Landlords claiming for dilapidations — Tenants admitting some want of repair — Diminution of value of reversion — Property having negative equity — Whether tenants liable — Judgment for the landlords in part
The plaintiff landlords took an assignment of an underlease of 3 Shortlands Road, Hammersmith, a substantial 10-floor office block, which had been leased in 1981 for 99 years. The defendant tenants were subunderlessees of two floors, together with a wing of another floor, which they let. In 1990, they exercised a break option to bring their personal occupation to an end. The defendants had covenanted to keep the interior in good and tenantable repair, as well as to decorate it and to yield up the premises in accordance with those covenants. When the defendants exercised their break options almost half the building was empty. The landlords had to compete for tenants with owners of brand new buildings while having to negotiate a rent revision on the underlease.
Three leases were subsequently granted to an incoming tenant, which comprised the defendants’ two floors plus one other floor for the residue of the term. The incoming tenant was paid £690,000 plus VAT, to bring the premises up to “landlords’ basic standard”. The defendants admitted repairs at a figure of £56,386.77, but stated that they were not liable to pay anything because: (a) no one could have been expected to foresee such a lavish refit so it rendered the claimed repairs unnecessary; and (b) the landlords’ premises, which had a negative equity, could not therefore suffer diminution in value. The landlords claimed £304,599 plus interest.
Held Judgment for the landlords.
The landlords had argued that if the value of the premises was somewhat negative in value in repair, then it was yet more negative out of repair. The court accepted that view. It was plain that the plaintiffs had suffered damage.
2. The worse negative value was evidenced by subsequent events when the landlords had to offer a very large sum specifically related to the condition of the premises.
3. It would be unfair to the tenants to have to pay the whole of the sum paid to the incoming tenants in respect of disrepair. Damages were assessed on the basis: (a) of the cost of repairs; and (b) as at the end of the lease, to take into account in valuing the reversion in its actual state, the consideration that any incoming tenant would demand money related to the disrepair. That sum of money would be related to the disrepair as viewed by the incoming tenant, not to breaches of the outgoing tenant’s covenants.
4. Thus, the actual disrepairs in the present case were greater than those for which the outgoing tenant was responsible, so that the only way of assessing that part of the difference in value of the reversion for which the tenant was responsible was by examining the cost of repairs and then applying to that the “cap” imposed by section 18(1) of the Landlord and Tenant Act 1927. That imposed a limit on the common law measure, but did not alter the method of its assessment.
5. Judgment for the plaintiffs for £295,321.37. Interest to be assessed from end of September 1991.
Michael Driscoll QC and Erica Foggin (instructed by Forsyte Kerman) appeared for the landlords; Joseph Harper QC and Jonathan Karas (instructed by Slaughter & May) appeared for the tenants.