Landlord and tenant — Terminal dilapidations — Effect of tenant demand for new specifications — Negative reversionary value — Whether cost of repairs measure of damages — Proper application of limit applied by section 18(1) of the Landlord and Tenant Act 1927 to negative reversionary value
By an
underlease dated September 11 1981 the plaintiffs held a term for 99 years
(less 10 days) from June 24 1981 of 150,000 sq ft of office premises the rent
for which was agreed at £3,396,000 in respect of the September 1991 rent
review. By a subunderlease dated January 31 1985 the defendants held a term of
parts of the building giving up possession of most parts of their demise upon
the exercise of a break clause on September 29 1991. By the subunderlease the
defendants covenanted to keep the interior of the demised premises in a good
and tenantable repair and condition and to yield up in such repair and
decorative conditions in accordance with the covenants. Three of the floors of
the premises were eventually let to W Ltd in October 1992 to whom was paid
£690,000 by the plaintiffs, being an estimate of the sum required to bring the
premises up to the normally accepted letting condition. The plaintiffs claimed
damages from the defendants based on a terminal schedule of dilapidations,
contending that the cost of carrying out the disputed repairs was the proper
measure of damages. Because the plaintiffs had not carried out any repairs, the
defendants submitted that the plaintiffs had not suffered any loss and the cost
of repairs was not the appropriate measure: the rule in Joyner v Weeks
[1981] 2 QB 31 should not be applied in the light of dicta in Tito
v Waddell (No 2) [1977] Ch 106 at p332. Further, that
section 18(1) of the Landlord and Tenant Act 1927 limited the diminution in
value of the reversionary interest because in current market conditions
incoming tenants required specification changes, which would render unnecessary
certain repairs.
law the damages are the diminution of the landlords’ reversionary interest and
events after the determination of the lease do not affect the matter except
that they may be evidence of what was in prospect at the time the lease came to
an end. Having regard to the necessity to pay the sum to W Ltd, the plaintiffs
suffered damages notwithstanding the negative value of their
possible guide in the assessment of damages. As the defendants were liable for
only some of the items of disrepair, the only way of assessing that part of the
difference in value of the reversion was by examining the cost of repairs and
then applying the limit imposed by section 18(1) of the Landlord and Tenant Act
1927. In determining the diminution in value for the purposes of the first limb
of section 18(1), a test derived from Cunliffe v Goodman [1950] 2
KB 237 was appropriate: viewing the question as at the date when the covenant
ought to have been performed, was it inevitable, either because of a settled
intention of the landlords, or for some other extraneous reason that the
premises would be pulled down or altered in such a way as to cause diminution
of the value of the reversion. On the evidence, what was bound to happen and
what was reasonably foreseeable was that the incoming tenant would use the
disrepair as a bargaining point so that the value of the plaintiffs’ reversion
was diminished. In considering the application of section 18(1) to the gross
costs of repairs and loss of rent, the plaintiffs’ reversionary interest always
would have had a negative value and one had to assume a transaction under which
something was paid to the transferee of the interest. The diminution in the
reversionary interest was the difference between the amount which would have
been paid by the willing transferor of that interest to the willing transferee
if the premises were delivered up in a condition in conformity with the
covenants and the amount paid out by the willing transferor to the willing
transferee if the premises were delivered up in their actual condition. Because
the common law claim was greater than the diminution in value so assessed,
judgment would be for the latter.
The following
cases are referred to in this report.
Bwllfa &
Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd
Waterworks Co [1903] AC 426
Crown
Estate Commissioners v Town Investments Ltd
(National Westminster Bank plc, third party) [1992] 1 EGLR 61; [1992]
08 EG 111
Cunliffe v Goodman [1950] 2 KB 237; [1950] 1 All ER 720, CA
Hanson v Newman [1934] Ch 298
James v Hutton and Cook [1950] KB 9; [1949] 2 All ER 243, CA
Jones v Herxheimer [1950] 2 KB 106; [1950] 1 All ER 323, CA
Joyner v Weeks [1891] 2 QB 31
Salisbury
(Marquess of) v Gilmore [1942] 2 KB 38
Smiley v Townshend [1950] 2 KB 311; [1950] 1 All ER 530; [1950] EGD
139; (1950) 155 EG 110, CA
Tito v Waddell (No 2) [1977] Ch 106; [1977] 2 WLR 496; [1977] 3
All ER 129
Westminster
(Duke of) v Swinton [1948] 1 KB 524; [1948]
1 All ER 248
Wigsell v School for Indigent Blind (1882) QBD 357
This was a
claim for damages by the plaintiffs, Shortlands Investments Ltd, against the
defendants, Cargill plc, on terminal dilapidations relating to premises at 3
Shortlands Road, Hammersmith, London.
Michael
Driscoll QC and Erica Foggin (instructed by Forsyte Kerman) appeared for the
plaintiffs; Joseph Harper QC and Jonathan Karas (instructed by Slaughter &
May) represented the defendants.
Giving
judgment, Judge Bowsher QC
said: The plaintiffs claim damages for dilapidations on the termination of a
tenancy of office premises. The claim is now limited to £304,599 plus interest
from September 29 1991.
The defendants
admit that there were some wants of repair and decoration on the termination of
the tenancy, but dispute other allegations of disrepair. It is agreed that the
cost of remedying the defects admitted by the defendants would be in excess of
£50,000. On the latest admissions, the figure admitted would be about
£56,386.77.
The defendants
say that despite their admissions, and despite whatever else might be proved
against them, they are not liable to pay anything to the plaintiffs for two
reasons:
1. At the time
of the termination of the tenancy, it was inevitable that any incoming tenant
would require a new fit-out of the premises, which would remove any disrepair.
2. Such
disrepair as there was did not give rise to any diminution in value of the
plaintiffs’ reversion, which had a negative value.
The plaintiffs
contend that there was a diminution in value of the reversion equivalent in
amount to the total of both the cost of remedying the breaches and the loss
suffered while the remedial works were to be carried out.
The
premises
At the London
end of what has been called ‘the M4 corridor’ there have been built a number of
office blocks. In particular, in Hammersmith, there was a considerable quantity
of building in the 1980s. In about 1980, the building the subject of this
action was completed. It is an impressive glass-clad building at 3 Shortlands Road,
rated by one of the witnesses as nine out of 10 for Hammersmith office
buildings.
The building
was constructed in 1979–80. It is a substantial office block providing
approximately 150,000 sq ft of office accommodation on ground, mezzanine and
nine upper floors. It has a leisure centre and restaurant on the ground and
mezzanine floors for the use of occupiers. Those facilities are also available
to a small number of members of the public on a membership basis. The building
comprises four wings (the north wing, the south wing, the east wing and the
west wing) arranged around a central core. Each floor consists of approximately
16,000 sq ft of accommodation. The office accommodation is fitted throughout
with variable air-volume air-conditioning, perimeter convector heating,
three-compartment underfloor trunking and suspended ceilings. The building is
conveniently located in that it is within minutes (by car) of the M3, M4 and
M40 motorways, and within minutes (on foot) of the Metropolitan and District
Underground lines.
Leases and
underleases of the premises
There have
been some complex property transactions in relation to the plaintiffs’ interest
in the property. Those transactions are of little importance to the present
action, having taken place within one group of companies and the owners of
those companies. The claim is effectively an action brought by a firm of
consulting engineers, Sir William Halcrow & Partners, through a company
which it owns.
It is agreed
that, in relation to the premises in question, the plaintiff company is to be
regarded as an investment company.
The freeholder
of the building is Hammersmith and Fulham London Borough Council. On September
11 1981 the borough granted a lease of the whole of the building to Norwich
Union Life Assurance Society for a term of 99 years from June 24 1981. Norwich
Union granted an underlease on the same day, September 11 1981, of the whole of
the building to the partners of Sir William Halcrow & Partners for a term
of 99 years less 10 days from June 24 1981. That is the plaintiffs’ underlease.
The partners
of Sir William Halcrow & Partners occupied the premises and other parts of
the building from about 1981 until about 1985. From early 1985 Sir William
Halcrow & Partners continued to occupy only small parts of the building.
On October 30
1990 the plaintiffs took an assignment of the underlease of the building.
The
defendants’ subunderlease, the subject of these proceedings, was granted on
January 31 1985 by partners of Sir William Halcrow & Partners to the defendants.
