Landlord and tenant — Repairs — Terminal dilapidations — Damages — Section 18(1) of Landlord and Tenant Act 1927 — Valuation date in recession period — Unhelpful comparables — Landlord not carrying out repairs — Whether any diminution in reversionary value — Whether cost of repairs relevant — Factors that would influence hypothetical purchaser
The claimant was the owner of a multi-storey mill complex, mainly
built between 1893 and 1900, in an area zoned for industrial purposes. The
defendant, who had occupied the building under three consecutive leases, gave
up occupation when the last expired on 28 February 1993. In breach of covenant,
the defendant left the building out of repair and
of the trial, claimed damages for breach of covenant. At the trial the experts
agreed that the cost of the necessary works of repair would have been £312,500.
In applying section 18(1) of the Landlord and Tenant Act 1927, the experts
further agreed that the value of the building in disrepair was £245,000. They
could not agree the value in repair; the claimant’s valuer contended for
£585,000, whereas the defendant’s valuer was of the opinion that there was no
comparable evidence supporting a value in excess of the disrepair value of
£245,000 at the valuation date of 28 September 1993.
of the comparables relied upon helped the exercise of valuing the building in
repair or finding the diminution in value in the reversionary value due to the
disrepair, as none of the properties were in good repair; they were also much
smaller. In a case where the landlord has not and does not intend to carry out
repairs the burden of proof that the cost of repairs is the measure of damages
lies on the landlord. In any event, and on the evidence, in relation to a late
19th century mill building, a costed schedule of dilapidations could not
constitute even prima facie evidence of actual diminution. The only
likely purchaser of the building on the valuation date, which was during a
recession, was someone prepared to hold it until the market improved or
changed, with a view to putting the building or site to whatever use could be
justified financially in the changed market circumstances and could lawfully be
achieved. Such a purchaser would have taken into account a number of factors,
including the seriousness of the disrepairs, the possibility that his
speculation might come to nothing, that a substantial part of the mill was
listed, that he might not get consent to demolish it and that the local
planning authority might have been sympathetic to employment regeneration
development. Having regard to those factors, there was diminution in the value
of the land on reversion due to the disrepair. The significant items of
disrepair represented about 25% of the total costs. The correct figure for
diminution was £40,000.
The following cases are referred to in this report.
Crewe Services
& Investment Corporation v Silk [1998] 2 EGLR 1; [1998] 35 EG 81
Portman v Latta
[1942] WN 97
This was the hearing of a
claim by the claimant, Craven (Builders) Ltd, for damages for terminal
dilapidations against the defendant, the Secretary of State for Health.
Derek Wood QC and Nigel
Meares (instructed by Freeth Cartwright Hunt Dickins, of Nottingham) appeared
for the claimant; Kim Lewison QC and Timothy Fancourt (instructed by Edge
Ellison, of Birmingham) represented the defendant.
Giving judgment, NEUBERGER
J said: This is a claim for damages for dilapidations. It is brought
by Craven Builders Ltd (the landlord) against the Secretary of State for Health
(the tenant) in respect of dilapidations that have admittedly accrued in a
building fronting Grange Lane and Deacon Street in Leicester (the building).
The building is located three-quarters of a mile south-west of
Leicester city centre. The area was developed around the turn of the century in
connection with traditional Leicester local industries: textiles, textile
engineering and shoes. In more recent years these industries have declined, and
de Montford University, in an area to the north and west of the building, and
the Royal Infirmary Hospital, to the south of the building, have expanded.
The building itself is a large multi-storey mill complex; its total
internal area is some 63,800 sq ft (5,933m2) and the site is approximately 1
acre (0.4ha). Block A, comprising just over 40% of the space, is mostly a
four-storey building built in 1893. The balance of the building, with one
exception, consists of a lower block built around 1900. The exception is a
small one-storey block built as a canteen in about 1972.
The site ratio is high and there is very little room, by modern
standards, for car parking and loading facilities. The building is zoned
Industrial in the adopted Central Leicester district plan and its established
use is Warehouse-B8, in accordance with the Town and Country Planning (Use
Classes) Order 1987. The building was demised to the defendant by three
consecutive leases granted on 2 December 1971, 21 October 1991 and 9 January
1993, for terms respectively of 21 years, one year, and half a year, the last
of these terms having expired on 28 September 1993.
Each of these leases contained full tenant’s repairing and
decorating obligations, and contained an express covenant by the tenant to
deliver up the building in good repair and appropriately decorated in the last
year of the term. Shortly before the last of the three leases came to an end,
on 15 June 1993, part of the building, namely block A, was added to the list of
buildings of special architectural and historic interest pursuant to the
Planning (Listed Buildings and Conservation Area) Act 1990; in other words,
block A was listed Grade II.
