In the recent case of Pullman Foods Ltd v The Welsh Ministers and another [2020], the High Court was asked to consider whether a tenant’s failure to remove asbestos-containing materials from a site amounted to a breach of the yield up covenant contained within the lease.
Most commercial leases will impose an obligation on the tenant to keep and return a property in good repair and condition, often to the satisfaction of the landlord. Pullman Foods was the tenant of a piece of land at Swansea Dock, and built a number of cold storage buildings on the premises during the early 1970s. In 2013, the Welsh Ministers, who held the reversion of the lease, served a s.25 Landlord and Tenant Act 1954 notice on Pullman to terminate the lease. Pullman did not seek a new tenancy and vacated the premises in 2015. As Pullman vacated without demolishing the buildings, two successive licences were granted to BFS, Pullman’s parent company, to enter the premises in order to remove the cold storage buildings. However, asbestos-containing materials had been used during the construction of the buildings in the 1970s. Upon their demolition, adequate precautions were not taken regarding safe disposal of the asbestos-containing materials, which resulted in the land subject to the lease becoming heavily contaminated.
In 2019, Pullman began proceedings against Welsh Ministers, claiming compensation stemming from the termination of their tenancy in accordance with s.37 of the 1954 Act. Welsh Ministers did not object to this, however did raise a counterclaim regarding Pullman’s failure to fulfil their obligation under the yield up covenant, and BFS’ breach of licence.
The yield up covenant in the lease required Pullman to return the site ‘in good and substantial repair and condition to the satisfaction of the landlord’. The High Court found that use of the word ‘condition’ imposes an obligation on the lessee which goes beyond strict repair. Although the Court stated that Welsh Ministers did not have absolute discretion to decide the standard which met good condition, they did confirm that they had the freedom to form their own judgement so long as it was reasonably held. Pullman’s failure to safely remove the buildings directly resulted in contamination of the land, meaning the site was not returned in a condition which could reasonably be considered in ‘good and substantial repair’.
The Court found Pullman to be in breach of covenant, in that they did not return the property in good condition by failing to demolish the buildings. BFS were also held to be in breach of licence, as although there was no express obligation to comply with the covenant in the lease, it had failed to remove building remains containing asbestos. They had also failed to inform Welsh Ministers of the presence of contaminated material. BFS were deemed responsible to the Welsh Government for the full costs of remediation, whilst Pullman was liable for damages as a consequence of breaching the yield up covenant contained within the lease.
This case highlights the importance of due diligence regarding remediation. Tenants should ensure that they understand their obligations contained within the lease, in order to be able to comply with yield up covenants. Such obligations may require significantly more action and repairs than anticipated. The Court did also note that even if the asbestos had been present before the grant of the lease, the yield up covenant would still apply. This demonstrates the importance of undertaking environmental due diligence, to identify contamination and hazardous building materials before entering into a lease. No doubt, this will provide a tenant with the opportunity to consider their obligations, in order to protect themselves from costly remediation works when exiting a lease
If you would like any further information or to discuss any business matter, please contact us.
