Bluestorm Limited v Portvale Holdings Limited [2004] EWCA Civ 289

“Embassy Court was one of the most significant buildings of the 1930s. It is a 12-storey block of flats in a very prominent position on the seafront at Brighton. It was built in 1930s by Wells Coats, one of the leading figures in the English modern movement, only a year after he had completed his famous Lawn Road flats in Hampstead”.

With those words of affection and nostalgia, Buxton LJ opened the leading judgment in this tale of claim and counterclaim, set off and struggle.

He followed them with an unhappy description of the sorry pass to which Embassy Court had been reduced by 2004:

“Unfortunately, however, the building’s glory is now in the past. For the past 15 years it has been subject to neglect, lack of repair and under-investment, and for the last five or six years it has been the locus in quo for the series of disputes that culminated in a 10-day hearing before H.H. Judge Kennedy Q.C., and a two-day appeal in this court”.

How had that happened?

In 1994, Embassy Court was already suffering. In March of that year, a company named Portvale Ltd bought the freehold. At the same time, another company, Portvale Holdings Ltd, bought the leases of 11 of the flats in the building. It continued to acquire leases over the following years.

Portvale Ltd was a subsidiary company of Portvale Holdings Ltd. It had a short-lived role in the drama that was to unfold.

Both Portvale and Portvale Holdings were, for the purposes of the litigation that followed, an emanation of a Mr Marcel. In Buxton LJ’s words, his activities were “expressed through the Portvale companies”.

The leases

The leases were broadly all in the same form, and were fairly standard:

• The landlord covenanted to provide services and to maintain the building;
• The leaseholders were required to contribute to those costs.

In the mid-1990s, Portvale, as freeholder landlord, issued forfeiture proceedings for non-payment of service charges against two leaseholders, one of whom was a Miss Smart. Miss Smart was an active member of Embassy Court leaseholders’ association.

Miss Smart counterclaimed. She and her fellow counterclaimant were awarded:

• An injunction requiring Portvale to perform its repairing obligations, and
• £6,000 in damages arising from the poor repair of the building.

When judgment was entered against Portvale Ltd, Mr Marcel put it into liquidation, effectively leaving Embassy Court without a landlord.

It appears that Miss Smart then claimed a vesting order. In any event, the freehold was transferred to her.

She transferred it to Bluestorm Ltd, a company set up and owned by the lessees.

Bluestorm therefore became Portvale Holdings’s landlord.

Mr Marcel was not pleased. His plan, presumably to re-acquire the freehold, had been thwarted. He therefore decided to refuse to pay anything to Bluestorm.

Not only that, but on the very day that the freehold was transferred to Bluestorm, Portvale Holdings, in its capacity as Bluestorm’s lessee, gave Bluestorm formal notice that it was in breach of its repairing covenants.

Those breaches had of course been inherited by Bluestorm from the now-liquidated previous landlord, Portvale, a subsidiary of Portvale Holdings, the company that was now complaining that Bluestorm was in breach of covenant.

“The short historical fact” recorded the trial judge, “is that from then on, as Mr Marcel also admitted, he hoped [Bluestorm] would founder… Bluestorm and Portvale [Holdings] have been in conflict ever since…”

By November 2000, “there was no doubt that the situation was severe, if not desperate”.

In March 2001, Bluestorm issued the claim that ultimately took the parties to the Court of Appeal.

It claimed £86,000 of arrears of ground rent and service charges.

Portvale Holdings defended the claim and, ironically, given the litigation that had led to Bluestorm becoming the landlord, it counterclaimed. It alleged that, due to Embassy Court’s dilapidated condition:

• Its leases had diminished in value, and
• It had lost rent.

It contended that it was entitled to damages, and sought to set off those damages against any liability to pay service charges and ground rent.

Bluestorm responded that, properly interpreted, any obligation to provide services did not arise until Portvale Holdings paid its service charges.