On October 28
1990 the defendants granted a sub-subunderlease of the south wing of the
seventh floor to General Electric Technical Services Co for a term of years
from June 24 1989 to September 28 1996.
On December 21
1990 the defendants exercised a break option contained in clause 9(ii) of the
subunderlease bringing their interest in the property personally occupied by
the defendants to an end on September 29 1991.
General
Electric Technical Services Co remained in occupation of the south wing of the
seventh floor after September 29 1991. Their leasehold interest contains
obligations in respect of repair and alterations in similar terms to the
obligations in the defendants’ subunderlease and no claim is made by the
plaintiffs in respect of the south wing of the seventh floor.
The present
action accordingly concerns only the fifth, sixth and a part of the seventh
floors of the building.
It is agreed
between the parties that the relevant date for the assessment of damages, if
any, is September 29 1991.
The
defendants’ subunderlease, in clause 3, contains the following terms:
The tenant …
hereby covenants with the landlords as follows: …
(iii)(a) To
keep the interior of the demised premises including the internal plaster faces
of the boundary walls that enclose the demised premises and all additions
thereto and the Landlord’s fixtures thereon properly cleansed and in good and
tenantable repair and condition (damage by Insured Risks excepted)
(b) To renew
as necessary the carpets laid in the demised premises to such a standard as
shall be reasonably required by the Landlords and in the case of the last
renewal before the determination of this subunderlease in such colour as shall
be reasonably required by the Landlords
(iv) In or
before One thousand nine hundred and eighty-six and thereafter once in every
five years of the term (but no more than five years shall elapse between each
successive painting and treating as set out hereunder) and in the last year of
the term (howsoever determined) in a proper and workmanlike manner to paint
with two coats of good quality paint (the tint or colour thereof used in the
last year of the term to be approved by the Landlords) paper whitewash
colourwash distemper grain varnish french or wax polish and otherwise to
decorate to the reasonable satisfaction in all respects of both the Head
Lessor’s Surveyor and the Landlord’s Surveyor such parts of the interior of the
demised premises as have been previously or usually or which ought to be so
treated and as often as may be necessary to clean and treat in a suitable
manner for its maintenance in good condition all the inside wood and metal work
and polished stone not requiring to be painted polished or distempered and to
clean all tiles glazed bricks and similar surfaces …
(x) Not
without the prior written consent of the Landlords and the Superior Landlords
(such consents not to be unreasonably withheld) … to cut maim or injure or
permit or suffer to be cut maimed or injured any of the walls or structural
members of the demised premises or the buildings nor without such consents to
make or maintain or permit or suffer to be made or maintained any other
alteration or improvement or any external projection on the front thereof or
any material change or addition whatsoever in or to the demised premises
(including the cables wiring light fittings and the Landlords’ fixtures
therein) or any part thereof (provided
always that the Tenant shall be entitled to carry out works of an
internal non-structural nature without such consents) …
(xxxiii) To
yield up the demised premises with all Landlords’ fixtures and additions
thereto wires cables and lighting apparatus and pipes at the determination of
the term in such repair and decorative condition as shall be in accordance with
the covenants hereinbefore contained.
There are no
terms of the defendants’ lease requiring the tenants to reinstate internal
non-structural alterations at the end of the term. As a result, it has been
common ground that it was permissible for the tenants to remove extensive
non-structural alterations without making good the unsightly results of the
removal.
There are
terms of the plaintiffs’ lease which forbid assignment or other disposal by
them of parts of their tenancy except by subletting on a full market rent.
Those terms contribute to the difficulty of assessing damages.
History
after exercise of the break option
At the same
time as the defendants exercised their break option, other tenants also
exercised break options so that on September 29 1991 almost half of the
building became empty. The exercise of the break options was no doubt connected
with the fact that the commercial property market was collapsing badly. In this
action it has been described as ‘in free fall’, and in September 1991 no one
knew where it would all end. The position of the plaintiffs as pig in the
middle, having to pay rent subject to an upwards-only revision and other
outgoings with much reduced income coming in, was described by one of their
advisers as ‘dire’. To make matters worse, overbuilding in the 1980s resulted
in there being much unoccupied new office space and the plaintiffs were
competing for tenants with the owners of brand new buildings.
The detailed
history is as follows:
The building
was occupied immediately prior to September 29 1991 as follows:
Ground floor
(south & west wings)
Reception area
and otherwise occupied by Halcrow Fox and by the building superintendent.
Ground floor
(north east wings)
Let to OKI
whose lease expired on September 28 1991 when OKI vacated
1st and 2nd
floors
Let to Chase
Manhattan Bank NV who exercised an option to break their lease effective
September 29 1991
3rd floor
Let to ITM
Corporation Ltd
4th floor
Let to General
Electric
5th, 6th
floors west and south wings of 7th floor
Let to the
defendants
South wing
7th floor
Sublet by
defendants to General Electric, who remained in occupation after September 29
1991
North &
East wings of 7th floor, 8th and 9th floors
Let to General
Electric
On December
1990 the defendants served notice of their intention to exercise their
contractual right to break the lease with effect from September 29 1991.
In May 1991,
Kemp & Hawley, the plaintiffs’ managing agents, gave advice to the
plaintiffs in relation to the building as a whole. Mr Peter Beckett frics, of that firm, gave evidence both as to the
facts of what he saw and did at the relevant time, and as to opinion of
valuation. He advised that the defendants’ premises were fitted out to a good
standard, but that there would be a need to consider serving the defendants
with a schedule of dilapidations related to the end of the tenants’ tenancy. By
mid-1991, the plaintiffs faced the prospect of some 45% of the office space in
the building becoming vacant by September 29 1991 at the same time as an upwards
review of the rent payable by them under their own underlease of the whole of
the building. As well as losing the defendants as tenants of the premises the
plaintiffs were to lose OKI as tenant of part of the ground floor and Chase
Manhattan’s first and second floors. It was recognised by Kemp & Hawley in
May 1991 that the condition of Chase Manhattan’s first and second floors was
poor and worse than that of the defendants’ and OKI’s. Chase Manhattan used
their part of the premises as a training centre and the poor state of repair
and decoration was obvious even before they had moved out. In the case of other
tenants, the disrepair and need for redecoration was more obvious after they
had moved out. When tenants’ fittings and furniture were moved, deficiencies in
the decorations and state of repair were revealed. Mr Beckett described the
defendants as good tenants. I accept the evidence of Mr Beckett in these as in
most other respects.
On September 5
1991 the plaintiffs served a schedule of dilapidations on the defendants
following an inspection of the premises by Watkinson & Cosgrave, chartered
building surveyors. The defendants did not attempt to do all the work specified
in the schedule and by September 29 1991 the defendants had vacated the
premises save that their contractors returned shortly afterwards to complete
the removal of certain items of equipment. The premises were reinspected by
Watkinson & Cosgrave on October 30 1991 and a revised schedule of
dilapidations was produced as a result of that reinspection. Evidence was given
in support of those schedules by Mr J W Goedecke frics of Watkinson & Cosgrave. Since service of those schedules, the
plaintiffs have conceded that the defendants are not obliged to remove the
non-structural partition walls, which they installed, nor to replace carpets.
As I have already indicated, some of the items in the schedules are admitted
(subject to allegedly overriding defences) and some are disputed.
As at
September 29 1991 the plaintiffs had not made any decision as to what works, if
any, they would carry out to the premises the subject of this action. Those
premises together with the other vacant office space in the building were being
marketed as they were. In the meantime the plaintiffs, through Kemp &
Hawley, were negotiating with Norwich Union, the headlessee, whose agents were
Strutt & Parker, with regard to the market rent for the whole of the office
space in the building as at September 29 1991. For this purpose Kemp &
Hawley were seeking as low a figure as possible and they suggested to Strutt
& Parker on November 13 1991 a rent of £22.50 psf. Strutt & Parker
rejected that figure as quite unacceptably low.
In December
1991 Kemp & Hawley advised the plaintiffs to settle their rent review
negotiations with their own tenants and their own landlord on the footing that
the agreed market rent for office space in the building as at September 29 1991
was £23.50 psf. Kemp & Hawley advised the removal of the partitions and the
carpets from the first and second floors formerly let to Chase Manhattan which
‘present very badly’, but did not advise that any work needed to be done to the
premises formerly occupied by the defendants or to OKI’s former office space
for the time being.
