21st Feb 2019

Ground rent investments - the risks of purchase

I was interested to a read a case the other day (Blue Manchester Ltd v. North West Ground Rents [2019]), both because it involved an iconic building – the Beetham Tower in Manchester, a 47 storey part-hotel, part-apartment building which dominates the Manchester skyline – and because the judgement resulted in what could be a very expensive outcome for the freehold owner of the building in an action brought by one of its long leasehold tenants.

The facts are straightforward. Beetham Tower was built by Carillion Construction in 2006. The ground to 23rd floors are an hotel and floors 24 to 47 are apartments. The hotel was acquired from the original developer by the Claimant hotel by way of a 999 year long lease for £60 million and an annual rent of £20,000, whilst the freehold of the building was bought by the Defendant ground rent investment company for £400,000 (a figure which no doubt reflected the value of the ground rents paid by the hotel and apartment owners).

Although the details are inevitably a little more complicated, in a nutshell: the external elevations of the building are fully glazed; the structural sealant bond in the glazed units failed; this was first noticed in 2014 and a temporary solution was put in place, but this was not sufficient and a permanent solution had not been agreed by the time Carillion went into liquidation in 2018.

Under the terms of the Claimant’s lease, the landlord (the Defendant) is obliged to keep the common parts (which include the external façade) ”in good and substantial repair…and where necessary… to reinstate replace and renew…”. Most importantly here, in the context of the result of the action and the potential cost to the Defendant, is that the lease specifically excludes expenditure arising out of the initial construction of the building and incurred in remedying any inherent defect from being recovered under the service charge provisions in the lease. (The case report does not say if and to what extent the Defendant can recover such costs via the service charge provisions in the upper floor apartment leases.)

The Defendant’s position was that the existing temporary solution it had put in place was sufficient whilst it pursued an action against Carillion’s insurers and the specialist design sub-contractor which designed and installed the façade. However, the High Court judge disagreed, held that the Defendant was in breach of its repair covenant and granted an order for specific performance compelling it to replace the panels.

Specific performance is a discretionary remedy and should only be granted where it is just and equitable and where damages would not be adequate. It is also a draconian remedy, in that failure to comply with an order is a contempt of court. Whether you have sympathy with the Defendant depends on your point of view. Did it purchase the ground rent investment in ignorance of the risks involved, was it badly advised or was it just plain unlucky? Whatever the answer, the Defendant must feel pretty hard done by considering the potential for the costs (of compliance with the order for specific performance and the legal costs of pursuing the original contractor’s insurance company and the sub-contractor) to far outweigh its original investment.

A salutary tale.

Richard Wheeldon is a Senior Consultant within Berwins' industry ranked Commercial Property team.  

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