On 28 September 1993, when the third of the three leases
determined, the tenant then vacated, leaving the building out of repair and
undecorated. The freehold of the building is vested in the landlord, as it was
in September 1993. Since then, until about 1998, comparatively small parts of
the building have been let out on tenancies at will, effectively at no rent, to
office or storage users. In 1998 a part of the ground floor was let for a
substantial term as a snooker hall. There are currently negotiations for the
lease of substantial parts of the upper part of the building to be granted to a
company, associated with those controlling the landlord, for warehouse
purposes. So far as the disrepair and want of decoration are concerned, there
is no evidence of anything much having been done by or on behalf of the
landlord until the recent lease, granted in 1998, of what is now the snooker
hall, in respect of which it appears that some work has been done.
The parties are now agreed that the cost of the necessary works to
put the building in the state of repair and decoration stipulated by the
covenants in the third lease, as at the date of its determination, would have
been £312,500. That agreement was reached shortly before trial. Until then,
there had been one schedule setting out the agreed works, which cost an agreed
sum of some £278,000, and a further schedule setting out works that were in
dispute, but which have now been agreed.
In common law, the measure of damages for terminal dilapidations is
the cost of carrying out the remedial works, ie the works set out in the two
schedules to which I have referred (the works). However, by section 18(1) of
the Landlord and Tenant Act 1927, the maximum damages that a landlord can claim
for terminal dilapidations are:
the amount (if any) by which the value of the reversion… in the
premises is diminished owing to the breach…
In most cases, this effectively renders the measure of damages for
terminal dilapidations substantially the same as the measure of damages for
dilapidations in common law during the term.
In these circumstances, the exercise that has to be carried out in
the present case is to assess the amount, if any, by which the disrepair as set
out in the schedules has diminished the value of the building as at 28
September 1993. In that connection, not only do I have the schedules to which I
have made reference, identifying the works and their costs, but there is also
an agreed structural report that indicates that, subject to some £2,000 worth
of work, the building is in a satisfactory structural state. However, that
report does not give the building a completely clear bill of health. When
considering block A, the report says:
The pitched roof structure appears generally sound although there
are numerous areas of water penetration through the roof coverings/gutters etc
which require attention. The subsequent degree of damage to the structure is
not considered to be of significant concern at this stage but may become so if
the situation is not rectified.
In relation to the other four blocks, known as blocks B, C, D and
E, I think I need only refer to the concluding remarks relating to block E:
As with the previous [blocks] the water ingress is not considered
to be of detriment to the structure but is in obvious need of attention.
The primary evidence as to the diminution in value of the
reversion, if any, comes from two expert surveyors. The landlord’s surveyor was
Mr Christopher Sinclair FRICS, a director of Chestertons, who has been in
charge of its Nottingham office since 1993; the tenant’s surveyor is Mr Peter
Parsons FRICS, a director of Innes England, who has been in practice in
Leicester for some 28 years. The two experts have helpfully agreed a statement
covering agreed areas, and each has also produced a proof relating to their
areas of disagreement. In the agreed statement one finds:
The Experts agree that the normal basis of valuation, with a view
to establishing the diminution in value, is to assess the current open market
value in disrepair, at the valuation date; and to assess the current
open market value in repair [at the same date].
The Experts are able to agree a valuation of the property in
disrepair, but are unable to agree a valuation in repair for the
reasons set out in this joint report.
They then go on to deal with various matters, and, under the
heading of ‘Valuation’, one finds:
4.1 The Experts have agreed that the value of the freehold
interest, with vacant possession, in disrepair, at the valuation date,
was £245,000 (two hundred and forty five thousand pounds), for the purpose of assisting
the Court. However, Mr Parsons stresses that in his opinion there was no market
for the property at the date of valuation. If he is wrong, then he accepts the
beforementioned valuation which is based on historical comparable evidence.
4.2 The Experts cannot agree on the freehold value, in repair,
at the valuation date.
4.3 Mr Sinclair is of the opinion that the value in repair is
£585,000 (five hundred and eighty five thousand pounds). His reasons are:
4.3.1 Despite a general over supply of multi-storey industrial
accommodation in Leicester (and indeed other towns and cities throughout the
UK) demand does exist and transactions have taken place.
4.3.2 He contends that a building which is in a state of repair
will command a higher value than it would if it were in a state of disrepair.
4.3.3 He believes that although the existing use is for
warehousing purposes and that a light industrial use might be most appropriate,
that is not to say there would be no demand for the building from other end
users either as owner occupiers of the whole or part or as tenants of the whole
or part.
4.4 Mr Parsons… is of the opinion that there was no demand for
multi-storey mill buildings of this size in Central Leicester, for existing
use purposes, at that time, and his reasons are:
4.4.1 The decline in the textile and shoe trades, coupled with the
general economic recession, which was in its depth during the period 1993/1994,
resulted in no demand for multi-storey mills for use as either warehousing or
light industrial purposes.
4.4.2 The design features of these old mills are not conducive to
today’s industrial and warehouse demand criteria.
4.4.3 Mr Parsons can find no comparable evidence which supports a
valuation for a mill building of this size put into repair pursuant to the
Schedule of Condition which is in excess of the agreed valuation in disrepair.
