Ltd at 13 and Rainbow Estates Ltd v Tokenhold Ltd at 71). Tokenhold in particular held such issues could be overcome by “ensuring that there is sufficient definition of what has to be done in order to comply with the order of the court.” Certainty and clarity of a court order will in turn result in the court simply confirming compliance on completion of works rather than continual supervision of it.

Given the combination of circumstances in Tokenhold specific performance could be justified. It is unlikely however that many other landlords would have such a combination of factors and limited remedies available to them.
A landlord must assess his position carefully before attempting to obtain specific performance. Are other remedies available? Is it more appropriate to pursue these and are the costs involved in pursuing them more proportionate than the use of specific performance? Is the landlord able to argue one or more of the criteria under section 1(5) of the 1938 Act? Could an order be clearly defined without the need for court supervision?
Even when such a course of action can be justified the landlord must be mindful that specific performance is an equitable remedy. He must come with clean hands and remember the granting of an order 
is discretionary.
Accordingly the use of specific performance by landlords still remains the exception rather than the rule.

Issue: 
Vol 156 no 42 06-11-12

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