By the date of the trial, about 35 flats belonged to either Portvale Holdings or Mr Camillin, solicitor to Portvale Holdings.

Mr Camillin, who had paid his ground rent and service charges, had issued his own claim for damages, identical to Portvale Holdings’s. The trial judge described that claim as a “deliberate and public alliance” with Portvale Holdings.

In his judgment, noting that that many other tenants had stopped paying their service charges, the judge concluded that:

“Embassy Court is held in stalemate until Portvale and Mr Camillin radically change their attitude and their behaviour. Otherwise, their stance only bears the construction that they are still waiting for Bluestorm—or any Freehold owner other than themselves or their creatures— to fall down and let them back in.’’

That was not the least of his criticisms. He added:

“It is a disgrace to see a building that should be a reasonable source of income to its owners as well as a provider of reasonable, peaceful and secure homes to its occupiers, become first neglected by the former; then, when the latter obtain judgment to have matters put right, to have that judgment thwarted by behaviour frankly more suited to a Nursery School playground than to the conduct of responsible landlords; then, lastly, to find those landlord in the guise of tenants, aided by their professional advisers and associates, deliberately obstructing the putting right of their own previous neglect (albeit inherited) as landlords, and using the very defects—now worsened by time, it is true—of which they avoided the remedy by sinking into tactical insolvency, as an excuse for not playing their part as tenants in putting things right.’’

The trial judge gave judgment for Bluestorm on Portvale Holdings’s ground rent and service charge arrears. He dismissed Portvale Holdings’s counterclaim in its entirety.

Three key points arose from his judgment on the counterclaim.

First, on grounds of equity, Portvale Holdings would not be permitted any set-off or injunction to oblige Bluestorm to carry out works.

Secondly, in any event, and radically, on the claim for damages, the court:

• Would not assist a party that had behaved with impropriety, and
• Was “not prepared to entertain a claim for damages in respect of breaches which the claimants had themselves substantially helped to ensure could not be remedied”. [Ed.: “Claimants” here is assumed to be a reference to Portvale Holdings.]

Thirdly, he dismissed Bluestorm’s argument that, properly interpreted, the obligation to provide services was contingent on the obligation to pay.

Mr Camillin’s case was adjourned. Portvale Holdings appealed.

Buxton LJ held that the claim for damages on the grounds of improper conduct should not have been dismissed. Conduct was only relevant to equitable and discretionary remedies.

A claim to damages is no such remedy, and Portvale Holdings’s conduct was therefore not relevant to whether it was entitled to damages.

So far, so uncontroversial.

Bluestorm accepted that Portvale Holdings had suffered some loss because of its failure to keep Embassy Court in repair.

It nonetheless argued that the judge had been correct to dismiss the counterclaim.

How could those apparently inconsistent propositions be reconciled?

Its argument, which was detailed, ran as follows:

• Portvale Holdings was not permitted to rely on a defence of set-off. Therefore, it was liable pay Bluestorm its arrears of service charges. By failing to pay, Portvale Holdings was in breach of contract;
• Portvale Holdings’s non-payment was the cause, alternatively a cause, of Bluestorm’s inability to fulfil its repairing obligations;
• As a party in breach of contract, Portvale Holdings was liable to Bluestorm not only for the service charge debt, but also for damages for any foreseeable further loss caused to Bluestorm by its failure to pay;
• That foreseeable further loss included any damages for which Bluestorm was liable as a result of it being unable to fulfil its repairing obligations.

In short, Bluestorm’s losses comprised both Portvale Holdings’s unpaid ground rent and service charges, and, circularly, Bluestorm’s liability for damages to Portvale Holdings.

This time it was Bluestorm that argued that it was entitled to set-off the ground rent and service charges owed to it against any damages that it would otherwise be liable to pay for failure to keep Embassy Court in repair.

The result, posited Bluestorm, was that its liability to Portvale Holdings should be nil.