On the evidence I have heard, the Leicester property market, at
least in general, started to decline in 1991 and reached a low around the end
of 1993; this low point may have continued for some time, but the market had
started to recover significantly by some time in 1995. The weakness of the
property market in Leicester, and, in particular, the glut of second-hand
industrial buildings, especially old mills, make it easy to understand why Mr
Parsons considers that there was ‘no market’ for the building in September
1993, whether in repair or out of repair.
It is a view underscored by the fact that there were, on the
evidence, at least five old industrial buildings on the market in Leicester
actually at the valuation date, or possibly, in one case, only very shortly
thereafter. The unattractiveness of this type of property in the market is
further underscored by the fate of these buildings since the improvement in the
market from 1994. Two York Road and the Benjamin Russell factory are still on
the market, the third may have been sold in 1996 (the Liberty works), the
fourth was sold only in 1997 (Upper Ground Street) and the fifth has been
demolished (21-3 Newarke Street).
However, the fact that in reality a property may not have found a
buyer, as at the date it falls to be valued, does not mean it has no value. As
Mr Derek Wood QC and Mr Nigel Meares say in their skeleton argument on behalf
of the landlord:
Valuing shares in private companies which may be in practice
impossible to market or valuing shares in suspended listed companies is the
sort of exercise which has to be undertaken and is undertaken frequently for
capital gains tax or inheritance tax purposes.
Accordingly, it is not open to the court to conclude that, because
the market was ‘dead’ as at 28 September 1993, in the sense that there was not
likely to have been any buyer for the building, whether in repair or out of
repair, the value of the building as at that date must be nil. The fallacy in
that argument is that it involves concluding that there would have been no
transaction, whereas the valuation exercise required by section 18, and,
indeed, by any other open market valuation exercise, requires one to assume
that there was a transaction. It should be recorded, in fairness to Mr Kim
Lewison QC and Mr Timothy Fancourt, who appear on behalf of the tenant, that
they did not seek to argue otherwise.
However, that is not to say that an opinion that the value of the
building, in whatever state, as at 28 September 1993 was nil must be wrong. The
hypothetical parties negotiating for the sale and purchase of the building must
obviously be taken to know the state of the market, and, if that state is very
weak, it is a factor that would no doubt be relied upon by both parties in
striking their deal.
Be that as it may, in the present case the experts appear to have
agreed that the value of the building out of repair, ie in its actual state of
repair as at 28 September 1993, was £245,000. During the course of his
evidence, Mr Parsons appeared to have some doubts or reservations about that
figure. However, Mr Lewison has not sought to resile from the written agreement
between the experts, and, in my view, rightly so. Indeed, it might be said that
if the experts have agreed too high a figure for the value of the building out
of repair, that benefits the tenant, as it could be expected to produce a
smaller figure for the diminution in value. However, it seems to me that unless
the agreed valuation out of repair is substantially wrong (and that is not the
case here), it should not make any significant difference to the assessment of
the diminution in value of the reversion. One is ultimately concerned with the
difference, if any, between the value in repair and the value out of repair.
The valuation exercise in the present case is not only difficult
because of the state of the market and the nature of the other properties on
the market, but also because of the nature of the other evidence. First, the
experts’ opinions are as wide apart as could be: nil on the one hand (Mr
Parsons); more than the cost of repair on the other hand (Mr Sinclair).
Second, valuation of a property is normally carried out by
reference to comparable transactions. Only four transactions have been cited
within the respective two-year periods before and after the valuation date in
the present case; that is of itself a comparatively wide window for valuation
purposes. Of the four transactions, two, I think, are accepted as being of no
real assistance, namely those relating to Millstone Lane and Humberstone Road,
the latter having been cited by Mr Sinclair more to support evidence of rental
value. The remaining two transactions, relating to Mansfield Street and Sussex
Street, concern properties of between one-third and one-half of the size of the
building. They are of highly questionable comparability quite apart from that.
About half of Sussex Street is a comparatively modern structure, and its lack
of comparability can be judged by the fact that, although it was in poor repair
at the date it was sold, it fetched a rate per sq ft three and a half times
that agreed between the experts for the building out of repair, and, indeed,
more than 50% of the rate per sq ft attributable to the building in repair by
Mr Sinclair. Mansfield Street sold in poor condition for nearly twice the rate
per sq ft that the experts agree is appropriate for the building out of repair.
Quite apart from this, the exercise with which I am concerned can
either be characterised as valuing the building in repair on 28 September 1993
or simply assessing the diminution, if any, in the value of the building due to
the existing disrepair as at 28 September 1993. However one expresses it, the
comparables, as I see it, cannot
actual transactions appear to have been in good repair. Mansfield Street and
Millstone Lane were in poor condition and therefore cannot assist on the value
of the building in good condition. Sussex Street was said by Mr Sinclair to be
occupiable, but Mr Parsons, who had visited it in 1988, said that it was in
fairly poor condition. Anyway, as I have said, the rate per sq ft attributable
to it is substantially greater than the value of the building in repair, even
according to Mr Sinclair’s figure.