In January
1992 the plaintiffs and Norwich Union, their landlord, agreed the market rental
value of the building as at September 29 1991 at £3,396,000 pa, which was
considered to establish ‘the market rental value of the building let on
conventional occupational leases on a floor by floor basis’ at £23.50 psf.
In a written
agreement made by the parties’ valuers for the purpose of this action, it was
agreed that the rent reviews with the plaintiffs’ tenants in the building, all
with a view to agreeing or determining the market rent as at September 29 1991,
were settled by agreement and the basis of the settlement was a rent for a
typical floor at £385,000 pa, which is equivalent to £23.50 psf.
The premises
previously occupied by the defendants remained unlet, although interest in them
was being shown by Walt Disney. After some negotiation, Mr Beckett on behalf of
the plaintiffs made an offer to Walt Disney including the offer of a capital
sum by the plaintiffs which Kemp & Hawley stated they regarded as a sum
required
in order to
bring the space up to what we have described as ‘basic landlord’s standard’. By
this we mean the standard and condition when it was first let … Either our
client [the plaintiffs] will pay over the dilapidations moneys to your clients
[Walt Disney] or we will organise the work …
In that
letter, Mr Beckett offered a sum of about £660,000 to cover the outgoing
tenants’ dilapidations and, in addition, offered a sum not exceeding £750,000
towards Walt Disney’s fitting-out costs.
I accept Mr
Beckett’s evidence that the negotiations with Walt Disney genuinely reflected
the fact that work would have to be done to the premises to bring them up to
the standard and condition they were in when first let to the defendants and
that as between the plaintiffs and Walt Disney that cost would have to be borne
by the plaintiffs with the plaintiffs being left to obtain compensation from
their former tenants. The negotiations with Walt Disney did not result in a
letting to Walt Disney.
By June 1992
the plaintiffs were in negotiations with Waste Management International
Services Ltd (‘WMI’) for the letting of the fifth and sixth floors, and also
the second floor of the building.
WMI later
revealed that they intended to carry out a substantial refurbishment of the
second, fifth and sixth floors. That refurbishment put the fifth and sixth
floors into a far higher standard of fitting out than they had previously
enjoyed.
On October 13
1992 the plaintiffs concluded an agreement with WMI to let the second, fifth
and sixth floors of the building to WMI. By clause 2(5) of that agreement the
plaintiffs agreed to pay to WMI £690,000 plus VAT, which was expressed to be
‘the tenant’s estimate of the sum required to bring the premises up to the normally
acceptable condition for the letting of such premises by a landlord’. Mr
Beckett stated in evidence that the sum of £690,000 plus VAT represented an
estimate for carrying out the works required to bring the floors up to a
‘landlord’s basic standard’, that is, the works required to be carried out by
the schedules of dilapidations prepared in respect of those floors. In his
written factual evidence in chief, Mr Beckett wrote and attested:
The payment of
£690,000 plus VAT was discussed and agreed specifically in the light of the
state of the premises. It was in this context alone that it was agreed, whereas
the other concessions … were accepted as being the normal concessions that had
to be given to reflect the market for premises in good repair at that time.
This sum was
intended to represent the cost of bringing the premises up to a ‘landlords
basic standard’. The tenants were provided with a copy of the costed schedule
of dilapidations and estimates for the necessary works by me during the course
of the negotiations as guidance to the standard the landlord was seeking and
the likely cost. The cost estimates that I used for the purpose of my
negotiations were based on works being carried out in respect of the first
floor. The estimate was for about £200,000 per floor. The second floor was in a
completely unacceptable condition. However, when one came to examine the
required repairs and redecoration to those floors the actual cost of works
would not have been very much different.
However, they
would not accept my calculations nor the figure that I offered. They made it
clear that the figure of £690,000 plus VAT was not negotiable. Mike Roberts of
Gooch and Wagstaff told me that he had a costing done but I was never shown
that costing. My figures were based on an estimate of the direct cost of the
works. Taking into account the risk that the actual cost would be higher and
the indirect cost of the works, such as financing costs, I was persuaded that
it would not be possible to persuade WMI to move from its figure.
In
cross-examination, Mr Beckett qualified his evidence. He was not sure that he
had sent a copy of the costed schedule of dilapidations to WMI’s agents, though
he did send it to either WMI or Walt Disney. He accepted that there was no
relation between the figure of £690,000 and the £105,000 claimed from the
defendants as the cost of doing the works (exclusive of other costs). Mr
Beckett explained that WMI were not interested in the legal liability of the
defendants to the plaintiffs: for example, they were dissatisfied with the
state of the carpets and accordingly demanded payment for carpets even though
the plaintiffs do not now claim payment from the defendants for carpets. Mr
Beckett did, however, contend that the £690,000 was closely related in amount
to the damage to the reversion calculated by a different method.
It is plain
from Mr Beckett’s evidence that he did not negotiate the figures in the
schedule of dilapidations with the representative of WMI figure by figure in
the way that a landlord’s building surveyor might discuss these figures with
the surveyor to an outgoing tenant. However, it is equally plain from his
evidence that the fact that the premises were in disrepair gave to WMI a
bargaining counter, which enabled them to demand and obtain a sum specifically
for the disrepair in addition to the other payments and special terms for which
they were able to negotiate as incentives to take the lease.
In his written
statement dated April 29 1994, Mr Beckett stated:
I agree with
the general principle that [in September, 1991] landlords were offering very
attractive incentives to incoming tenants. The vital question is: would a
‘reasonable landlord/developer’ offer an incoming tenant a sum of money to
repair and redecorate the premises when they were in a good state of repair and
decoration already? One has only to ask the question to answer it. If the
condition of the premises was sub-standard because of failure to repair and
decorate, logically the landlord would have had to offer bigger incentives than
if the premises were in a good state of repair and decoration. No amount of
mixing up of repair and decoration on the one hand and ‘fitting out’ on the
other can defeat this logic.
Later in the
same document, in answer to Mr Lyall’s argument about the premises having a
negative value, Mr Beckett stated:
If the value
[of the premises] is somewhat negative in value in repair, then it is yet more
negative out of repair.
I accept all
of that evidence from Mr Beckett and I reject the evidence of Mr Stephen Lyall
where it is opposed to Mr Beckett’s evidence. Mr Lyall is an expert who came on
the scene fairly recently.
logic. He was very ready to draw inferences adverse to the plaintiffs from
documents which he read only after the event. Mr Beckett, on the other hand,
seemed to be a very honest witness as to the facts of which he had first-hand
knowledge, including the negotiations with WMI, and he gave his evidence of
opinion modestly and with a willingness to make proper concessions and his
evidence appeared logical and sensible.
Three leases
were subsequently granted by the plaintiffs to WMI of the second, fifth and
sixth floors of the building, each being for the residue of 25 years for
September 29 1991 at a rent of £302,000 pa.
WMI carried
out substantial works of refurbishment to the second, fifth and sixth floors.
Those works included some of the remedial works which the plaintiffs allege the
defendants should have carried out. Having conducted a view of the building I
have seen enough of the WMI premises in their present condition to obtain a
general impression of them. It is quite clear that, as has been said in
evidence, on September 29 1991, no one could have been expected to foresee that
a future tenant would outfit the premises to the very high standard chosen by
WMI. The defendants contend that that extensive and lavish refit rendered the
claimed repairs unnecessary.
The south and
west wings of the first floor were subsequently let by Halcrow Properties Ltd
who had acquired the plaintiffs’ leasehold interest in the building on November
1 1992 to Office Angels Ltd (‘OA’) on March 2 1993 for a term of 10 years from
September 29 1991 at an initial annual rent of £192,000 pa. OA did not carry
refitting works to anything like the standard of WMI’s works nor were the
premises let to OA after substantial refitting works had been carried out to
them, but OA did replace the ceiling tiles with more modern ceiling tiles.
The west wing
of the seventh floor was subsequently let by Halcrow Properties Ltd to General
Electric in December 1993. GE did not carry out any substantial refitting works
nor were the premises let to General Electric after substantial refitting works
had been carried out to them.
The ground
floor is let to Hanes, who have not changed the ceiling.