(i) Portvale’s claim to a set-off

Buxton LJ paused to consider the two differing forms of set-off:

• A set-off of mutual claims, discussed by Morris LJ in Hanak v Green [1958] 2 Q.B. 9;
• A ‘‘self-help’’ set-off of equitable origin but uncertain scope and content, by which an indebted party deducts sums from a debt otherwise payable, described by Lord Denning M.R. in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] 1 Q.B. 927.

Portvale Holdings sought to rely on the second form, but Buxton LJ was with the trial judge.

There was, in his view, “ample justification for refusing Portvale Holdings the assistance of equity in any form”.

Therefore, Portvale Holdings was not entitled to set off the damages that it claimed from Bluestorm against its liability to pay service charges and ground rent. It should have paid the ground rent and service charges when demanded.

By failing to pay, it was in breach of contract.

Bluestorm was home on point (i).

(ii) Causation

Buxton LJ reminded himself that a party may be liable for another’s loss where it is a substantial, but not the sole, cause of that loss (Wardlaw v Bonnington Castings [1956] A.C. 613 and the cases that follow it).

Here, Portvale Holdings had not paid. It had made “very public assertions that it would not pay”, and other tenants therefore saw no point in paying either.

Through its attitude, Portvale Holdings had ‘‘substantially helped’’ to ensure that Bluestorm’s breaches could not be remedied.

Breaking the chain of causation

Portvale Holdings argued that, by failing to obtain funding elsewhere, Bluestorm had broken the causal link between between Portvale Holdings’s failure to pay and Bluestorm’s failure to carry out the relevant works.

No, said Buxton LJ. Bluestorm had acted “entirely reasonably”, and that “where causal responsibility is concerned, the various alleged contributors are only required to act reasonably”:

• Miss Smart and Bluestorm had become the “unwilling freeholders” of Embassy Court because of its parlous condition, and as a result of the disappearance of the previous freeholder through Mr Marcel’s liquidation of it;
• It was common knowledge that Bluestorm was dependent on the tenants’ cooperation for its existence;
• Bluestorm had no power under the leases to raise external funds;
• It would have been unreasonable of Bluestorm to go ahead with any major scheme when it knew that 31% of the necessary funding – the percentage payable by Portvale Holdings – would not be available.

Therefore, if Bluestorm had failed to ensure that it had funding, that failure was due to Portvale Holdings.

The problem would have arisen anyway

Portvale Holdings’s next argument was that even if it had paid, the works could not have been done because Bluestorm was under-funded.

That too was rejected:

• Bluestorm had been forced to take the freehold in disadvantageous circumstances, to which Portvale Holdings or its associates had already strongly contributed, and
• Portvale Holdings’s subsequent conduct was intended to have, and had, a chilling effect on Bluestorm’s performance of its duties as landlord.

Again, Buxton LJ found that the causal path led back to Portvale Holdings.

(iii) Loss and foreseeable further loss to Bluestorm

If Portvale Holdings had caused Bluestorm to be unable to fulfil its repairing obligations, what foreseeable losses flowed therefrom?

Wadsworth v Lydall [1981] 1 W.L.R. 598 is authority for the proposition that special damage can be caused by a failure to pay money such as ground rent and service charges.

As to whether Bluestorm had suffered any foreseeable further losses, Buxton LJ cited Scarman LJ in Parsons (Livestock) v Uttley Ingham [1978] Q.B. 791:

‘‘The court’s task … is to decide what loss to the plaintiffs it is reasonable to suppose would have been in the contemplation of the parties as a serious possibility had they had in mind the breach when they made their contract.’’

He continued:

“…  by ‘‘the breach’’ I am quite satisfied that Scarman L.J. did not simply mean the bare fact of the breach, but also the circumstances in which it occurred. Especially in a long running contract like a lease, it is legitimate to ask:

“(a) could the parties have contemplated the circumstances of the breach?

“(b) was the loss caused by that breach in their contemplation?

On (a), Buxton LJ was confident that the circumstances of the breach, ie. the failure to pay service charges, was within the parties’ contemplation.