The fact that there is little, if any, helpful evidence in terms of
market transactions is not the fault of the experts. However, in my judgment,
Mr Sinclair was not justified in his view that the evidence of sales and
lettings of buildings in Leicester during the period 1992 to 1996 established,
or even really in any significant way helped to establish, any particular
differentiation between the value of the building in repair and the value of
the building out of repair, or any particular value for the diminution in value
of the reversion of the building due to the disrepair. I am left with the
pretty clear impression that Mr Sinclair’s evidence merely amounted to saying
that, as the building was unlikely to be demolished, a purchaser would have
assessed the price that he was prepared to pay for the building out of repair
on the basis that he would have to carry out all the items of repair set out in
the schedules, and would therefore discount the price he was prepared to pay by
a little more than the cost of those works to allow for risk.
It does not appear to me that his view was based on much, if any,
direct experience of transactions relating to properties of a comparable nature
to the building in Leicester. However, particularly in the context of the case,
with no helpful comparable evidence and with the difficulties I have already
identified, it would be wrong to be too ready to conclude that Mr Sinclair’s
evidence is of no value, especially bearing in mind his long professional
experience in the property field in the Midlands.
Mr Parsons had much more direct experience of Leicester, having
been in practice there for 28 years. It was clear from his evidence that,
unlike that of Mr Sinclair, he had been professionally involved in the 1990s
with a number of the properties referred to during the course of this case. His
evidence was that there was no demand from any quarter for redundant mill
properties in September 1993, whether from investors, speculators or
owner/occupiers, whether for industrial/warehouse use, refurbishment or
redevelopment as offices, residential or any other use. He also said that old
mills such as the building were and are not normally kept in repair unless
refurbished for office or residential purposes; indeed, he knew of no case
where an unrefurbished mill was in repair when it was sold or let to occupiers;
other than for refurbishment, in other words, it was regarded as ‘cheap
business space’.
On this basis, he concluded that the value of the building, as at
the relevant date, was the same whatever its state of repair, at least assuming
that it was in sound structural condition. This assessment is consistent with
the view he had expressed to the tenant in a report that he gave on 26 October
1993, within a month of the relevant valuation date here, although it is also
right to say that he came up with a somewhat different view when he was asked
to advise in 1991.
I have no doubt that Mr Parsons was a more helpful witness than Mr
Sinclair. He knew Leicester better, his professional work had involved him in
the Leicester old mill market since 1990 and before, and he was still involved
in that market. He had produced a valuation of the building almost at the
valuation date. His current evidence is consistent with that valuation. He has
not sought to justify his evidence by reference to evidence that, on analysis,
is of no assistance.
He is not open to criticism in some respects as, albeit in a mild
way, is Mr Sinclair. I have in mind his failure to chase up the replies to the
advertising of the building on behalf of the landlord during the last quarter
of 1993, his failure to explain why he considered industrial use to be ‘the
most expedient use of the building’ and his persistence in his view that all
the repairs in the schedule represented ‘the bare minimum’ in a wide range of
circumstances, when this was simply not the case.
I should add that I do not find it significant that Mr Parsons gave
a different view in 1991, when he advised that there was a £75,000 diminution,
from what he says now. His evidence indicates that the market is in a different
state now from what it was in 1991 and also that, in 1991, he was valuing on a
different basis, namely, that the building was subject to a lease in favour of
the Secretary of State.
Having said all that, I do not think that it necessarily follows
that I should accept Mr Parsons’ view in its entirety or reject Mr Sinclair’s
view in its entirety. Mr Parsons’ reasoning could well, it appears to me, be
flawed. First, the fact that old mills are normally out of repair does not mean
that this building, in the state that it was as at 28 September 1993, would not
have attracted some sort of discount compared with the state that it should
have been in had the tenant complied with his covenant, even if the building
was structurally sound.
Second, the fact that, in his view, there would have been no demand
for the building as at 28 September 1993 does not mean that the artificial
exercise that one has to carry out results in the conclusion that it would not
have fetched less in significant disrepair than in repair, any more than the
fact that the market was dead should result in the conclusion that the building
had a nil value.
Given the paucity of the evidence, the question of burden of proof
was raised. The landlord, through Mr Wood, says that the cost of the repairs is
prima facie evidence of the diminution in the value of the reversion,
and, therefore, if the evidence that has been called does not establish any
particular diminution to the court’s satisfaction, the court should fall back
on the cost of the repairs as the diminution and award that as damages. On behalf
of the tenant, Mr Lewison says that, given section 18 and its terms, it is up
to the landlord to prove the diminution in the value of the reversion, and, in
so far as he fails to prove any particular diminution, the court should award
no damages.
The topic is accurately explained in Dowding & Reynolds
in Dilapidations: the Modern Law and Practice at paras 23.17, 23.18 and
23.31. The law is as follows. In a case where the landlord has carried out the
works, or clearly intends to carry out the works, then the cost of the works
is, or at least can be, prima facie evidence of the diminution in value.
However, in a case where the landlord has not carried out the works, and there
is no evidence that he intends to carry them out, then the cost of the works is
of no assistance. In other words, in the former case Mr Wood’s contention would
appear to be right; in the latter case Mr Lewison’s approach would appear to be
right. In the light of that, it appears to me that the proper course in the
present case is to assume that the onus lies on the landlord.
