Landlord and tenant — Dilapidations — Damages — Headlease governed by Part II of Landlord and Tenant Act 1954 — Grant of licence to sublet — Sublease subject to same covenants as headlease — Undertaking by head lessee’s parent company that sublessee’s repairing obligations confined to keeping property wind- and watertight with any greater obligation to be performed at expense of parent — Expiry of headlease — Whether landlord entitled to substantial damages for dilapidations — Whether any diminution in value of reversion Whether landlord’s position affected by undertaking
The appellant was the landlord and the respondent was the tenant under a headlease of two industrial units for a term expiring in January 2002. In late 1999, the appellant granted a licence to the respondent to sublet to a third party (P). P covenanted with the appellant to observe and perform all the covenants contained in the headlease. The respondent’s parent company (BVP) had previously given an undertaking to P, in a letter, that P’s repairing obligations would be limited to making the property wind- and watertight, and that any greater obligation contained in the sublease or the licence to sublet would be performed at BVP’s expense.
Following the expiry of the headlease, P remained in possession under the terms of the sublease pursuant to Part II of the Landlord and Tenant Act 1954. The appellant brought a dilapidations claim against the respondent. The respondent denied any liability for damages on the ground that there had been no diminution in the value of the reversion within section 18 of the 1954 Act. It was accepted that, unless BVP’s letter altered the position, any damage to the reversion was nil or nominal since, at the date upon which the headlease expired, P was in occupation under a sublease, to which Part II of the 1954 Act applied, containing the same or similar repairing covenants, which the appellant could enforce directly by virtue of section 65(2) of the 1954 Act. The appellant maintained that the letter adversely affected its interest; it relied upon an admission of the respondent’s expert (L) that, had he been advising the appellant at the time of the licence, he would have advised it to take a guarantee from BVP. Determining a preliminary issue, the county court judge held that the existence of the letter did not affect the value of the reversion and that the appellant was not entitled to substantial damages. The appellant appealed.
Held: The appeal was dismissed. The judge had been entitled to accept the evidence of the respondent’s expert and to conclude that the letter had not adversely affected the value of the reversion. The arrangement between BVP and P, as set out in the letter, could have no effect upon P’s obligations to repair under the sublease. Although there was a degree of uncertainty in the letter, and a potential for falling out between P and BVP, that was not a significant risk and would not worry a potential purchaser. The judge had been entitled to infer that the advice that L would have given would have been aimed at taking commercial advantage, at a time when P was not yet bound by the sublease, of BVP’s willingness to indemify P. The position had been quite different by 2001 and 2002.
The following cases are referred to in this report.
Crown Estate Commissioners v Town Investments Ltd (National Westminster Bank plc, third party) [1992] 1 EGLR 61; [1992] 08 EG 111
Family Management v Gray [1980] 1 EGLR 46; (1979) 253 EG 369
Jaquin v Holland [1960] 1 WLR 258; [1960] 1 All ER 402, CA
Smiley v Townshend [1950] 2 KB 311; [1950] 1 All ER 530; (1950) 155 EG 110, CA
This was an appeal by the appellant, Lyndendown Ltd, against a decision of Deputy District Circuit HH Judge Laurie, sitting in Bromley County Court, ruling in favour of the respondent, Vitamol Ltd, on a preliminary issue in proceedings by the appellant for breach of repairing covenants in a lease.
Robert Levy (instructed by Streeter Marshall) appeared for the appellant; Stuart Hornett (instructed by Addleshaw Goddard, of Manchester) represented the respondent.
Giving judgment, Lawrence Collins LJ said:
[1] In this case, Lyndendown Ltd (Lyndendown), the freeholder of two industrial units in Northampton, sued its former tenant, Vitamol Ltd (Vitamol) for failure to deliver up the premises at the end of the term of the lease in accordance with repairing covenants. At the time the headlease expired, a sublessee from Vitamol, Pacific Industrial Ltd (Pacific), was in occupation of the premises and Pacific held over under Part II of the Landlord and Tenant Act 1954 (the 1954 Act) on the terms of the sublease with the head lessor, Lyndendown.
