Beacon Carpets Ltd v Kirby

This is an appeal from Mr Justice Russell who dismissed a claim by the former tenants of a warehouse in Bournemouth relating to the landlords' failure to reinstate those premises after they were destroyed by fire and the destination of the insurance monies.

Under a lease dated 24th June 1972 Mr Kirby and Mr Butterworth ("the landlords") let the premises to Beacon Carpets Limited. ("the tenants") for a term of 14 years from 1st June 1972. The original rent was £1,500 per annum with provision for rent reviews. Clause 1 of the lease provided that in addition to the ordinary rent the tenants would pay "by way of further or additional rent from time to time a sum or sums of money equal to the amount which the Lessors may expend in effecting or maintaining the insurance of the demised premises against loss or damage by fire explosion and other perils together with a sum sufficient to cover two years rent thereof and architects' and surveyors' fees to be incurred in connection with the reinstatement of any loss or damage as hereinafter mentioned".

By clause 2(3) of the lease the tenants covenanted to keep the premises in repair. By clause 3(2) the landlords covenanted as follows: "That the Lessors will at all times during the said term unless such insurance shall be vitiated by the act of the Lessee insure and keep insured the premises against loss or damage by fire explosion and other perils together with a sum sufficient to cover two years' rent thereof and architects' and surveyors' fees to be incurred in connection with the reinstatement of any loss or damage in some insurance office of repute in the full value thereof at the least in the joint names of the Lessors and the Lessee and will whenever required produce to the Lessee the policy or policies of such insurance and receipt for the last premium and FURTHER that in case of destruction of or damage to the demised premises or any part thereof the Lessors will with all convenient speed expend or lay out all moneys received in respect of such insurance in rebuilding or reinstating in a good and substantial manner the demised premises so destroyed or damaged."

Clause 4(2) provided that if the premises were destroyed by fire the obligation to pay rent should be suspended until the premises should again be rendered fit for habitation and use.

The landlords insured the premises in the sum of £30,000 plus £3,000 to cover two years' rent and architects' and surveyors' fees. The policy named "the insured" as the landlords and the tenants "for their respective rights and interests". It was common ground at the hearing that the premises had been substantially under-insured, the proper sum necessary to reinstate the premises in the event of total loss being a little over £50,000.

The premises were destroyed by fire on 16th July 1977. The total sum paid by the insurance company at a later date was £31,484, of which £2,000 was paid and applied in demolishing the shell of the building, £3,000 was on account of loss of rent and the balance of £26,484 was the sum available for reconstruction.

The landlords instructed architects in August 1977. The architects made an application for planning permission which, to the surprise of all parties, was refused on 5th December 1977 on the grounds that the premises might be needed for road widening. A fresh application was made for planning permission for a smaller building and on 22nd May 1978 planning permission for that building was granted, but only until 2nd February 1986. Following receipt of that planning permission, a quotation for reconstruction was sought from a builder, who in September 1978 quoted what was thought to be an excessive figure. There ensued negotiations between the landlords' quantity surveyors and the builders, which led to the tender being reduced to a figure of £52,000 in October 1978, which figure was acceptable to the landlords.

The architects' plans for the building to be constructed included certain special features requested by the tenants. The landlords felt that the tenants should bear part of the cost of reconstruction to reflect this factor. In October 1978 they raised the question with the tenants in rather obscure terms and suggested a meeting to discuss the matter. On 31st October 1978 Mr Cross (the Chairman of the tenants) wrote to Mr Kirby suggesting the possibility that the tenants might surrender their lease and agree with the landlords reasonable compensation. The proposed meeting took place on 7th November 1978; Mr Cross made it clear that the tenants would no longer wish to occupy the building even if it were reconstructed, since it would be too small. There were preliminary discussions as to the possibility of the tenants surrendering the lease.

On 9th November 1978 Mr Cross wrote to Mr Kirby setting out the proposed terms of surrender. He pointed out that there was a substantial shortfall between the insurance monies and the cost of erecting the new building, which shortfall would have to be made good by the landlords (who were trustees of a trust) from some source. He pointed out that the building which was to be erected was, in certain respects, tailored to the special needs of the tenants, and if the lease were to be surrendered a cheaper building could be put up which might command a profit rental. He suggested that, if there were to be a surrender, the trustees would be free to put up such building as they wished and could afford and let it at a much higher figure than would be payable under the existing lease. He confirmed that the proposed building would be too small and too restricting for the business needs of the tenants. Bearing those matters in mind he offered to surrender the lease to the landlords on payment of a sum of £15,000 to the tenants.

In a letter dated 13th November 1978 Mr Kirby rejected the suggestion for a surrender on terms that the landlords should pay the tenants compensation and suggested that the surrender should be on the terms that the tenants should pay the landlords compensation. He said that the landlords were holding the tenants to the terms of their lease and called upon the tenants to deal with the question of "fixtures and fittings", which was the confusing terminology applied to describe that part of the cost of reconstruction attributable to the special needs of the tenants. Mr Cross replied on 17th November 1978 saying that, if the landlords did not wish to take a surrender on reasonable terms, the tenants would start at once looking for a suitable assignee of the lease; he pointed out that such assignee would be taking a purpose-built building primarily suitable to the tenants' business rather than for general industrial purposes.

The correspondence as to surrender ceased at that point. However, the learned judge held that, Mr Cross having made it unequivocally clear that the tenants did not wish to occupy any building, the landlords thereupon ceased to take any further step to reconstruct the building. In fact at no stage thereafter did the tenants call on the landlords to reconstruct; the site remained vacant.

Immediately after the fire the tenants had been temporarily housed in accommodation provided by the local authority. They stayed in that temporary accommodation until they found permanent alternative premises in June 1979.

Negotiations with the insurers had been taking place and they continued down to October 1979. Apart from a sum of £2,000 used in demolition and £3,000 on account of rent, no insurance monies had been paid over prior to 5th October 1979 when the writ and statement of claim were served. The balance of the insurance monies amounting to £26,484 were paid over by the insurance company on 29th October 1979 and put into a joint account in the names of the parties' solicitors. There was no agreement as to the basis on which the monies in joint account were to be held, save that it was "entirely without prejudice to any of the issues involved in this dispute".

Shortly after 29th October the landlords' solicitors wrote to the tenants' solicitors complaining of the tenants' refusal to release the insurance monies; as a result, it was alleged, the life tenant under the trust of which they were trustees had been deprived of income and they claimed that the landlords were entitled to claim damages on that account. On 6th December 1979 the tenants' solicitors wrote saying that the tenants had reconsidered their attitude regarding monies on deposit in their joint names and informed them that the tenants were now "prepared to release such monies to your clients subject to retention on deposit in joint names of the sum of £13,000 representing approximately one half of the funds". Following that letter £13,000 plus the appropriate interest was retained and the balance of the monies plus interest was released to the landlords.

On 20th March 1980 the tenants surrendered the lease to the landlords. The surrender took the form of an assignment and surrender to the landlords of the premises demised by the lease "to the intent that the term of...