The difficulties that the court faces in assessing the diminution
in the recession where, whether or not through the fault of the experts, the
evidence is unsatisfactory, have been considered by the Court of Appeal in Crewe
Services & Investment Corporation v Silk [1998] 2 EGLR 1*,
especially at pp2D-5D. Because what Robert Walker LJ said in his judgment
accords with the approach that appeared to me, even without that guidance, to
be appropriate, I should mention the important warning that that case was
concerned with dilapidations during the currency of the term. There are two
particular passages that strike a chord, at pp4M-5B:
The true position is (as Millet LJ observed in the course of
argument) that general damages are at large, and the judge must do the best he
can, just as the jury would have had to do when civil actions were heard by
juries. I have already referred to the old case of Worcester School Trustees
tried by Coleridge J with a jury. Just the same approach can be seen in Portman
v Latta [1942] WN 97, in which Croom-Johnson J was unimpressed by all
the expert witnesses, but he proposed ‘to deal with the case as he thought a
jury would’ and assessed damages, in the particular circumstances of that case
as they appeared in evidence, at about three-fifths of the cost of the repairs.
There the lease had come to an end, but the premises could not be relet as a
dwellinghouse.
Where a landlord claims damages for breach of a repairing covenant
near the beginning or in the middle of the term of a long lease… he will, if he
fails to lead evidence of diminution in the value of the reversion, run a
serious risk of the court concluding that there had been no significant
diminution. Where a
will, if he fails to lead evidence that the diminution is much less than the
cost of repairs, run a serious risk of the court accepting that cost (or that
cost only slightly discounted) as the best evidence of the diminution. In most
cases the evidence before the court (even if imperfect and incomplete) will be
more important than issues as to the burden of proof.
* Editor’s note: Also reported at [1998] 35 EG 81
The second of those two paragraphs does highlight the fact that
that was a case involving damages being sought during the currency of the
lease, but I note that the Court of Appeal appears to have approved the
approach of Croom-Johnson J in Portman v Latta [1942] WN 97, a
case concerned with terminal dilapidations, at a time when, of course, section
18 applied. I respectfully echo the undesirability of determining the case by
reference to the burden of proof unless absolutely necessary. Whoever has the
burden of proof in this case, Mr Parsons’ evidence has quite satisfied me that,
at least in relation to a large, old, turn of the century mill in Leicester on
28 September 1993, one cannot say that a costed schedule of dilapidations, of
itself, in the absence of any other evidence, constitutes even prima facie
evidence of the diminution in the value of the reversion, let alone that it is
any sort of prima facie evidence of the actual diminution. On the other
hand, it does not follow from this that there was no diminution in the value of
the reversion as at 28 September 1993 due to the disrepair described in the
schedules to which I have referred.
In light of the evidence, it seems to me to be appropriate to
consider who would have been the likely bidder in the market for the building
on 28 September 1993. In practice, that involves much the same answer on the
alternative that Mr Wood suggested: what view would the landlord have taken in
relation to the building as at 28 September 1993?
In my judgment, the only likely purchaser for the building in
repair or out of repair, as at 28 September 1993, would have been someone who
was prepared to hold it until the market improved or changed, with a view to
putting the building or its site to whatever use could be justified financially
in the changed market circumstances and could be lawfully achieved in planning
and listed building terms. In the meantime, he would put the building to such
short-term use, if any, as he could.
As at 28 September 1993, the experts are agreed that neither office
use nor residential use would have been regarded as a realistic possibility. I
am not persuaded by Mr Sinclair’s view that industrial use or warehouse use
would have been regarded as significantly more feasible at the time. I accept
Mr Parsons’ evidence that what light industrial storage demand there had been
for old mills in Leicester during the late 1980s had started to tail off around
1990/1991, and had effectively dried up by 1992. The point is well illustrated
by the number of industrial properties on the market in Leicester between 1991
and 1996; only one, Sussex Street, was sold to an industrial or warehouse
owner/occupier, and none appears to have been let for industrial warehouse
uses, apart, possibly, from part of Alexandra House and also Humberstone Road,
although it appears that the tenant had gone into liquidation by September
1993.
Sussex Street, as I have already mentioned, appears to me not
merely to have been a different sort of property, but a significantly more
attractive property than the building — less than one-third of the size and
half of it being substantially more modern. I also consider that some of the
properties on the market, with which the building would have been in
competition on 28 September 1993, would have been regarded as more attractive
by many purchasers, for the reasons of location or being smaller, or because of
not being part listed or because of having better access, parking or loading.
In concluding that the likely purchaser would have been a
speculator who would, as it were, have tucked the property away in the hope of
better times, I have not overlooked the fact that Mr Parsons said that there
was no evidence of speculative purchasers in the Leicester old mills market in
September 1993. However, he did not say that if one had to assume a purchaser,
it was inconceivable that it would be a speculative purchaser. It seems to me,
on the evidence, that a speculative purchaser of the sort I have described
would have been the least unlikely purchaser. There is also Mr Sinclair’s
evidence that the purchaser would have been of this nature, and, while I do
not, in this particular case, think that his evidence is of great assistance, he
has wide experience of the property market in the Midlands.
