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05 June 2019

166: What happens when a building is built to the wrong size?

In Mears Limited v Costplan Services, an agreement for lease for the development of two blocks of student accommodation could not be terminated by the intended tenant, Mears, even though 56 rooms had been built smaller than the agreed size.

The agreement for lease stated that the landlord could not vary the development so as to materially affect the size of any ‘distinct area’ of the development. The parties had agreed in the contract that a reduction in size of more than 3%t of any distinct area would be deemed to be ‘material’.

When the building was built, 56 rooms within the student blocks were over 3% smaller than set out in the original plans. Mears sought a number of declarations from the High Court, including that any breach of the agreed size tolerances was a ‘material and substantial breach’ of the agreement entitling Mears to terminate.

The High Court disagreed concluding that a material change in the size of a distinct area of the development did not necessarily mean that there had been a material and substantial breach of contract allowing Mears to end the agreement for lease.

On appeal, the Court of Appeal also dismissed Mears’ arguments. It concluded that although the reduction of more than 3% in the size of any room was to be deemed a ‘material’ reduction in size, this didn’t mean the resulting breach of contract itself was material.  If Mears’ argument was accepted then a failure to meet the 3% tolerances, for example, in constructing a bin storage area, would be a material breach of contract and allow the tenant to walk away.

The tenant should have included a provision allowing it to terminate the agreement if the student rooms built were in breach of agreed size measurements, but it did not do so.

This case is an important reminder to parties entering into contracts that they should think carefully about the remedies they want available to them for certain breaches of contract and include an express right to terminate in particular circumstances.

A tenant is likely to want to have the option to terminate a contract for breach of a size tolerance, particularly when dealing with student accommodation where the size is important and rooms cannot be occupied if they are built too small.

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