Mr Marcel intended to bring about the circumstances that arose. In Buxton LJ’s view, if the original lessee “had been asked whether, if one of his successors acted in the way that Mr Marcel acted, that would bring about the difficulties that occurred, there is no doubt what the answer would have been”.

The answer to (b) was, “as a matter of course or inevitability on the facts of this case” also yes.

Here Buxton LJ signalled a note of caution: just because the answers had been straightforward Bluestorm’s case, they may not be so straightforward in others.

Clearly, in his view, this was an unusual case.

(iv) Portvale Holdings’s liability

Buxton LJ held therefore that Bluestorm had made out its case:

• By failing to pay ground rent and service charges, Portvale Holdings was in breach of contract;
• Not only was it liable for the sums claimed as ground rent and service charges, it was also liable to Bluestorm for its further losses, those being the very sums that it claimed as damages for the failure to keep the building in repair. In other words, it was liable to fund its own claim for damages for the failure to keep Embassy Court in repair.

Set-off of Bluestorm’s claims against its liability to Portvale Holdings

Turning again to set-off, but this time whether Bluestorm was entitled to set off its losses against its liability to Bluestorm, Buxton LJ held that Portvale’s claim for damages and Bluestorm’s defence were “effectively ‘‘back-to-back’’ and cancelled each other out.”

Buxton LJ continued: “This may appear to be a legal artifice, but it is one that in this case properly meets the merits”.

That was because this time the set-off was an equitable one between claims within the same litigation described by Morris L.J. in Hanak v Green. Further, a set-off will be permitted where justice requires it in the context of the relationship between the two claims: National Westminster Bank v Skelton [1993] 1 W.L.R. 76F, per Slade L.J.

On that basis, concluded Buxton LJ, a set-off was inevitable.

So, the counterclaim was dismissed, but for different reasons to those given by the trial judge.

That was the end of the appeal:

• Portvale Holdings was not entitled to set off its claim to damages against its liability to pay ground rent and service charges;
• Therefore it was in breach of contract;
• That breach had caused loss to Bluestorm;
• Bluestorm’s losses were a) the amount that Portvale Holdings should have paid in ground rent and service charges, and b) the damages it was liable to pay to Portvale Holdings because it had failed to comply with its repairing obligations;
• It was entitled to set-off its losses against the damages payable to Portvale Holdings.

The entire labyrinthine exercise plays Old Harry with the mind, but the Court of Appeal did not stop there.

Technically there was no need to continue but none of the judges could resist opining on Bluestorm’s appeal.

Bluestorm appealed on the ground that, on a true reading of the lease, its obligation to fulfil its repairing obligations only arose once it had received payment from Portvale Holdings.

The lease was worded thus:

‘‘… the Lessor will (subject to the receipt by the Lessor of the Maintenance Contribution from the Tenant) throughout the term hereby granted provide and carry out or procure the provision and carrying out of the purposes particulars of which are set out in the Sixth Schedule . . .’’

The trial judge held that Bluestorm had to fulfil its obligations, irrespective of whether it had been paid. He cited the Court of Appeal’s decision in Yorkbrook Investments v Batten [1985] 2 E.G.L.R. 100.

The facts of Yorkbrook

In Yorkbrook, a landlord of a large complex of flats claimed for possession and payment of arrears and service charges. The tenant, who had withheld rent and service charge contributions, counterclaimed for damages resulting from the landlord’s breach of its repairing covenants.