The
approach to assessment of damages
In the light
of both the admitted and the disputed breaches of covenant, what is the correct
approach to the assessment of damages?
Leading
counsel for the plaintiffs and the defendants put forward conflicting
submissions. The plaintiffs rely on a conservative view of a well-known line of
authorities on dilapidations cases which they submit are binding on all courts
except possibly the House of Lords. The defendants submit, however, that those
authorities ought to be read in the light of decisions on damages of more
general application.
The first
question to be considered is: What is the measure of damages to which the
plaintiffs would be entitled but for section 18(1) of the Landlord and Tenant
Act 1927?
The leading
text books state the approach to be as follows: Woodfall’s Law of Landlord
and Tenant (1993) para 13.081 p13/60 reads:
At common law
the measure of damages for breach of covenant to leave in repair at the end of
the term was the cost of putting the premises into the state in which the
tenant ought to have left them … In addition the landlord is entitled to
damages of loss of rent during the period needed to carry out the repairs.
McGregor on
Damages, 15th ed paras 1001 to 1003 reads:
1001 Where the action is commenced after the expiration or earlier
determination of the term the damages at common law are such a sum as will put
the premises into the state of repair in which the tenant was bound to leave
them. The first clear judicial holding that this was the proper measure is that
of Denman J in Morgan v Hardy followed by the Court of Appeal in
the leading case of Joyner v Weeks. In this latter case the
choice between the two measures of cost of repairs and diminution in the
reversion’s value was directly before the court, and it was decided that the
former represented the true measure; whether or not it exceeded the latter was
a question that need not be explored. Lord Esher MR said that to award the cost
of repairs was such an inveterate practice as to amount to a rule of law, while
Fry LJ regarded such a rule as one of great practical convenience since it was
far simpler than the alternative one and he had no hesitation in endorsing it.
Megarry VC in Tito v Waddell (No 2) questioned whether this case
did indeed lay down that cost of repairs was the invariable rule of damages,
but that this was the universal interpretation is clear from the decisions
dealt with below, and from the intervention of statute, otherwise uncalled for,
in the form of Section 18(1) of the Landlord and Tenant Act 1927.
1002 The cost of repairs is the short way of expressing the normal
measure; more precisely it should be expressed, as by Wright J in Joyner
v Weeks, as the cost of repairs with some allowance for loss of rent or
occupation during repair and with some deduction, where proper, by reason of
substitution of new for old …
1003 The cost of repairs would in the normal case properly represent the
extent to which the lessor has been injured by the breach. But where the
circumstances were such that the loss to the lessor was less by reason of the
fact that the repairs were not to be done completely or so thoroughly or were
to be done by a third party at no expense to the lessor the normal measure
still applied: all these factors were in effect held to be collateral and did
not go in mitigation. Thus no reduction of the damages was made in all the
following circumstances: (1) where the landlord had decided before the end of
the lease to pull down the buildings and had done so before action: Inderwick
v Leech; (2) where the lessor had made an agreement with a third party
to grant him at the end of the defendant’s term a new lease under which the
buildings were to be pulled down by the third party, the conditions of the
premises having formed, it was said, no ingredient in the price: Rawlings
v Morgan; (3) where, owing to a deterioration in the neighbourhood, the
premises would command as high a rent even though the covenant to repair was
not strictly complied with: Morgan v Hardy followed in Anstruther-Gough-Calthorpe
v McOscar; (4) where the Plaintiff had granted a new lease to a
third party to run from the expiration of the defendant’s lease under which the
third party covenanted to repair, so that the performance of the defendant’s
covenant to repair was a matter of pecuniary indifference to the plaintiff; Joyner
v Weeks.
The plaintiffs
rely heavily on Joyner v Weeks [1891] 2 QB 31, where Lord Esher
said at p43:
… for a very
long time there has been a constant practice as to the measure of damages in
such cases. Such an inveterate practice amounts, in my opinion, to a rule of
law. That rule is that, when there is a lease with a covenant to leave the
premises in repair at the end of the term, and such covenant is broken, the
lessee must pay what the lessor proves to be a reasonable and proper amount for
putting the premises into the state of repair in which they ought to have been
left. It is not necessary in this case to say that it is an absolute rule
applicable under all circumstances; but I confess that I strongly incline to
think it is so. It is a highly convenient rule … it is … I think, at all
events, the ordinary rule …
In Joyner
v Weeks the court disregarded the fact that before the lease expired the
landlord had entered into a contract with a new tenant under which the tenant
was to pull down part of the premises and repair the rest.
Without being
so blunt as to say so, counsel for the defendants in effect invited me to hold
that there was no such rule of law as was stated by Lord Esher. Counsel did
expressly invite me to hold that it was not an invariable rule of law and did
not apply in this case. Counsel relied first on James v Hutton and
Cook [1950] KB 9, an appeal from an official referee. In that case a
tenant, under licence, took down a shop front and erected a new one on terms
that he would replace it on request. The premises were requisitioned by the War
Department in 1941 and apparently were still requisitioned in 1949. In the
circumstances, it was not surprising that the official referee and the Court of
Appeal decided that the landlord had suffered no loss from the shop front not
being put back into its previous condition. In that case, Lord Goddard CJ,
giving the judgment of the Court of Appeal (sitting with Tucker and Singleton
LJJ) expressly approved the decision in Joyner v Weeks, but added
(at p16):
… that case
must be regarded as proceeding on the footing that the plaintiff suffered damage
by the tenant yielding up the house out of repair. We see no ground here for
assuming that the plaintiff in this case has suffered any damage at all.
Counsel also
relied on certain extracts from Megarry V-C in Tito v Waddell (No 2) [1977]
Ch 106 at p332. After some discussion of
which have been cited to me, Megarry V-C said at p332C:
… if the
plaintiff has suffered little or no monetary loss in the reduction of value of
his land, and he has no intention of applying any damages towards carrying out
the work contracted for, or its equivalent, I cannot see why he should recover
the cost of doing work which will never be done. It would be a mere pretence to
say that this cost was a loss and so should be recoverable as damages.
In the
absence of any clear authority on the matter before me, I think I must consider
it as a matter of principle. I do this in relation to the breach of a contract
to do work on the land of another, whether to build, repair, replant, or
anything else: and I put it very broadly.
First, it is
fundamental to all questions of damages that they are to compensate the
plaintiff for his loss or injury by putting him as nearly as possible in the
same position as he would have been in had he not suffered the wrong. The
question is not one of making the defendant disgorge what he has saved by
committing the wrong, but one of compensating the plaintiff. In the words of
O’Connor LJ in Murphy v Wexford County Council [1921] 2 IR 230, 240:
‘You are not
to enrich the party aggrieved; you are not to impoverish him; you are, so far
as money can, to leave him in the same position as before.’
Second, if
the plaintiff has suffered monetary loss, as by a reduction in the value of his
property by reason of the wrong, that is plainly a loss that he is entitled to
be recouped. On the other hand, if the defendant has saved himself money, as by
not doing what he has contracted to do, that does not of itself entitle the
plaintiff to recover the saving as damages; for it by no means necessarily
follows that what the defendant has saved the plaintiff has lost.
Third, if the
plaintiff can establish that his loss consists of or includes the cost of doing
work which in breach of contract the defendant has failed to do, then he can
recover as damages a sum equivalent to that cost. It is for the plaintiff to
establish this: the essential question is what his loss is.
Fourth, the
plaintiff may establish that the cost of doing the work constitutes part or all
of his loss in a variety of ways. The work may already have been done before he
sues. Thus he may have had it done himself, as in Jones v Herxheimer [1950]
2 KB 106. Alternatively, he may be able to establish that the work will be
done. This, I think, must depend on all the circumstances, and not merely on
whether he sues for specific performance.