What view would such a speculator or, indeed, the landlord,
assuming a hypothetical person in the position of a landlord, take of the
disrepair? If the disrepair were not very extensive, I strongly doubt,
particularly in the light of Mr Parsons’ evidence, that it would significantly
affect his bid. If redevelopment or refurbishment occurred in due course, any
repair works, or else the great majority of repair works (in the case of
refurbishment), would be rendered redundant. If let for industrial or warehouse
purposes, I accept Mr Parsons’ evidence that mills were expected to be in
disrepair, and, particularly if the disrepair was not very extensive, it might
well not have been expected to affect a tenant’s or subsequent purchaser’s bid.
In the meantime, if he anticipated granting short-term tenancies, such
disrepairs would have, on the evidence I have heard, very little effect upon
putting prospective tenants off.
However, if the disrepair were more serious, so that it affected,
or might soon affect, the structure of the building, I believe that the
position would be different. Safety, short-term lettings and long-term
proposals other than demolition might be at risk. In the present case, the structure
was substantially sound. However, the agreed extent of disrepair was extensive.
If it is a helpful measure, it works out at just under £5 per sq ft in terms of
cost. There was fairly considerable internal disrepair and significant external
disrepair.
So far as the internal disrepair is concerned, it seems to me that
the great majority of it would have been perceived by the purchaser as
inessential if the building were to be occupied in the short term, or even if
it were to be occupied on a longer-term basis by an industrial or warehouse
user. However, it seems to me that the hypothetical purchaser might well have
taken the view that if, at some time in the future, he found a long-term tenant
for the building without it being refurbished or redeveloped, he might have to
carry out some internal works, or at least make an allowance, eg a rent-free
period, in favour of a new tenant in respect of such internal works. I have in
mind the state of the lavatories, the non-functioning of some of the electric
lights, the poor state of some of the floors and the poor state of some of the
walls. Accordingly, the hypothetical purchaser would, in my judgment, consider
the internal state of the building was such that he might suffer some loss in
the future as a result of a limited proportion of the internal disrepair. As to
the exterior works, there were some defects that might have weighed with him
for similar sorts of reasons. In relation to the pitched roofs, there were a
number of slates missing and a number of delaminating tiles; there were some
defective flat roofs; the asphalt had come to the end of its useful life; there
was some spoiling and delaminating brickwork; and, in the case of the windows,
none of them had been decorated and a few had rotted.
It seems to me that a potential purchaser, even a speculator of the
sort that I consider would be the likely purchaser, would to an extent be
concerned about the internal and external disrepair I have identified (the
significant disrepair). Common sense, invoked by Mr Wood, does suggest that
this must be so, but common sense can be a dangerous, even a misleading, guide
in a case of valuation of an unusual and relatively undesirable building in a
mediocre location in a poor market. None the less, I accept that the significant
disrepair would be likely to have deterred a purchaser, particularly of the
sort I have mentioned, to an extent. He would anticipate the real possibility
of having to put right some of these defects or their consequences at some time
in the future to an extent, and that the existence of these defects may
accelerate the need for other works in order to protect the structure. For
instance, as is clear from the structural report and from the evidence I have
heard, the state of the roofs and, possibly, of the windows and walls, and,
more significantly, of the roofs is such that the building is not wind and
watertight, or indeed pigeon-proof, to use Mr Sinclair’s expression. The
ingress of water over time might well lead to greater damage to the building, and,
therefore, greater works having to be done, if the building is not demolished,
and possibly even if it is refurbished, than would
hypothetical purchaser was purchasing it.
Of course, the hypothetical purchaser would take into account the
fact that, whatever the state of the building, his speculation may come to
nothing, in which case he would do no work and, as it were, write off his loss.
Alternatively, the building may be demolished in whole or in part, and, in that
case, he may take the view that no work would be necessary at all. The building
may be refurbished so as to render all or some of the significant work that I
have identified unnecessary.
He would further take into account that some of the work may be
carried out by a tenant in the future at little cost to him. He may also take
the view that, while the cost of the items of works shown in the schedule is
the cost of doing them properly, he would be perfectly content, bearing in mind
the need merely to protect the building and to ensure that it is wind and
watertight, that the cost of the work that he might have to carry out would be
much less. Further, even if the building had been sold to him in repair, with
the building being unoccupied, as he would anticipate, or occupied on a
comparatively short-term basis to a comparatively small extent, it would start
deteriorating due to the passage of time in any event.