The clause in question was similarly, but not identically, worded to the clause in Bluestorm’s case. It read:

‘‘The lessor covenants with the lessee that subject to the lessee paying the maintenance contribution pursuant to the obligations under clause 4 hereof the lessor will . . . [perform various tasks and provide certain services]’’

The Court of Appeal held that the key was to establish the intentions of the parties. That was to be done by considering the wording and context of the lease at issue, including:

• The statutory provisions existing at the time the lease was drawn;
• The wording of the lease itself, and
• The effect of any given

It held that the term was not a condition precedent. Buxton LJ noted however that:

• Its decision was based on the facts of the case before it;
• If it were correct that a simple failure to pay absolved a landlord entirely, then that landlord could refuse to provide services in circumstances where the lessee’s failure to pay was not culpable;
• If payment were a condition precedent to compliance with repairing obligations, that would all but stultify any attempt by the tenant to challenge the landlord’s performance or the level of service charges, and
• The (then recently introduced) legislation, ie the Landlord & Tenant Act 1985, required such charges to be reasonable.

Yorkbrook’s standing

Thus, concluded Buxton LJ, although the contractual structure in Yorkbrook was not dissimilar from Bluestorm’s, the context of the case and its surroundings were very different, and, were he required to decide the point, Buxton LJ indicated that he would not feel bound by Yorkbrook:

• Yorkbrook was decided on the wording of a specific document. Such a decision did not bind the Court of Appeal, “though of course its view must be taken with the greatest respect”;
• Words must be interpreted in the context of a particular lease and of the assumed intention of the parties in entering into it;
• Bluestorm’s lease potentially created a “closer linkage” than Yorkbrook’s between the tenants and their payments on the one hand and the landlord and his responsibilities on the other;
• “In the context of a lease such as [Bluestorm’s], and the scheme in which it forms part, it would be entirely understandable that the words in brackets were intended at least to carry some meaning. The landlord depends entirely for his ability to run the building on contributions from the tenants, and that is what the lease provides for.

The arguments

Buxton LJ reviewed some of the arguments advanced by the parties, but came to no firm conclusion:

• If payment were a condition precedent, any late payment, even by a day, might result in a leaseholder having his/her lights or heating cut off by the landlord;
• If the converse were true, the clause would potentially bear no meaning at all;
• It might be acceptable to say that a leaseholder who does not pay should lose the right to complain of the landlord’s breach if there is a direct connection between the non-payment and the breach;
• That would lead to some “but not all, and probably not very many” leaseholders being unable to claim damages for breach of covenant: a single tenant with a genuine grievance would not be disqualified, but a tenant such as Portvale Holdings, refusing to pay for the reasons that it did, would be.

“That, indeed”, said Buxton LJ, “may be to state in more general terms a conclusion somewhat like that which I have already reached without reference to this disputed clause”.

Concluding that he would “therefore say no more on this point, but leave it to be considered, or repudiated, when it does become essential to a decision”, he laid down his pen and – if you will excuse the mixed metaphor – passed the baton to Maurice Kay LJ.

Maurice Kay LJ had little to add.

He agreed with Buxton LJ on the arguments that resolved the appeal.

He expressly declined however to address Yorkbrook, saying:

“Whatever may be the conceptual imperfections of that authority, it has stood without judicial criticism for almost 20 years. It stated an approach, and to some extent a principle, and it appears in leading textbooks as authority for the same. It is binding on this court. We are invited to distinguish it. Whilst the facts of this case can be described as extraordinary, there is nothing extraordinary about the terms of the lease. It contains similarities to the lease in Yorkbrook. I am concerned that if we strive to distinguish Yorkbrook we may unwittingly disturb the assumptions upon which other leases have been negotiated and upset the balance that Yorkbrook appears to achieve. I do not think that this is an appropriate case in which to go down that road”.

The third judge, Sir Martin Nourse, was with Buxton and Maurice Kay LJJ on the determinative aspects of the appeal, but, like Buxton LJ, he had views about the condition precedent.

The meaning of the covenant

Sir Martin reminded himself of the covenant:

‘‘. . . the Lessor will (subject to the receipt by the Lessor of the Maintenance Contribution from the Tenant) throughout the term hereby granted provide and carry out or procure the provision and carrying out of the purposes particulars of which are set out in the Sixth schedule . . .’’

What, he asked, was the effect of the words ‘‘subject to the receipt by the Lessor of the Maintenance Contribution from the Tenant’’?