Counsel also
relied on a passage from Megarry V-C’s judgment at p329 where, commenting on Joyner
v Weeks, he said:
I know that
in Westminster (Duke) v Swinton [1948] 1 KB 524, it was said that
in Joyner v Weeks it had been held that ‘the cost of repairs was
the measure of damages in all cases,’ and that in the latter case Lord Esher MR
had said that he was very much inclined to think that this was an absolute
rule. But he expressly refrained from holding that this was so; and what both
he and Fry LJ actually decided was that it was ‘the ordinary rule,’ or ‘the ordinary
prima facie rule,’ and that it was subject to there being no
circumstances which made it inapplicable …
By way of
further comment on Westminster v Swinton, it should be
added that Denning J, the judge at first instance, was not applying Joyner
v Weeks, he was distinguishing it. At p533 he said:
As to damages
for breaches of these covenants, the decision of Atkinson J in the case of Eyre
and Another v Rea must not be taken as a decision that in every
breach of this kind the cost of reinstating the premises is the measure of
damages. I am sure Atkinson J did not mean that. The position is that in Joyner
v Weeks, it was held by the Court of Appeal that on a breach of
covenant to deliver up in repair at the end of the lease, the cost of repairs
was the measure of damages in all cases, even though the money was not going to
be used on repair, and even though the premises were going to be pulled down
next day. That was never applied to cases of covenants to keep in repair during
the term, see Conquest v Ebbetts.
I am very
conscious that the function of damages in civil actions is to compensate the
plaintiffs, not to punish the wrongdoer. That is a principle which has been
forgotten all too often in modern cases. Plainly, if the plaintiffs have
suffered no damage, or only minimal damage, one does not begin to assess
damages. But here, in the light of my view of the evidence of Mr Beckett, it is
plain that the plaintiffs did suffer damage. If the premises had been
delivered up in a state of good repair and decoration the premises would have
had a negative value, but as they were delivered up in a bad condition, they
had a worse negative value. That worse negative value was evidenced by
subsequent events when Mr Beckett had to offer a very large sum of money
specifically related to the condition of the premises. It would be unfair to
the defendants to say that the whole of the money paid to the incoming tenants,
WMI, in respect of disrepair represented the loss to the plaintiffs from the
defendants’ breaches, because, in part, that money was related to matters (like
carpets) which are not the responsibility of the defendants under the terms of
the lease.
So there are
damages to assess. How should they be assessed?
The defendants
submit that the rule in Joyner v Weeks appears to have arisen at
a time before courts became used to dealing with complicated principles of
valuation. By implication I am asked to reject the rule. It is, however, quite
clear that so far as the Court of Appeal expressed itself as stating a rule
(and there were limits to the expression of the rule), the rule in Joyner
v Weeks stands today subject only to section 18 of the Landlord and
Tenant Act 1927: Hanson v Newman [1934] Ch 298; James v Hutton
and Cook [1950] KB 9. Jones v Herxheimer [1950] 2 KB 106; Smiley
v Townshend [1950] 2 KB 311. Bwllfa & Merthyr Dare Steam
Colleries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 relied
on by the defendants is irrelevant because in the different circumstances of
that case the House of Lords held that statutory compensation (not damages) was
to be assessed not by relation to a fixed date (the giving of a counternotice)
but by reference to what the coal owners would have made out of the coal during
the whole time it would have taken them to get it.
At common law,
the proper measure of damage is the difference in value of the reversion at the
end of the lease between the premises in their then state of unrepair and in
the state in which they would have been if the covenants had been fulfilled.
Matters happening after the lease came to an end do not affect the matter
except that they may be evidence of what was in prospect at the time the lease
came to an end. In most cases the cost of repairs is a good guide to the
difference in value of the reversion.
In this case,
the cost of repairs seems to me to be the best possible guide in the assessment
of damages. As at the end of the lease, one of the matters to be taken into
account in valuing the reversion in its actual state was the consideration that
any incoming tenant would demand a sum of 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 tenants’ covenants. In this case, the
actual disrepairs were greater than the disrepairs for which the outgoing
tenants were responsible, so the only way of assessing that part of the
difference in value of the reversion for which the tenants were responsible is
by examining the cost of repairs and then applying to that the ‘cap’ imposed by
the 1927 Act.
Section 18(1)
of the Landlord and Tenant Act 1927 imposes a limit on the common law measure,
but does not alter the method of its assessment: Crown Estate Commissioners
v Town Investments Ltd [1992] 1 EGLR 61 at p63H.
Section 18(1)
imposes a limit on the recoverable damages in the following terms:
Damages for
breach of a covenant … to keep or put premises in repair during the currency of
a lease, or to leave or put premises in repair at the termination of a lease …
shall in no case exceed the amount (if any) by which the value of the reversion
(whether immediate or not) in the premises is diminished owing to the breach of
such covenant … and in particular no damage shall be recovered for a breach of
any such covenant … to leave or put premises in repair at the termination of a
lease, if it is shown that the premises, in whatever state
of repair they might be, would at or shortly after the termination of the
tenancy have been or be pulled down, or such structural alterations made
therein as would render valueless the repairs covered by the covenant.
The words in
section 18 after the words ‘and in particular’ on their literal meaning are not
relevant to this action. There was no demolition and there were no structural
alterations. However, since those words are plainly intended to be by way of
example, they may be some guide to the meaning of the earlier part of the
section.
Relying on Cunliffe
v Goodman [1950] 2 KB 237, a decision itself based upon the judgment of
Lord Greene MR in Marquess of
submitted that the courts have interpreted the expression ‘alterations … would
render valueless the repairs covered by the covenant’ as not being satisfied by
a mere foreseeability test. Counsel submitted that the test is whether at the
date of termination of the lease the landlord had formed a firm and settled
intention to carry out the alterations; if the landlord had considered the
possibility, but not reached a definite decision, then the tenant failed to cap
the damages otherwise payable at common law. Counsel went on to argue that as
the test for the second limb of section 18(1) requires evidence of a definite
intention on the part of the landlords to carry out the relevant works, then
where the tenants rely upon future works for the purpose of the first limb of
section 18(1) the test should be no different, that is, it is not a matter of
mere foreseeability but of definite intention as at the date of termination of
the lease.
I agree with
counsel for the plaintiffs that construction of the second part of section 18
is helpful in construing the first part of that section, but the test he
proposes, that there must be a definite intention on the part of the landlords
to carry out the works, is too narrow.
In Cunliffe
v Goodman [1950] 2 KB 237 at p249, Cohen LJ said:
The question
then arises, what is the test by which the fate of the building as at the
relevant date — namely, the date at which the covenant ought to be performed —
is to be ascertained? I have already pointed out that a building may be
destined for demolition either because the landlord has so determined or
because some extraneous authority has decided to exercise its powers in that
behalf.
Plainly Cohen
LJ was putting forward that test very much with the facts of Cunliffe v Goodman
in mind.
A test which
would be in keeping with the decision of Cunliffe v Goodman and
which would encompass the facts of this case (and no doubt some others) is as
follows:
Viewing the
question as at the date when the covenant ought to have been performed, was it
inevitable, either because of a settled intention of the landlord, or for some
other extraneous reason that the premises would be pulled down or altered in
such a way as to cause diminution of the value of the reversion?
That test
would not be inconsistent with the final submissions of counsel for the
defendants, though he did not formulate a test in that way. I propose to apply
the test I have formulated.
Although the
reference in section 18 to alterations is limited to structural alterations, as
I have said, that reference is only by way of example and I do not read the
second part of the section as ruling out consideration of non-structural
alterations under the first part of the section if non-structural alterations
will cause material diminution to the value of the reversion. No doubt it did
not occur to the draftsmen of the Act that non-structural alterations were
likely to have an impact on the value of the reversion, but this is a case
where unusual market conditions combined with modern methods of building and
fitting out offices create a situation which perhaps could not have been
foreseen in 1927.
The defendants
make both a broad submission and a more narrow submission on this point. The
broad submission is based on the evidence of Mr Lyall. Mr Lyall said that,
because the plaintiffs were competing for tenants with other prospective
landlords who could offer modern office buildings, it was inevitable that any
incoming tenant would demand a modern fit-out. In particular, and by way of
example, the ceiling tiles were old fashioned in that they have two long sides
and two short sides, whereas the modern fashion is for square ceiling tiles: as
a result, existing damaged ceiling tiles could be replaced only by special
order. It was said that, regardless of the state of cleanliness and repair of
the ceiling tiles, any incoming tenant would want to replace the ceiling tiles
with square tiles and so any money spent on cleaning tiles or replacing
defective tiles would not improve the value of the reversion or — to put it
another way — the disrepair and lack of cleanliness of the ceiling tiles did
not result in diminution of the value of the reversion. The narrower
submission, and the only one put in the defendants’ final submissions in reply,
was that inevitably the partitions would be taken down by the incoming tenant
and therefore the carpets would be damaged and also the ceilings would be so
damaged that they would have to be replaced.
