Landlords are suffering. Large areas of the market have reached a low point in which only the best or least problematic properties will let. In order to attract tenants, say Vivien King and Nigel Laing, landlords are offering huge incentives, including extended rent-free periods, removal of privity of contract, regular break clauses and substantial capital contributions.
Letting properties in disrepair in a difficult market is often impossible. Landlords and tenants are in dispute in an environment that is a minefield of legal issues. We hope in this article to guide readers through these issues, the works to be conducted, the market and the strategy to be adopted by both parties.
The legal issues
Before a claim can be justified, a series of key points has to be investigated. Each should be considered, even if it is later rejected as being irrelevant to the particular facts of the case. The number one rule is that each case will turn on its own facts.
The key points are:
- The wording of the covenant and what and whom it incorporates.
- Section 146 of the Law of Property Act 1925 and in what circumstances a notice should be served.
- Section 18(l) of the Landlord and Tenant Act 1927, which effectively caps a landlord’s claim for damages.
- Section 1 of the Leasehold Property (Repairs) Act 1938, which requires the landlord to apply to the courts for leave to commence its proceedings for damages.
The extent of the tenant’s repairing liability will depend on the wording of the covenants, which often relate to works to be carried out during and at the end of the term. The words should be read with care. They can limit repair liability, but may impose surprising burdens.
Who are the parties? Clearly the landlord and the tenant. However, the law in England and Wales still includes privity of contract. Hence, any original covenantors and guarantors may be embroiled in problems which they had forgotten or thought had been passed on.
If a property is in disrepair, a landlord should have a schedule of wants of repair and dilapidations prepared during the term of the lease (even if it is a terminable schedule) and annexed to a section 146 notice. The 1925 Act enables the landlord to recover the costs of preparing the schedule whether or not the wording of the lease in question does so. Service of such a notice may also assist the landlord in negotiations if the tenant should apply for a new tenancy pursuant to Part II of the Landlord and Tenant Act 1954.
If the tenant breaches a covenant, the landlord can claim damages, but section 18(l) of the 1927 Act can cause problems. Under this section, a landlord cannot claim damages for breach of a repairing covenant which exceeds the amount, if any, of the loss to the landlord’s reversionary interest. Proving such loss is difficult.
The landlord is further restricted if he tries to enforce a repairing covenant during the course of the lease. He might, quite reasonably, consider that, if a property is in disrepair, he can seek damages or forfeiture. Section 1 of the 1938 Leasehold Property (Repairs) Act, however, requires him, when serving a schedule of wants of repair, to annex a section 146 notice (pursuant to the 1925 Act) which entitles the tenant to serve a counter notice. The effect of this procedural ping pong is that the landlord can commence proceedings only with the permission of the courts.
The works
Whether disrepair constitutes a breach of repairing covenant will, in the first instance, depend on the wording of the lease. The cardinal rule, again, is that each case will turn on its own facts. It must also be remembered that a covenant to keep and leave premises in repair means that the party liable must first put the premises into repair, even if they are defective at the commencement of the term. This was highlighted in Elite Investments Ltd v T I Bainbridge Silencers Ltd [6] 2 EGLR 43. At the time of the grant of the lease, a roof of an industrial unit was already deteriorating and this eventually led to the stage where it was beyond patching. The court found the tenant liable to replace the roof at a cost of more than £84,000.
In addition to considering the facts at the time of the landlord’s complaint, the covenant is also to be construed in the light of the condition of the premises when leased, the length of the term, the age, character and location of the premises and the extent of the works required to remedy the disrepair.
The above, of course, presupposes that the physical problem constitutes disrepair, which generally implies deterioration of a former physical state of repair. In Post Office v Aquarius Properties Ltd [7] All ER 1055, a defect in the original construction resulted in flooding of the basement. The court found that there was no disrepair and the tenant was under no obligation to remedy the defect.
Repairing works may, of course, be extensive and, so long as they do not substantially change the property, may be enforceable. However, the line between righting a disrepair and creating an improvement is often a thin one. There are no hard and fast rules and consultation of reported cases may not always assist. For example, replacement of an old but trusted boiler with a modern and more efficient machine would constitute an improvement and not a repair, but, if the old boiler failed to work, its replacement would be a repair.
Other examples should be considered. In Halliard Property Co. Ltd v Nicholas Clarke Investments Ltd [4] 269 EG 1257 premises which had an unstable and jerrybuilt structure at the rear of the premises when the tenants took possession led to one wall eventually collapsing. The court found the tenant not liable to reinstate because it would involve handing back an edifice different from the structure leased.
In contrast, in New England Properties plc v Portsmouth News Shops Ltd [3] EGCS 26, a roof failed to stand up to the ravages of the 1987 storms. It was proposed that a stronger roof, different in form to that originally provided, should be installed at a cost in excess of £200,000. The tenant attempted to argue that replacement of an inadequate roof with an adequate one, differing in form to that originally provided, did not constitute a repair. The judge held that, while the roof may be very different in form to that originally provided, in the context of the building as a whole the work did not constitute an improvement and the tenant was liable to meet the costs.
This case appears to follow a line taken in Elmcroft Developments v Tankersley-Sawyer [4] 270 EG 140 CA. In that case, an obligation to repair was held to impose an obligation to install a silicone-injected damp proof course as it was the only way of curing damp in the premises.
These three cases taken together require a subjective judgment to be made. Are the works of repair such that, when looking at the demise as a whole, its nature has changed in some significant way?
