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Is a landlord responsible for tenant's economic loss?

Case review: Eaton Square Properties Limited v Sonja Shaw

Mrs Shaw was a tenant of Eaton Square Properties Limited (ESPL) over many years. In the 1990s she had conceived a substantial business project which was due to launch in 2002, and from which she expected to earn significant sums.

In 2000 ESPL told her they needed possession of her flat to carry out structural repairs. Mrs Shaw and ESPL agreed that ESPL would relocate her permanently to a new flat; that they would carry out works to that flat to put it in a suitable condition for her; and that there would be a concessionary rent for the first few years of her new tenancy.

Mrs Shaw alleged that ESPL so mishandled her move to the new flat and the works which they agreed to carry out that she was forced to devote all her energies to dealing with the move; as a result the project had to be shelved and, when the funder died, abandoned.

When ESPL increased the rent under the terms of the tenancy, Mrs Shaw refused to pay the increase, on the grounds that, first, ESPL had said that it would not increase the rent until the works had been carried out (estoppel); second, that it was in breach of its obligations to her as landlord under her new tenancy (breach of covenant); and, third, that she had a substantial counterclaim for loss of the very significant earnings she was expecting to make from her business project. ESPL issued proceedings for possession on the grounds of arrears of rent.

ESPL accepted that it was open to Mrs Shaw to seek to defend the claim on the estoppel and breach of covenant grounds; however, it applied to strike out her counterclaim based on the loss of the earnings from the business project.

Judgment

Mr Justice Macduff held that there was no contract in place that made ESPL liable for Ms Shaw's losses relating to her business project. He therefore considered whether ESPL owed Mrs Shaw a duty of care for economic loss unconnected with the landlord and tenant relationship.

There is extensive case law as to whether there is such a duty of care. The starting point is the test in the case of Caparo Industries v Dickman, which asked:

  • Whether the loss is a reasonably foreseeable consequence of the other party's acts or omissions;
  • Whether the relationship is one of sufficiently close proximity; and
  • Whether it is just and reasonable to impose a duty of care

However, this is tempered by the case of Customs and Excise v Barclays Bank, which states that there is no one test and the Court needs to consider the circumstances of each case on its own merits, with particular focus on the nature of the parties' relationship in the context of the factual situation. Mr Justice Macduff held that, as there was no concurrent contractual duty, the test in this case should be relatively narrow. The judge considered firstly the purpose of the service provided, secondly ESPL's knowledge of the purported economic loss and finally the reasonable reliance of Mrs Shaw on ESPL.

It was held that the purpose of the move was to relocate Mrs Shaw in order to make her flat fit for occupation, not to further or assist her business. ESPL were aware of Mrs Shaw's business activities and of her concerns that moving between the two flats should not disrupt her business. However ESPL, relying upon the case of Customs and Excise v Barclays Bank, argued that having knowledge of a potential loss does not itself bring about a duty of care. Therefore, ESPL's awareness of Mrs Shaw's business activities and concerns did not in itself create a duty of care.

Mr Justice Macduff held that the relationship between ESPL and Mrs Shaw was one of landlord and tenant, not one of economic adviser or provider of services relevant to her business venture. Consequently, whilst ESPL owed Mrs Shaw a duty to carry out the works properly, any economic loss from her business venture is unconnected with their relationship. He concluded by stating that reliance by Mrs Shaw on ESPL was not reasonable and it would not be fair or reasonable to hold the claimant responsible for the alleged losses.

Conclusion

Residential landlords will be pleased with the outcome of this case. It shows that, in these circumstances, the relationship between landlord and tenant does not extend to a duty of care for pure economic loss.

However, each case will turn on its own facts and landlords cannot infer that tenants will not be able to make claims for economic loss. In his judgment, Mr Justice Macduff stated that he might have come to a different conclusion if these had been business rather than residential premises. The tests outlined above as to whether there is a duty of care for pure economic loss remain and could come into play in different circumstances.

This article first appeared in Property Investor news - October 2011.

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