I reject both
those submissions on the facts. They are inconsistent with Mr Beckett’s
evidence, which I accept, and they are inconsistent with what in fact happened.
WMI and Office Angels have made substantial refits (though the refit by Office
Angels is much less extensive than that of WMI), including replacement of the
ceiling tiles with modem ceiling tiles. But other parts of the building are
occupied with ‘old-fashioned’ tiles, though many of the ‘old-fashioned’ tiles,
which I saw on a view during the trial, need cleaning. (I do bear in mind that
we are now three years after the relevant date.) WMI in particular wanted a
prestige head office, and have it. But as at September 29 1991 it could not
have been said that every incoming tenant would have such wishes. It has to be
remembered that one of the outgoing tenants used their premises as a training
school and appeared to be willing to use their premises with an old-fashioned
fit-out. Another tenant might well have come along with limited aspirations as
to fit-out, though I cannot believe that, however limited the aspirations of an
incoming tenant, the opportunity would have been missed to demand compensation
for disrepair. As regards the more limited submission, the damage caused by
movement of partitions, I reject that also. Certainly, the chances of an
incoming tenant wanting to use partitions in exactly the same positions as
those used by the outgoing tenant were slim in the extreme. Equally, once the
partitions were moved, it would become apparent that the carpet was worn in places
which would not ‘match’ the new positions of the partitions. But the carpet is
not now a part of the claim. It is not alleged to be relevant to the alleged
damage to the reversion and it can be disregarded. As to the ceiling, I do not
accept that it has been shown on the evidence that moving the partitions would
have caused such damage to the ceilings as to make it necessary to replace the
ceilings. Some damage to the ceilings might have been caused on moving the
partitions, and it might be that that part of the damage would have been the
responsibility of the plaintiffs to put right, but I do not accept such
evidence as there is that such damage would require total replacement of the
ceiling.
In summary, I
do not accept that any incoming tenant was bound to refit the premises in such
a way as to repair the defects left by the defendants, nor do I accept that it
was reasonably foreseeable that that would happen. What was bound to happen and
was reasonably foreseeable was what in fact did happen, namely that the
incoming tenant would use the disrepair as a bargaining point so that the value
of the plaintiffs’ reversion was diminished.
In the light
of those observations, I turn to consider the detailed assessment of damages.
In accordance with the approach taken by counsel for both parties, I begin with
the cost of works and the lost outgoings during the time taken for the works. I
shall then consider to what extent, if at all, the resulting figure should be
‘capped’ by a calculation under section 18 of the 1927 Act.
The cost
of works and associated costs
At common law
on the plaintiffs’ original figures, the damages would be:
|
Limb 1: |
£105,125.5 |
(cost |
|
Limb 2: |
£200,046.45 |
(loss |
|
£59,356.28 |
(loss |
|
|
£30,740.80 |
(12 |
|
|
£395,269.03 |
Each figure of 12 weeks should be reduced to 11 weeks for the
following reasons. In his evidence, Mr Goedecke worked on the basis that the
works would take 12 weeks. Very fairly and reasonably, that figure was reduced
by Mr Goedecke in his evidence to 11 weeks. Mr M J Armstrong arics, a director of Herring Baker
Harris, called by the defendant to give evidence on its behalf as an expert
building surveyor, said that the works would take six and a half weeks. One of
the differences between them was that Mr Goedecke assumed that the
professional advisers would be doing other things at the same time. I have the
impression that this difference of approach explains the difference between the
parties on this important issue. If everyone concerned, professional men, main
contractors and subcontractors, were to drop everything else and give top
priority to the works, those works might well be done within Mr Armstrong’s
period (barring accidents). While I agree that it would have been the duty of
the plaintiffs in mitigation of damage to give this matter the highest
reasonable priority, I do not see that they could be expected to carry everyone
else along with them in that endeavour and the highest reasonable priority is a
lesser requirement than the highest possible priority. I hold that 11 weeks is
the better figure.
It is accepted
between the parties that any difference between them as to the amount of work
required will not substantially affect the time taken.
The revised
figures claimed by the plaintiffs under this head are therefore as follows:
|
Limb |
£105,125.50 |
(cost |
|
Limb |
£183,375.90 |
(loss |
|
£54,409.92 |
(loss |
|
|
£28,179.07 |
(11 |
|
|
£371,090.39 |
Under this part of the claim it remains only for me to consider the
details of the claims for the costs of the works.
The breaches
alleged by the plaintiffs, but disputed by the defendants, are the following 28
items on the Scott Schedule third amendment:
|
Ceiling |
Items 12–20a |
|
Air-conditioning |
|
|
heating |
Items 48 and 50 |
|
Clips |
Item 119 |
|
Redundant |
Items 118, 129–132, 135 |
|
Redundant |
|
|
extinguishers: |
Item 137 |
Ceiling tiles: items 12–20a. There are
two distinct forms of breach alleged by the plaintiffs. First, there are
discoloured or stained tiles, the cost of cleaning and protecting of which is
agreed subject to denial of liability at £21,540. Second, there are damaged
tiles, the cost of replacing which is said to be £2,243, but both the cost and
the existence of any damaged tiles are denied.
Discoloured
tiles. The plaintiffs’ evidence that there were
discoloured or stained tiles was provided by Mr D Purtle, the building
superintendent, Mr Peter Beckett, Mr A Cosgrave arics and Mr John Goedecke frics, a partner in Watkinson & Cosgrave, who was called as the
plaintiffs’ expert building surveyor. Some photographic evidence also was
relied on. The interpretation of some of the photographs was open to argument
and I put them on one side. I do, however, accept the oral evidence of the
plaintiffs’ witnesses, which in Mr Purtle’s case was supported by detailed
notes in the form of plans.
The
defendants’ covenants included an express covenant ‘to clean all tiles’. There
was no evidence that the tiles had been cleaned during the tenancy and I accept
that the tiles had not been cleaned during the tenancy and that they needed
cleaning and that they needed a protective coating in the same way that a raincoat
needs a protective dressing after it has been cleaned and as part of the
cleaning process.
To clean some
tiles and not to clean others would produce an appalling patchwork effect. All
the tiles had to be cleaned and coated.
The cost of
remedy is agreed at £21,540.
Damaged
tiles. Mr Purtle’s evidence, which was specific
both as to the number and location of damaged and missing tiles, was not
challenged on cross-examination and the evidence to the contrary was not
convincing. I accept the evidence of physical damage to the ceiling amounting
to a breach of covenant on the part of the defendants. There was some
speculation that some damage to ceiling tiles was caused by others for whom the
defendants were not responsible. I do not find that that speculation amounts to
proof.
The cost of
remedy is agreed.
Air-conditioning/perimeter
heating units: items 48 and 50. There are two items
still disputed. Item 48, although described as agreed in the Scott Schedule
1/31, and in Mr Armstrong’s report at 3B/10 and not varied by him in
examination-in-chief, is now disputed. The defect complained of is simply that
a part of the landlords’ fixture was removed during the term and not replaced
at the end of the term. So far as item 50 is concerned, the cost of remedying
this item is agreed at £800. The defendants removed a heating unit and did not
replace it. The only dispute is as to whether the tenant was liable to replace
it. The unit is part of a heating system which without that unit is not
effective in the room from which the unit was removed. If a tenant removes part
of the premises or of the landlord’s fixtures in those premises, the premises
or the fixtures are out of repair. The tenants were not permitted by this lease
to remove the landlords’ fixture and they were under an express covenant to
yield up the premises and the fixtures at the end of the term in good repair.
The proviso which entitled the tenants to carry out internal non-structural
works cannot sensibly be relied on to excuse the damage which has been done
here. These items are proved.
Clips on
heating unit: item 119. This item, costed at £500,
requires the removal of clips which the defendants fixed to the heating unit to
hold cables installed by the defendants, but removed when the defendants
vacated. They therefore serve no purpose at all any more. The defendants say
that the clips are in good condition and there is therefore no disrepair. I
reject that argument. The heating unit is the landlords’ fixture. Leaving it
with the redundant clips affixed to it is not leaving it in a good and
tenantable state of repair or condition and there is therefore a breach of the
covenants to keep in tenantable repair and condition.