There is one more factor to consider, that of reinstatement works. Leases commonly require the tenant either to remove items put in the premises or to put back items previously removed. These works are often included in the schedule of wants of repair although strictly are not disrepairs (although the works may lead to items of disrepair – for instance, the removal of partitioning will require the premises to be made good after the removal).
For convenience the disrepairs and the works of reinstatement are often put into one schedule, possibly to the landlord’s disadvantage. Reinstatement is not repair and the 1927 and 1938 Acts do not apply. Therefore, a separate schedule of reinstatement works may be of strategic advantage to the landlord.
The market
The market is weak, particularly for properties constructed in the late 1960s and early 1970s whose 21- and 25-year leases are now running out. Oddly, this can be of advantage to a landlord.
A few years ago many dilapidations claims were defeated because the property was to be redeveloped, refurbished or even, in drastically overheated markets, would let in almost any state of repair. These arguments are usually not available to tenants in a weak market.
There are some interesting variations available to tenants. The market may be weak, but landlords may be forced to redevelop or refurbish. For example, temporary planning permissions for offices in Mayfair require, in effect, the landlord to convert the premises to residential use.
The weakness of the market may enforce a change of use. Redevelopment may be the only future for a property in a very weak market. There are, of course, still some properties where refurbishment has to be carried out regularly. For example, this may apply to industrial properties where there can be a remarkable difference in value between a refurbished property (which may obtain the same rent as new property) and an asbestos-clad dingy horror.
These considerations are now relatively rare. In a weak market a property in good repair may still be lettable, but in poor repair the letting value and capital value may even be nil. In the City of London, for example, there are properties where the state of repair is critical. In good repair there is a prospect of letting, albeit at nominal levels. The landlord will be receiving some rent and, of course, saving substantial holding costs. In poor repair those buildings may never let, and redevelopment in a market where supply is out of all proportion to demand is not an option.
The valuation consequences of this are obvious. Landlords with this sort of property should be able to make and sustain substantial dilapidation claims.
The market can be too weak. There are some properties which may never let, whatever their condition. The future for these buildings is either demolition or constructive vandalism (to save vacant rates). It is clear that dilapidations cannot be an issue in these cases.
One common element of dilapidations claims is loss of rent. The landlord argues that the property cannot be let until it is repaired and therefore he requires the cost of the repair and rent during the period it takes to carry out the repairs. This argument has some merit in a strong (but not overheated) market, but can be defeated in a weak one.
If, for example, the repairs take three months, what are the prospects of finding a tenant within that time? Why cannot the building be marketed during the repair period? The reality is that, in many cases, a letting is unlikely to be completed within a year, let alone three months.
The strategy
The three strands – the legal issues, the works and the market – need to be drawn together and a strategy composed.
First, the landlord’s position. We do not propose to consider remedies available to the landlord in any depth other than that relating to a claim for damages. Forfeiture has generally not been relevant to the present market. Specific performance and injunctive relief appear little used unless the building has become unsound.
Whatever the remedy chosen, however, the landlord’s first step is to have prepared and served a schedule of wants of repair annexed to a section 146 notice.
However, many leases enable the landlord to serve a notice of disrepair on the tenant and, if the latter fails to comply within a stipulated period of time, permit the landlord to enter the premises and carry out the works and then recover the cost as a debt. This tactic has been used in order to circumvent the traps of both the 1927 and 1938 Acts and in such circumstances a section 146 notice is not relevant.
The courts, however, are presently undecided as to whether the debt in this context falls to be regarded as a claim for damages (in which case the statutes could be applicable). Decisions are in stark contrast one with another and, until the Court of Appeal considers the matter in any depth, difficulties will remain. Finally, of course, conducting the works and then attempting to recover the costs does not assist the landlord’s cash flow. Some landlords, indeed, prefer a dilapidation claim approach because it can provide an inflow of cash which they can then decide whether to spend on the building.
Some landlords have anticipated problems in relation to repairs and have opted for a service charge, thus either clawing back from the tenant the cost of repairs or obtaining the costs in advance of conducting the works by way of a sinking fund. This puts the repairing liability upon the landlord, but does prevent statutory intervention. Leases of premises within shopping precincts commonly contain such clauses. While squabbles often arise as to whether works do constitute repairs, at least such premises will, generally speaking, face the longed-for upturn in the market in, better state of repair than those left to the whims of the occupying tenant.
We have already discussed works of reinstatement. These should not be forgotten, particularly in connection with premises where the 1927 Act is likely to be a problem to the landlord in seeking damages for wants of repair.
Finally, as the market slowly improves and tenants look towards renewing their leases, the power of serving a section 146 notice with the threat of forfeiting the lease should not be underestimated. A landlord can then oppose the grant of a new tenancy and any application for relief from forfeiture unless the works are carried out by the tenant.
The tactics for the tenant will depend very much on whether he wishes to stay in occupation. If he does he should be able to negotiate his way out of any dilapidations claim and even to be, in effect, treated as a new tenant. There is no reason why an existing tenant coming to an end of a lease and renegotiating a new lease should not receive rent-free periods, contributions to improving the fitting out of the property and all the other perks which might be negotiated by a new tenant in the market.
If, however, the tenant wishes to vacate he may be vulnerable. He must assess the disrepair in the legal context of his lease and consider the costs of repair in relation to the state of the market. The reality is often that carrying out the repairs, or some of the repairs, is the cheapest and most effective option.
Both parties need to consider the legal, repair and market issues and adopt a strategic approach. Without it, the initiative will flow to the other party. Always think, plan, then act.
Vivien King is property litigation partner with City solicitors Bower Cotton & Bower. Nigel Laing is valuation partner with Drivers Jonas.
