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Expert Insights

05 March 2021

Q&A: Terminating a contract – matters of materiality

Question

I am buying an off-plan house from a developer. The contract contains a provision that says the developer won’t make changes that will “materially affect the size, layout, or appearance of the rooms”. I have now been told that the layout and size of the master bedroom will be very different to the plan. The room is going to be 10% smaller and I am also not happy with the changed layout. The developer has confirmed practical completion is imminent. Can I terminate the contract?

Answer

It is going to depend on both the wording of your contract and the circumstances of the case. Without a bit more detail on either of those, we cannot give a definitive answer. The first step would be to check the contract to see whether: (i) it defines what a “material change” on the size, layout, etc is; and (ii) whether it provides that any material change in size, layout, etc is also a material breach allowing you to terminate the contract. Although both use the term “material”, these two issues are different. It is only if a breach of the contract is material that it might allow you to terminate it.

Explanation

If either or both of “material change” and “material breach” are not defined, then in order to assess whether or not (i) the change is material and (ii) it is likely to amount to a material breach, you have to look at all the circumstances of the case. For example, if you’ve bought a 12-bedroom mansion with a master bedroom bigger than most flats, a 10% reduction may not be either a material change or, even if it is, may not be a material breach. If it is a small one-bedroom house and that reduction takes it below nationally required space standards, it might be different. As questions like this are fact and contract dependent, we suggest that you seek legal advice.

A similar situation to this was considered by the Court of Appeal in Mears v Costplan Services (South East) Ltd and others [2019] EWCA Civ 502; [2019] EGLR 22, which concerned the construction and lease of two blocks of student accommodation. The landlord wanted to get substantial building works done and then lease out the blocks. It entered into an agreement for lease (AFL) with Mears, under which the landlord agreed to carry out the “Landlord’s Works” (ie building works) and that five days after practical completion it would grant Mears (and Mears would execute) a lease. The “Landlord’s Works” were defined to include key components of the construction contract between the landlord and its builder. The AFL also included a provision that the landlord would not vary the Landlord’s Works or Building Documents so as to “[m]aterially affect the size (and a reduction of more than 3% of the size of any distinct area… shall be deemed material), layout or appearance of the Property”. As built, there were 56 failures to meet that 3% tolerance. Mears argued that, on a true construction of the AFL, any failure to meet the 3% tolerance was a material and substantial breach, permitting the termination of the AFL.

The Court of Appeal disagreed. It held that while it was open to the parties to agree, in advance, that a breach of a particular clause is a “material” or “substantial” breach of contract allowing it to be terminated, this had to be set out in clear terms. Looking at the wording of the clause and the commercial context, this is not what the clause did. Instead, the wording was fairly clear in that the clause identified what would be a “material” reduction in room size (enough to constitute a breach of contract), but not whether that breach would be material. This made sense in the construction context, where there may be all sorts of reasons why a room might be built smaller than in the drawings, and the extent of any departure might be very modest. It would have been commercially unworkable if say, one 3% reduction would have allowed Mears to determine the AFL. Therefore, although failing to meet that 3% threshold was a material change on size (and so a breach) and although there were therefore 56 breaches of the contract, whether those breaches were enough (individually or together) to constitute a material breach of the contract was a matter of fact and degree.

Against that background, we would really need to look at the whole contract and the context in order to properly advise you. The discrepancy here (10%) is obviously bigger than the one in Mears, both overall, and (given that you’re buying a house not blocks of flats) in relation to what you’re buying. But, the extract you have given us does not define what is a “material change”, nor does it say that would be a material breach. Therefore, we would suggest that you consult a lawyer.


This article was first published in Estates Gazette on 15 December 2020 and was published by associate, Megan Davies at Charles Russell Speechlys LLP and barrister, Nicholas Grant at Landmark Chambers.

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