Accordingly, in my judgment, the purchaser would have been affected
by the significant items of disrepair, but only to a limited extent. I believe
that this conclusion is reinforced when one remembers that block A, some 41% of
the building, was, at the relevant date, and indeed still is, listed, and the
hypothetical purchaser would have appreciated that there might be a difficulty,
even an impossibility, of demolishing block A. He would be aware that there
might even be a difficulty in demolishing the remainder of the building,
bearing in mind that it is in the curtilage of the listed part. He would also
bear in mind that the fact that block A was listed might lead to some
constraints on the extent and way in which he could refurbish block A and,
possibly, even the remainder of the building. Thus, there is evidence to
suggest that the local planning authority may not have accepted PVC windows
that would otherwise have been regarded as desirable instead of wooden ones. It
appears to me, therefore, that the listing of block A would result in a
speculative purchaser appreciating that there was a fairly high risk that
demolition of the whole of the building might not be permitted, and a risk,
albeit much slighter, that demolition of part could be difficult, and that the
refurbishment options might be constrained.
On the other hand, one should not overstate these factors. Apart
from the fact that the effect of the listing on future development of the
building would itself have involved speculation, the purchaser would have known
that the building was in the Leicester City Challenge area and he would have
expected the local planning authority to be sympathetic to any redevelopment
that would have resulted in new jobs. The hypothetical purchaser would also
expect any redevelopment, provided there was a prospective occupier involved,
to be rendered financially attractive by the possibility of a grant from
English Partnerships, a government-sponsored body that exists to assist city
centre regeneration, among other things.
Further, given that the purchaser would have been pretty uncertain
when the market was going to change, and the way it would change, and when, if
ever, the building would become income-producing, he would not have been very
clear about the nature and requirements of such an occupier, if and when the
building or the site became worth letting, repairing, refurbishing or
developing. Further, to keep the building wind and watertight over the short
term would not have involved a great deal of work.
Bearing in mind these factors, I consider that there was a
diminution in the value of the land on reversion of the building due to the
disrepair. Putting a figure on that diminution in light of the available
evidence is very difficult. Based on my view of the two experts and of the
evidence generally, I am quite satisfied that the diminution is substantially
closer to Mr Parsons’ figure of nil than to Mr Sinclair’s figure of £340,000.
In assessing the diminution in value, I take into account the factors that I
have mentioned above, and the weight that they could have had in the mind of
the hypothetical purchaser.
I turn to the cost of the external and internal items constituting
the significant disrepair, which would have carried, in my judgment, some
weight with the hypothetical purchaser. The sums set against them in the schedules
indicate that they are very substantially less than half the cost of the works:
to my mind, they would be, at the most, some 25%.
However, as I have said, the purchaser would bear in mind that it
may not be necessary to carry out, or even indirectly to pay for, any of these
significant works in due course. He may take that view either because of the
prospect of redevelopment or because of the nature of the tenant who may
eventually occupy the building, or because the building is eventually simply written
off. He would bear in mind that, if he had to carry out the works, he would not
know when he would have to do so. He may think that, if he had to carry them
out, they would cost significantly less than the figures in the schedules,
particularly because he would only be carrying them out if the building
remained substantially a mill building. If it was to be used for other
purposes, such as offices or residential, he would anticipate substantial
refurbishment that would render most repair works, quite possibly all of them,
redundant. He would also bear in mind the fact that if the building were to be
vacant for a substantial period, whether in repair or out of repair, it would
start to deteriorate and require attention.
Bearing in mind the sort of factors I have mentioned, I have come
to the conclusion that diminution in value of the reversion in the present case
does exist, and the correct figure at which to assess that is £40,000. In other
words, I think that the hypothetical purchaser would have paid £285,000 for the
building in good repair as at 28 September 1993.
That this figure of £40,000 is much less than the figure put
forward by Mr Sinclair of £340,000 causes me no real concern. I think the
furthest that his evidence goes, in terms of reliability or helpfulness, is
that, as an experienced surveyor in the Midlands, he felt it unlikely that the
reversion was not substantially diminished by the want of repair. I am more
concerned about differing from the evidence of Mr Parsons. However, he has had no
experience of mill properties in good repair, the valuation exercise was
difficult and his reasoning was not immune from criticism. Having said that,
the consistency and firmness of his view and the period and depth of his
expertise of the relevant market is such as to command considerable respect.
However, in the light of the evidence as a whole, I have reached the conclusion
that the right figure in the present case is £40,000.
I should say that, although there was evidence about what happened
to the building after 28 September 1993, especially the letting in 1998 to the
snooker hall and the projected letting this year for warehouse or storage
purposes, I have not taken it into account, but if I had taken it into account
it would have made no difference. In principle, it seems to me very dubious
whether one can take into account what has occurred since 28 September 1993 if
one is carrying out a valuation exercise on that date.
In practice, the four small tenancies at will are of no assistance
to the exercise I am carrying out. The unsuccessful attempt to let the premises
in the last quarter of 1993 could be said somewhat to assist the view that the
building would not, in fact, have found any purchasers, but I do not think that
that takes matters much further, for reasons already described.
The fact that the landlord has held the property, effected a few,
desultory, short-term lettings and not effected any work with a view to seeing
what could be done with the building, as and when the market improved, gives me
some comfort, in the sense that I think that is the sort of attitude that the
notional person who would have purchased the building as at 28 September 1993
would have adopted. In the end, as I say, for the reasons I have tried to give
in this difficult case, and adopting the approach of Croom-Johnson J in Portman
v Latta, albeit far more wordily, I have come to the conclusion that the
right award of damages in this case is £40,000.
