Stalled construction projects: can tenants cancel agreements for lease?


Author: Gillian Birkby


If a construction project stalls for lack of funding, can the proposed tenant cancel the agreement for lease? The answer to this question is not straightforward and the cost of getting it wrong and terminating without legal justification is very high. The court recently had an opportunity to consider this point and provided some useful indications on how to approach this kind of situation.

A few years ago a developer, Telford Homes, which is also a construction company, acquired land on the borders of Greenwich and Deptford. By October 2008 it had excavated almost the whole of a double storey basement and completed the foundation piling for four blocks, consisting of commercial units with flats above. Telford then entered into an agreement for lease with Ampurius for the purchase of the ground and first floor commercial units on 999 year leases.

Unfortunately, the credit crunch began to affect the funding of the project by July 2009, long before it was complete. Telford responded by suspending part of the works to ease their cash flow problems, and later suspended the whole of the works while they obtained alternative funding. Despite making strenuous efforts, it took them many months before they were in a financial position to resume construction.

Meanwhile Ampurius complained long and hard about the delay, and as early as October 2009 alleged that by suspending part of the works Telford had repudiated the agreement for lease (i.e. demonstrated an intention not to be bound by its terms). Telford denied this and there were lengthy, inconclusive negotiations.

Finally on 4 October 2010 work started again. However, no one on behalf of Ampurius visited the site in October 2010 and it appears that Ampurius did not know that the work had restarted. On 22 October 2010 Ampurius finally accepted Telford’s alleged repudiation of the agreement for lease, thus terminating it. Telford of course said that this was wrongful termination as the works had restarted, and the dispute went to court.

In the High Court the judge said that Ampurius were entitled to terminate, but the Court of Appeal disagreed. They said that in deciding whether there had been a breach of contract sufficient to show repudiation, the date on which to assess the breach was the date when Ampurius terminated the contract, not the date of the initial breach. As the works had restarted by the date Ampurius terminated, they could not argue that Telford was showing an intention not to be bound by the agreement for lease.

In addition, the Court of Appeal said that the ultimate object of the contract, which was the grant of the 999 year leases, meant that the loss to Ampurius as a result of Telford’s breach in delaying in the construction works (a period of several months) was not significant. In fact, there had been no actual loss to Ampurius at the date they terminated the contract; they were terminating because of an anticipated loss. The Court of Appeal said that the delay costs would have been around £100,000, which could have been set off against the purchase price. The anticipated delay costs were not great enough to establish that there was a repudiatory breach.

It was important that, before the right of termination was exercised, Telford had already started to remedy the breach by restarting works on site, so there was no longer an argument that work had ceased for an unknown period. Restarting the works on site was a genuine and (as later events showed) a successful attempt to build out and Telford was entirely committed to that. The judge recognised that uncertainty caused by delay was a commercial issue, but when set against 999 year leases, it was not significant.

Gillian Birkby, Partner, Fladgate LLP (gbirkby@fladgate.com)

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