Redundant
cabling: items 118, 129–132, 135. The defendants
laid cabling throughout the premises in connection with equipment which the
defendants also installed. The defendants have then removed the equipment at
the termination of the subunderlease, but left the cabling. The relevant items
in the Scott Schedule have an agreed cost of £6,675; item 132 alone has an
agreed cost of £5,500. The disputes here are: (i) whether the defendants did
the work, and (ii) whether the defendants were obliged to do the work.
As to (i), the
work was identified as outstanding in the schedule of dilapidations served in
December 1991, and so far as item 132 is concerned it was photographed in
November 1991.
The plaintiffs
relied primarily upon the photographic evidence and the evidence of Mr Goedecke
to prove this breach. The defendants employed Mr Noerenberg to remove all
communication cables, other than those that were the responsibility of BT and
Mercury. Mr Noerenberg was not called by the defendants and only one invoice
from him was produced in evidence. That invoice was for £1,350 although the
agreed cost of the works to which the disputed items in the Scott Schedule
related was £6,675. Either Mr Noerenberg charged much less than the surveyor
thought was reasonable, or he did not do all the work. It may be that when Mr
Noerenberg tackled the work he found there was less to do than the surveyors
had anticipated. One does not know, there is no evidence about these matters.
The defendants did, however, call their telecommunications manager, Mr Stephen
Morton, and his evidence was that after Mr Noerenberg had done his work he
carried out ‘spot checks’ on the premises. Mr Morton did not inspect every duct
and he himself admitted in cross-examination that he had not inspected the
ducts above the suspended ceilings. He also admitted that BT and Mercury cables
were not removed by Mr Noerenberg or anyone else on behalf of the defendants,
but that admission does not appear to me to tell the whole story. The strongest
evidence in favour of the defendants came from the plaintiffs’ witness, Mr
Purtle, the building superintendent at Shortlands. He was a plainly honest
witness and was in the best position to know about matters of this sort. In
cross-examination he said that Mr Noerenberg slipped out cabling and then Woolf
came and made good after him. Then Mercury came and took out Mercury equipment and
wiring. In re-examination he said that by the end of
the communication and power cables had been removed.
There was no
evidence that British Telecom removed any of its cables.
The evidence
most strongly relied on by the plaintiffs was a photograph taken by Mr Beckett
in about November 1991, showing a jumble of cables hanging from the ceiling in
what had been the computer room, with one cable going down to an old-fashioned
dial telephone resting on the floor.
From what I
have said about the evidence so far, it might be inferred that it is most
likely that the cables in that photograph were British Telecom cables. I take
the view that it was the responsibility of the defendants to get those cables
removed even though they were not the property of the defendants. I need not
give my reasons for holding that view because I find that the plaintiffs have
not proved their case on these items. The figures which have been agreed are
the costs for the whole of the work. Those agreed figures are not
appropriate to be applied in the light of my findings of fact. It may be that
some small part of the work of removing cables was not completed, but I do not
have any basis for assessing the cost of it and I therefore award nothing under
this head. I should say that in a dispute of this kind I would not usually be
reluctant to make a broad assessment of costs within the context of the
evidence given if I thought it just to do so. But in this case, while I find
that on the balance of probabilities the work of removing cabling was not
wholly completed by the defendants, I am unable to say whether the remaining
work was substantial or minimal.
Redundant
ventilation ducts: items 122, 127, 136, 141. These
are ducts which the defendants installed to serve equipment, which was also
installed by them. The ducts enable the equipment to be ventilated through
grilles or vents cut into windows. It was accepted by Mr Armstrong, the
defendants’ building surveyor, that the windows are visible from outside the
building. The defendants removed the equipment, but did not remove the ducts
which served the equipment. The most expensive of the three items is item 136,
which the defendants admit, save that the defendants contend, and the
plaintiffs accept, that a part of this item is a duplication of item 127. The
plaintiffs claim in respect of all three items a total of £5,150 and the
defendants, having heard the evidence, now admit liability for £3,900, leaving
£1,250 in dispute. As I understand it, the dispute is a dispute as to the need
for carrying out the repairs. I take the view that the plaintiffs are entitled
to the full sum of £5,150.
Redundant
halon gas fire extinguishers: item 137. This is a
single item costed by both parties at £1,450 which the defendants dispute on
the footing that, while it was installed by the defendants as fire-protection
equipment ancillary to other equipment which the defendants have removed, the
defendants are under no obligation to remove the fire-protection equipment. However,
the fire-protection equipment is incomplete and therefore not in good and
tenantable condition. The equipment would not be acceptable to an incoming
tenant. One should look at this matter more broadly than either party has done.
The halon gas fire extinguishers are specialist pieces of equipment in a
particular place in the building and there was only a remote possibility that
an incoming tenant would want to position equipment in such a place as to find
it useful to take over the redundant part of the fire-extinguishing equipment
by purchasing those extra parts which would make it usable and placing new
equipment under it. The question is not, ‘Was this equipment left in good and
tenantable condition?’ (as to which the answer would be, ‘No’, because it was
not working) but, ‘Were the premises as a whole delivered up in good and
tenantable condition?’ to which the answer would be certainly ‘No’, because the
premises were left with some redundant equipment in them which would have to be
removed to make the premises usable. There was general agreement on the
evidence that the redundant equipment was valuable. Whether its value was
greater than the cost of removing it was not established to my satisfaction and
the question is, in any event, irrelevant. There was no obligation on the
plaintiffs to take on the role of scrap merchants when possession was up to
them. I find this head of claim proved.
Summary of
building costs
I have
disallowed the item for redundant cabling, but allowed all the other disputed items.
I am told by counsel for the plaintiffs that the direct building costs of the
items claimed by the plaintiffs (excluding the cleaning of carpets) amount to
£62,335.95. The amount attributable to the disallowed item is £6,675, and after
that item has been subtracted the direct building costs allowed amount to
£55,660.95.
It is agreed
that to those basic building costs have to be added certain agreed additions as
follows:
|
£57,032.25 |
|||
|
Preliminaries and profit 12% |
£6,679.13 |
||
|
£62,340.08 |
|||
|
Fees: |
|||
|
Preparation of schedule |
£3,600.00 |
||
|
Negotiation 5% |
£3,116.80 |
||
|
Supervision 11.25% |
£7,012.80 |
||
|
£76,069.68 |
|||
|
VAT @ 17.5% |
£13,312.19 |
||
|
Gross cost of works |
£89,381.87 |
To that figure should be added the figures comprised in what the
plaintiffs call limb 2 of the common law claim, making the following addition:
|
Limb l: |
£89,381.87 |
(cost of works) |
|||
|
Limb 2: |
£183,375.90 |
(loss of 11 weeks’ rent) |
|||
|
£54,409.92 |
(loss of 11 weeks’ service charge) |
||||
|
28,179.07 |
(11 weeks’ void rates) |
||||
|
£355,346.76 |
Section 18 of the 1927 Act
Both parties
and their experts are agreed that the valuation of the leasehold reversion in
the premises is entirely hypothetical. Valuations are commonly made on the
basis of an imaginary sale, but in this case the sale could not have taken
place. Valuations have in fact been made on the basis that the leasehold
reversion is sold to an investor, but it is agreed that in practice it would
not be so sold and in law it could not be so sold because of the covenant (to
which I have referred) forbidding it. The parties ask me to proceed on the
basis of hypothetical valuations.
The valuation
for the purpose of a sale is made on the basis of a willing seller and a
willing purchaser. Mr Lyall accepted the concept of a willing seller, but was
unable to accept that in this case there was a willing purchaser. Much time was
taken in discussing this both in cross-examination and in submissions. I think
the difficulty is partly a matter of words and partly a matter of principle
where confusion is perhaps engendered by the words.
Normally when
property is transferred from one person to another, the transferee pays money
to the transferor and so it is natural to think of the transferee as the
purchaser. In this case, however, the transferor had to pay money to the
transferee to persuade him to take on the burdens of the property transferred
so that the transferee could then make a profit from the rent receivable. In
these circumstances it is difficult to apply the label of purchaser to the
transferee. In the unusual circumstances of this case one has to consider,
among other things, how much money had to be paid by the willing transferor to
the willing transferee, bearing in mind that if no money were to be so paid
there would be no willing transferee. The diminution in value is the difference
between the amount of money paid out by the willing transferor to the willing
transferee if the premises were delivered up in a condition in conformity with
the covenants and the amount paid out by the willing transferor to the willing
transferee if the premises were delivered up in their actual condition. There
would be no willing ‘purchaser’ if no money were paid to him.
