Monthly Q&A: a barrister and a solicitor answer your questions
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Damages against an outgoing tenant |
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Question: My company owns an office building. We are claiming damages for dilapidations against an outgoing tenant. The premises will need some modernising before they can be relet. Will the need for refurbishment affect the claim against the outgoing tenant? Answer: Yes. The cost of works and the section 18 valuation should be calculated based only on the works covered by the tenant’s covenants and not on the other works required to relet the premises. |
Explanation
The extent to which the claim will be affected depends on the extent of the modernising works and the precise covenants in the lease.
You can claim only for disrepair that falls within the tenant’s covenants and modernising work is not generally a tenant’s obligation.
You may be able to argue that you cannot repair the defects without substituting something different and that the modernising work is the only way of remedying the defects.
Also consider the different ways of remedying the defects as the tenant is entitled to adopt the method that a reasonable surveyor advises is appropriate.
However, before these arguments can be deployed, the relevant item must be in disrepair and must be within the tenant’s covenant. It is useful to go through the following stages.
(1) First, ensure that your schedule of dilapidations covers only items that are included under the tenant’s covenants.
(2) Second, ascertain the cost of the works in (1), including professional fees. In certain cirmcumstances, you may also be able to recover loss of rent, service charges and void rates: see below.
(3) The sum at which you arrive will be subject to the cap imposed by section 18(1) of the Landlord and Tenant Act 1927, so the next step will be to assess the diminution in the value of the reversion (if any) caused by the items identified at the first stage. If this is less than the figure already arrived at, your claim will be limited to this sum, if it is more, you can claim the full amount.
(4) Next, consider section 18(2) of the Act and whether structural alterations would render valueless repairs covered by the tenant’s covenant.
(5) Finally, in order to maximise your recovery, also consider whether claims can be made under other covenants such as covenants to decorate, reinstate alterations and comply with statutes. These may include works not covered by the covenant to repair and will not be subject to the section 18 cap.
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Claim for loss of rent by a landlord |
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Question: My company has recently vacated commercial premises upon expiry of a 15-year lease and we are currently negotiating with our landlord over its claim for terminal dilapidations. A third of the claim is for loss of rent. The premises form part of an industrial estate and there are other vacant units on the site. Is this claim justified? Answer: Yes, if the landlord can prove that the premises could not be let because of the disrepair. No, if the landlord could not have let these premises even if they had been yielded up in repair. |
Explanation
A landlord is entitled to claim loss of rent over the period that is reasonably necessary to undertake repairs, but only where the premises cannot be let because of the need to carry out repairs and the claim represents the landlord’s actual loss. Loss of rent can be claimed over the period that the landlord would reasonably take to perform the work. This will usually include the time necessary to prepare plans and specifications, to go to tender, to select a contractor and to carry out the works.
If, for any reason, the premises could not have been relet even if they had been yielded up in repair, the landlord will not be able to claim loss of rent. The landlord may be able to pursue the claim if it can satisfy the court that it would suffer a loss of rent when the market recovers and the premises become lettable again. However, the claim is likely to be discounted to reflect the fact that the loss will be incurred at some point in the future.
Test the landlord’s claim by seeking evidence that the premises would have been let but for the need to undertake the repairs. The best evidence is that of a prospective tenant but this will be available only in particular circumstances, for example, where a neighbouring tenant requires additional space. Evidence from letting agents that the premises could have been let if in repair is likely to be the best evidence available. You should make your own enquiries of local letting agents to establish the market position for these premises.
The existence of vacant units on the site suggests that the landlord would not have been able to relet the premises even if they had been yielded up in repair. However, there may be specific reasons for this on which the landlord can rely, such as the age or location of the other units or their physical condition, that distinguish them from these premises.
E-mail your questions to egq&a@enterprisechambers.com and EGQ&A@charlesrussell.co.uk
Zia Bhaloo is a barrister at Enterprise Chambers and Louise Clark is a partner in the property litigation and dispute resolution group at Charles Russell LLP