Like Buxton LJ, he considered that the words must mean something, because “it would offend all conventional principles of construction to give them no effect at all”.

That said, they could not have been intended to absolve the landlord of all liability at all if the lessee failed to pay his/her service charge just once.

Looking at the lease as a whole, there were two continuing obligations:

• The landlord covenanted to fulfill various repairing obligations, and
• The lessee covenanted to pay the service charge.

“The purpose of the words ‘‘subject to the receipt by the lessor of the maintenance contribution from the tenant’’, he observed, “is to forge a particular link between the one obligation and the other and to provide that the tenant is not to be able to claim the benefit of the lessor’s obligation if and so long as he does not discharge the burden of his own”.

Sir Martin expressly disavowed any decision on the point, but, again like Buxton LJ, could not resist proposing a solution to the conundrum.

Approaching the question from a slightly different angle, he suggested that it would perhaps be impermissible for the landlord to disclaim liability to provide services where a tenant, even in substantial arrears, recognised his/her obligation to pay.

That situation was easily distinguishable from Bluestorm’s, which was a case where:

“… until judgment, the tenant had evinced a fixed intention not to be bound by his obligation and had thereby disentitled himself from claiming the benefit of the lessor’s obligation. On that ground alone the counterclaim fell to be dismissed”.

Unhelpful authorities

Sir Martin does not appear to have been overly impressed by the case law that led the Court of Appeal to determine Yorkbrook as it did.

In his judgment, Edge v Boileau (1885) 16 Q.B.D. 117 (a case on covenants for quiet enjoyment) and Bastin v Bidwell (1881) 18 Ch. D 238 (on options for renewal), were not helpful to the resolution of the issue.

More relevant was Tito v Waddell (No.2) [1977] Ch. 106, in which Megarry V.C., building on Halsall v Brizell [1957] Ch. 169, distilled the ‘‘the pure principle of benefit and burden’’.

And, with that tantalising nod towards an alternative line of case law, he too laid down his pen, saying that neither Tito nor Halsall had been “examined in argument and it is unnecessary to rely on them”.

“Here”, he concluded, “the express words of the lease import its own principle of benefit and burden and no court of equity could, on the facts, allow the tenant to recover”.

I was reminded of this case earlier when looking at whether an obligation to pay can be construed as a condition precedent to the obligation to comply with maintenance and repairing covenants. It is the second in a trio of cases (sort of) on the point, sitting between Yorkbrook and Winchester Park Ltd v Sehayek [2016] EWHC 1216 (QB), a High Court appeal heard in 2016.

In Winchester Park, as in Bluestorm’s case, the court did not need to decide the question of the condition precedent, resolving the appeal on a different ground. Yorkbrook therefore remains the leading authority on the point, even if both Bluestorm and Winchester Park explore the arguments without deciding the point.

That is not to diminish Bluestorm’s value, which is, it seems to me, in the treatment of causation.

Whilst it may be a peculiar case where damages claimed by party A from party B also form the loss suffered by party B, caused by party A, in a different case an asset-less landlord or third party management company may be able to bring in a large leaseholder if it is the subject of a claim for damages for breach of its repairing covenants.

Take, for example:

• Napoleon Ltd owns the freehold of a building containing 15 flats;
• Jones Management Ltd is a management company, party to the lease, with responsibility for keeping the building in repair and providing services to it;
• Mr Smith owns one flat, and brings a claim for damages for disrepair;
• Alexander Holdings Ltd owns six flats, and has not paid its service charges.

If causation were established between Alexander Holdings’s failure to pay and Jones Management’s inability to provide services, Jones Management would arguably be entitled to join Alexander Holdings to the proceedings, and to claim damages from it, those damages comprising both payment of the service charge arrears and any damages that it might be ordered to pay Mr Smith.

It is a recipe for litigation, but it might also be the means by which an impecunious landlord or management company might save itself from insolvency.

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