At the heart
of this case, as it seems to me, there is a point of principle which arises out
of the implicit assumption of Mr Lyall and the defendants that it is impossible
to accept that one negative value can be worse or better than another negative
value. The point never came out into the open in express terms, but it seems to
have been assumed by Mr Lyall that once the value of a property gets down to
£nil there cannot be any diminution in value. That may be true in many or
perhaps most cases of chattels. It is quite a different situation where an
owner of a leasehold property has an onerous interest which he wishes to transfer.
Such an interest is transferable on the market if not ‘saleable’. If one
assumes a willing transferor and a willing transferee, there will be a point in
negotiations for a payment from the transferor where the parties are willing to
do a deal.
The two
valuation experts in this case are agreed that they have adopted the same
approach to valuation — what Mr Beckett has called ‘the residual approach’. Mr
Beckett has prepared two schedules, A and B, and taken the difference between
the end figures of each schedule as the diminution in value. Apart from the
submissions that there is no diminution in value, the defendants do not
challenge the approach in those schedules, but they do challenge some of the
individual figures. Apart from the challenge to the cost of the works, those
challenges are of no importance, because the figures are reproduced in each
schedule and since the only important result is the difference between the end
result of each schedule the size of figures in common between them is of no
importance so long as they remain common. For example, under the heading of
‘Deductions’, schedule A begins with an item of ‘Deficit of headrent for 30
weeks’. That period is made up of four weeks to remove partitions and lay
carpets and 26 weeks for marketing period. None of that period of 30 weeks is
for the defendants’ account: it is a period in relation to which the plaintiffs
would have suffered expenses even if the defendants had complied with their
covenants and is compared with a period of 41 weeks’ deficit of headrent
incurred on the actual state of repair and decoration. There has been some
discussion that a marketing period of 52 weeks would have been more
appropriate. It makes no difference and I make no finding about it. If the
marketing period should be 52 weeks, for the period of 30 weeks we would
substitute 56 weeks and for the period of 41 weeks we would substitute 67 weeks
and the difference would be the same, namely 11 weeks, which would be
translated into cash sums each with similar differences.
I do not
propose to say any more about details which are common to both schedules.
There are two
important disputes on the figures in the schedules:
1. The cost of
the works necessary to remedy the breaches of covenant — I have already dealt
with that.
2. The length
of time to be taken in doing those works.
I have already
indicated that I prefer the figure of 11 weeks for doing the work.
I have been
provided with a revised schedule B worked on the reduced period of 11 weeks.
Schedules A and B are annexed to this judgment. The difference between the
end-totals is £304,599 so that the latest position is that the plaintiffs limit
their claim to £304,599.
It appears
that the common law claim, on my findings, is greater than the section 18 ‘cap’
and the figures on the section 18 valuation are therefore vital. If the
disallowed figure of £6,675 plus percentage ‘add-ons’ but excluding the 5%
‘add-on’ for negotiation, which Mr Beckett has excluded from both schedules A
and B, and interest were removed from the computation of schedule B, it seems
to me that that should produce the correct end-figure for comparison with
schedule A, but I would welcome further assistance. Subject to further
argument, schedule B should be amended by deducting the negative figure at the
end as follows:
|
Net value: |
–397,221 |
||||
|
Redundant cabling: |
6,675.00 |
||||
|
Supervision 11.25% |
750.94 |
||||
|
7,425.94 |
|||||
|
VAT @ 17.5% |
1,299.54 |
||||
|
8,752.48 |
|||||
|
Interest for 6 months @ 12% |
525.15 |
9,277.63 |
|||
|
–387,943.37 |
The difference between Schedule A and Schedule B then becomes:
|
387,943.37 |
|||||
|
92,622.00 |
|||||
|
295,321.37 |
Subject to further argument on details, there will be judgment for
the plaintiffs for £295,321.37. I invite submissions on the claim for interest
from September 29 1991.
Appendix 1
Schedule A
3 Shortlands, Hammersmith International Centre,
London W6
Valuations of the interest of Shortlands Investments Ltd
as at 29th September 1991
in respect of the fifth, sixth and part seventh floors
For
assumptions underlying the valuations, see the accompanying notes.
A
Valuation assuming Tenant’s compliance with covenants (Revision 1)
A.1
Estimated value let and in good repair
|
36,888ft2 |
at |
£23.50 |
866,868 |
||||||||||||||
|
Less Headrent: |
36,888ft2 |
at |
£17.62 |
649,967 |
|||||||||||||
|
Profit rent |
216,901 |
||||||||||||||||
|
89 years’ purchase at 17% — sinking fund attracting |
5.82 |
||||||||||||||||
|
Estimated value let and in good repair |
1,262,364 |
||||||||||||||||
A.2 Deductions:
|
(i) Deficit of headrent for 30 weeks |
374,981 |
||||||||||||
|
(ii) Non-recoverable service charge for 30 weeks |
148,390 |
||||||||||||
|
(iii) Void rates |
55,626 |
||||||||||||
|
(iv) Interest on rent, service charge and rates (see |
27,079 |
||||||||||||
|
(v) Letting fees (15% + VAT) |
152,785 |
||||||||||||
|
(vi) Marketing costs |
50,000 |
||||||||||||
|
(vii) Profit to purchaser @ 25% of gross value above |
315,591 |
||||||||||||
|
(viii) Works |
a. Cost |
165,648 |
|||||||||||
|
b. Fees and VAT |
48,452 |
||||||||||||
|
c. Interest thereon for 6 months |
12,846 |
||||||||||||
|
|
Total cost of work |
226,946 |
|||||||||||
|
(ix) Acquisition costs say |
10,000 |
||||||||||||
|
Total |
1,361,398 |
||||||||||||
|
–99,034 |
|||||||||||||
|
(x) Interest for 30 weeks on purchase |
–6,412 |
||||||||||||
|
A3 Net value: Estimated value unlet and in state of |
|||||||||||||
|
envisaged by tenants covenants |
–92,622 |
||||||||||||
Appendix 2
Schedule B
3 Shortlands, Hammersmith International Centre,
London W6
Valuations of the interest of Shortlands Investments Ltd
as at 29th September 1991
in respect of the fifth, sixth and part seventh floors
For
assumptions underlying the valuations, see the accompanying notes.
B
Valuation in actual state of repair and decoration (Revision 2)
B.1
Estimated value let and in good repair
|
36,888ft2 |
at |
£23.50 |
866,868 |
|||||||
|
Less Headrent: |
36,888ft2 |
at |
£17.62 |
649,967 |
||||||
|
Profit rent |
216,901 |
|||||||||
|
89 years’ purchase at 17% — sinking fund attracting 4% and 35% tax thereon |
5.82 |
|||||||||
|
Estimated |
1,262,364 |
|||||||||
B.2 Deductions:
|
(i) Deficit of headrent for 41 weeks |
512,474 |
|||||||||||||
|
(ii) Non-recoverable service charge for 41 |
202,800 |
|||||||||||||
|
(iii) Void rates |
83,805 |
|||||||||||||
|
(iv) Interest on rent, service charge and rates (see |
48,033 |
|||||||||||||
|
(v) Letting fees (15% + VAT) |
152,785 |
|||||||||||||
|
(vi) Marketing costs |
50,000 |
|||||||||||||
|
(vii) Profit to purchaser @ 25% of gross value above |
315,591 |
|||||||||||||
|
(viii) Works |
a. Cost |
235,464 |
||||||||||||
|
b. Fees and VAT |
68,873 |
|||||||||||||
|
c. Interest thereon for 6 months |
18,260 |
|||||||||||||
|
|
Total |
322,597 |
||||||||||||
|
(ix) |
10,000 |
|||||||||||||
|
Total |
1,698,085 |
|||||||||||||
|
–435,721 |
||||||||||||||
|
(x) Interest for 41 weeks on reverse premium |
–38,500 |
|||||||||||||
|
B.3 |
||||||||||||||
|
disrepair |
–397,221 |
|||||||||||||