After hearing submissions on interest and costs, Neuberger J continued: I have given judgment in favour of the claimant
for £40,000. The first question is interest. Prima facie, as I
understand it, Mr Lewison accepts on behalf of the defendant that interest
would be
that, no doubt, can be agreed or I can determine it.
However, Mr Lewison says that the claimant should be deprived of
some interest, because, on 14 June 1996, directions were given, including a
direction to the claimant to set down for trial by 9 August 1996, and there was
a further hearing on 28 February 1997, because there were problems about the
experts’ reports when the claimant was ordered to set down by 19 June 1997. In
fact, the case was not set down until 11 January 1999. In those circumstances,
Mr Lewison says that the claimant should be deprived of its costs in respect of
interest in respect of two and a half years from 9 August 1996 to 11 January
1999.
In principle, the point is a difficult one because, in accordance
with the current approach to procedure, it seems to me that there is
considerable force in Mr Lewison’s argument that, where a claimant has failed
to comply with a direction to set down a case, as a result of which the case
comes on much later, he should be penalised and a message sent out to other
potentially delaying claimants to discourage them from delaying. A salutary way
of achieving this is to deprive the claimant of interest for the period of
delay.
On the other hand, as is said by Mr Meares, to deprive a claimant
of interest gives an uncovenanted windfall to a defendant, because the
defendant has had the benefit of money that, as a matter of law, should have
been the claimant’s, and why the defendant should benefit in the form of
interest is questionable.
However, it is fair to say that: (a) in general, there is no other
easy way of penalising a delaying claimant who has not been subjected to
striking out or other penal orders; and (b) in the present case, it could be
said that interest is not quite as compensatory as it is in many cases, because
the damages are assessed as diminution in the value of a building as at six
years ago and the claimant still has the building.
The added difficulty in the present case is that, although on the
face of it the claimant is in breach of orders to set down, and although it is
fair to say that the setting-down orders envisaged the case being set down
before expert reports were exchanged, I am told by Mr Meares that there was
considerable delay due to the experts not being able to agree, and due to the
defendant’s expert not being available. There was a lot to agree and it is
clear that the schedule of dilapidations was agreed in its entirety only
shortly before the hearing, and that that was beneficial in terms of costs,
eventually, and also the expert valuation surveyors had to have time to
negotiate.
I am not clear as to the wrongs and rights of the delay. It is true
that the claimant was in breach of the court order for setting down. It is
equally true that the defendant, if one is going to take the modern approach,
could have taken up the matter and had it set down.
I have reached the conclusion that, while it is tempting to deprive
the claimant of interest for the relevant period, it would not be right to do
so in this case. Although the claimant was in breach of a court order set down,
I am not satisfied, on what I have seen and heard, that it was substantially to
blame. I am not satisfied that there was any unreasonable delay, and the orders
concerned were all made well before, and, indeed, the setting down was effected
before, the new rules came into force.
If this delay had been after the new rules, and if I had been
satisfied that the delay was not merely failure to obey the court orders, but
was due to the claimant delaying in some way or another, then I would have
deprived the claimant of some of the interest; I might even have thought it
right to deprive the claimant of some interest, even if it had not been
established that it was the claimant’s fault.
So far as costs are concerned, the claimant asks for costs up to 15
May 1999 and accepts that, because of a payment into court or a Part 36 offer,
the defendant should have its costs after 15 May 1999. The only issue between
the parties is whether, and to what extent, I should reduce the order for costs
in favour of the claimant due to an issue that it abandoned, namely a
contention that the defendant had remained tenant in the premises after 28
September 1999. The issue between the parties on that concerned, as I understand
it, whether certain notices had been served and received.
The point involved research of fact, very limited, if any, research
of law, and preparation and exchange of witness statements. I understand both
parties to agree, in my view consistently, with common sense and the rules,
that if I think it right to allow for this factor it should be by way of a
deduction from the claimant’s costs of a proportionate amount. Mr Lewison says
half the costs should be deducted, on the basis that the defendant should be
treated as having had its costs of this abortive issue, the costs would have
accounted for a quarter of the total costs and, therefore, properly reflecting
that in a deduction from the claimant’s costs would involve the claimant having
half his costs.
I do not quarrel with the mathematics, but I quarrel with the
percentage; it seems to me that that is much too much. To my mind, the right
sort of figure is 5%, in light of the wide-ranging issues on the main matter,
which I had to decide, and the comparatively small range of issues on the
question, which was abandoned. In arriving at 5%, I also bear in mind the issue
of loss of rent while the works were carried out; and the costs of the notice
were going to be argued, but the claimant also abandoned that. Mr Lewison
realistically does not suggest that they justify a further deduction, but says,
rightly to my mind, that I should bear them in mind when I consider the
appropriate deduction.
Bearing in mind the risk of whatever is the opposite of double
counting if I think 5% is right, then I arrive at the conclusion that the
claimant should have 90% of its costs up to 15 May 1999 and the defendant
should have its costs thereafter.
