Remediation of fire safety issues in commercial buildings

Summary

The post-Grenfell legal landscape has understandably focused on fire safety risks in tall residential buildings. However, similar risks can also arise in buildings with commercial elements.

Two recent landlord and tenant decisions examine how those risks may be allocated under commercial leases:

• In Essendi UK Hotels 2 Ltd v London Property Co Ltd, the court held that a landlord's covenant to put and keep the external wall in "good...condition" required the landlord to replace ACM external wall façade panels on a hotel.

• In Into Nominee One Ltd and another v Study Group UK Ltd & Anr the court accepted that fire safety defects rendered a building unsuitable for educational use, but held that the lease was not frustrated. The parties had allocated the risk of defects through the lease terms, including a repairing covenant requiring the tenant "whenever necessary to rebuild reconstruct renew or replace the whole of the Demised Premises".

Essendi: landlord required to replace ACM external wall façade panels

In Essendi, the court reached two key conclusions:

(a) The landlord's covenant to put and keep the external wall in "good...condition" required it to replace the ACM panels, notwithstanding the presumption that such wording usually doesn't oblige a party to remedy an intrinsic design issue without disrepair or physical damage.

(b) A breach of statutory duties under the Regulatory Reform (Fire Safety) Order 2005 (RRO) can be civilly enforceable where the lease contains a covenant to comply with legal obligations and/or legislation. LPC's failure to remove the ACM panels breached its RRO obligations, enabling Essendi to claim for breach of the relevant lease covenant.

Background

Essendi leased LPC's property for use as a hotel. Essendi had originally developed and owned the property and, following a sale and leaseback, remained responsible for defects in the external façade until May 2017. From that point onwards, including under a new lease entered into in 2019, LPC was responsible for the external wall.

A dispute arose in around 2024 over whether ACM PE core panels installed on the external façade needed to be replaced and, if so, by whom. While that dispute continued, no works were carried out. In 2025, the hotel was closed due to the alleged fire safety risk caused by the panels.

The court ordered LPC to carry out the works and pay damages. It found that LPC's failure to replace the ACM panels breached both its repairing covenant and its obligation to comply with legislation.

The repairing covenant

LPC's repairing covenant required it to "put and keep" the external walls "in good and substantial...condition". The court held that, on the facts, this included an obligation to replace the ACM panels, even though the panels were accepted to be an intrinsic defect that had not caused physical damage.

The court acknowledged the general presumption that a duty to keep premises in good condition does not, without more, require a party to make premises safe where the lack of safety results from an intrinsic defect that has caused no damage, disrepair or other physical consequence. However, the court considered that the circumstances displaced that presumption.

Key factors included that LPC had assumed responsibility for repairs to the external walls from May 2017, and that by the time of the 2019 lease there had been a "complete revolution" in the understanding of the fire safety risks created by ACM PE core cladding in tall buildings. The court construed the lease as requiring the building to be put and kept in a condition which, given its age, character, locality, height and use as a hotel, made it reasonably fit for that use as regards fire safety risks.

The legal obligations covenant

The court also held that LPC's statutory obligations under the RRO were enforceable by Essendi under the lease. LPC's failure to remove the ACM panels breached those statutory obligations because:

• LPC was the responsible person for the structure and exterior of the building under sections 3 and/or 5 RRO;

• LPC owed duties to "relevant persons" to take such general fire precautions as were reasonably required to ensure that the premises were safe. Relevant persons included hotel guests, Essendi's employees, visitors and those living, working or visiting adjacent properties;

• the required "general fire precautions" included measures to reduce the risk of fire and the spread of fire, including in relation to the structure and exterior of the building where these formed part of the premises. The court held that replacement of the ACM panels was reasonably required to ensure the premises were safe; and

• the ACM panels were a "dangerous substance" for the purposes of section 12 RRO. The court considered that the definition should not be read restrictively and noted that, given the evidence from the Grenfell Tower Inquiry, it was difficult sensibly to argue that ACM PE panels did not create a fire safety risk.

Into Nominee / Study Group: lease not frustrated by fire safety defects

Here, the tenant of an academic facility - part-commercial with a residential element - unsuccessfully argued that its lease had been frustrated by serious fire safety defects in the external façades and internally. This decision underlines the difficulty of establishing frustration, particularly in a lease context.

Background

The tenant had leased the property since its construction in around 2007, for a term ending in 2032. The lease imposed extensive repairing obligations on the tenant, including in relation to the buildings' external walls.

In 2022, the tenant began winding down its business at the site and, by summer 2022, students and staff had vacated the property. At around the same time, fire safety defects were identified. The property has remained vacant since. The court noted that the evidence indicated the premises would be unfit for their intended purpose until the lease expired in 2032.

Frustration

Frustration requires an unforeseen external event that materially changes the circumstances, so that enforcing the contract on its literal terms would be unjust. The court emphasised that frustration is not lightly invoked - expense, delay or onerousness is not enough; there must be a "break in identity" between the contract as contemplated and its performance in the new circumstances.

The court accepted that the defects made the property unsuitable for educational use, but held that this did not frustrate the lease. The parties had allocated the risk of defects through the lease terms. Clause 3.7 required the tenant, "whenever necessary", to rebuild, reconstruct, renew or replace the whole of the demised premises, subject only to a carve-out for damage by insured risks. On its face, that obligation was capable of extending to latent defects, including defects requiring the rebuilding of the whole premises. Clause 6.5 also made clear that the landlord did not warrant that the premises were suitable for the tenant's purposes. The court also rejected the tenant's alternative argument that legislative changes had frustrated the lease, finding that remedial works were already necessary before those changes.

Commentary

These two decisions will be of interest to landlords and tenants of commercial properties affected by fire safety issues. They illustrate the importance of careful lease drafting, mindful of factual context and statutory obligations, to determine where responsibility for remediation falls.

Parties faced with fire safety issues should scrutinise both their lease terms and the circumstances in which the lease was entered into. Essendi suggests that, depending on the circumstances, in a post-Grenfell context, an obligation to put and keep premises in good condition may require the remediation of cladding or another inherent defect where it creates a significant fire safety risk, to make the building reasonably safe for occupation and to comply with RRO obligations. Parties who have assumed that repairing covenants will not extend to intrinsic or inherent fire safety defects that had not caused physical damage may need to revisit that analysis.

Essendi is also a reminder that fire safety issues, including external wall issues, can give rise to breaches by responsible persons under the RRO in relation to commercial premises. Such breaches may amount to criminal offences or trigger regulatory enforcement action. Depending on the lease wording, they may also be enforceable as breaches of lease, even where the relevant repairing covenant does not cover intrinsic defects.

Study Group demonstrates that parties are likely to face a high threshold when arguing that fire safety defects frustrate a lease, even where those defects render the property unusable for its intended purpose.

More broadly, parties should also keep in mind the Building Liability Order regime under section 130 of the Building Safety Act 2022, which can also apply to commercial properties. The court has a wide discretion, where just and equitable, to order that a "relevant liability" of one entity in relation to a specified building is also a liability of that entity's associates. A "relevant liability" includes, for example, a "liability incurred as a result of a building safety risk" and could potentially arise in contract, including under a lease. It may also potentially encompass a liability under the RRO, although that point has not yet been tested.