[2] By section 18(1) of the Landlord and Tenant Act 1927:
Damages for a breach of a covenant or agreement 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, whether such covenant or agreement is expressed or implied, and whether general or specific, 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 or agreement as aforesaid…
[3] The fact that the premises are occupied by subtenants under tenancies to which Part II of the 1954 Act applies must be taken into account in assessing the damage to the reversion. The subtenant will become the direct tenant of the landlord on the expiry of the head tenancy: see section 65 of the 1954 Act. The landlord will therefore become entitled to the benefit of any obligations to repair in the subtenancy. The subtenant will become entitled to a new tenancy under the 1954 Act and the new lease will prima facie be on the same terms (including repairing covenants) as the existing tenancy, and the rent will be fixed by the court without taking account of any disrepair that is attributable to the subtenant’s breaches of the repairing covenants in the current tenancy: see Dowding & Reynold on Dilapidations (3rd ed) 2004, at p666. |page:12|
[4] In Family Management v Gray [1980] 1 EGLR 46, the premises were let to subtenants under full repairing leases and the disrepair that was the subject of the landlord’s action against the head tenant was owing to breaches by the subtenants of their repairing obligations, who had by the term date of the head lease applied for new tenancies under the 1954 Act. It was held that there was no difference between the rental value of the properties in repair and their value out of repair because the reversion had to be valued subject to the rights of the subtenants to renew, and they could not, when renewing, pray in aid their own breaches of covenant in order to reduce the rent: see also Crown Estate Commissioners v Town Investments Ltd (National Westminster Bank plc, third party) [1992] 1 EGLR 61. According to Dowding & Reynolds, at p668, whether there is damage to the reversion is a question of evidence and the position may be different: for example, where the new tenants may not be good for the cost of repairs. The relevant date for assessing damages is the term date of the lease (see Jaquin v Holland [1960] 1 WLR 258, at p563, per Ormerod LJ), but subsequent events that were operative or potential at the term date may throw light on the value of the reversion at the term date: see Smiley v Townshend [1950] 2 KB 311; Family Management, at p48.
[5] This is an appeal with the permission of Arden LJ from the decision of HH Judge Laurie, sitting at Bromley County Court, on a preliminary issue, in which he decided that there had been no substantial damage to the reversion.
[6] The background is that Lyndendown is the freehold reversioner of the two industrial units, 10 and 11 Tyne Road, Weedon Industrial Estate, Northampton.
[7] By leases dated 23 April 1991, it let the units to Vitamol, which is a subsidiary of British Vita plc (BVP). Each lease was for a term commencing 23 April 1991 and expiring on 31 January 2002. Vitamol occupied the units for the purpose of its business and, accordingly, Part II of the 1954 Act applied. The leases contained standard covenants that included delivery up covenants and covenants to pay the landlord’s costs in relation to schedules of dilapidations and so on. They also contained alienation provisions that permitted with the landlord’s prior written consent (not to be unreasonably withheld) assignment or subletting of the whole. It is claimed that Vitamol failed to carry out the repairs.
[8] By a licence to underlet dated 22 December 1999 between Lyndendown, Vitamol and Pacific, Lyndendown granted Vitamol a licence to sublet the premises to Pacific on terms of a sublease that was annexed to the licence. It was a sublease of both units expiring on 30 January 2002. Under the licence, Pacific covenanted with Lyndendown that it would observe and perform all the covenants contained in the headleases. It provided also that if the subletting were not implemented within six months of the date of the licence, the licence would become void. In fact, the subletting permitted by the licence was not in fact granted within the six months, but Pacific remained in occupation. Lyndendown threatened forfeiture proceedings and, on 26 April 2001, Pacific executed the sublease. It was for a term from 1 May 1999 to 30 January 2002.
[9] On 30 April 1999, that is, before the date of the licence, Vitamol’s parent company, BVP, had written to Pacific in the following terms (in a document to which I shall subsequently refer as “the letter”):
In consideration of your having today entered into a sale and purchase agreement (“the Agreement”) with this company’s subsidiary, Vitamol Limited, relating to its PEC Plastics business, we hereby undertake to you that your obligation to repair the Property is only to keep it wind and water tight regardless of any conflicting or contrary provision contained in the under lease of the Property or in the landlord’s licence to underlet and if the landlord requires repairs in excess of an obligation to keep the Property wind and water tight such repairs will be at our expense. [Signed by BVP]
[10] It is common ground that the letter was not disclosed to Lyndendown at any stage prior to the licence, nor even before the commencement of these proceedings. Pacific supplied it in the course of it surrendering its continuation tenancy to Lyndendown. Nothing now turns on whether the letter should have been disclosed earlier.
[11] By the time that the headlease expired on 31 January 2002, Pacific was in occupation of both units for the purposes of its business and, therefore, it held over, under Part II of the 1954 Act, on the terms of the sublease, with Lyndendown as its effective landlord. In 2003, Pacific surrendered its continuation tenancy and Lyndendown let the unit to Slotseal Extrusions Ltd.
[12] I turn to these proceedings. By its particulars of claim dated 26 February 2002, Lyndendown asserted that when the headlease expired on 31 January 2002, Vitamol failed to deliver up possession in accordance with the relevant repairing covenants, and Lyndendown served two schedules of dilapidations on Vitamol. The particulars of claim asserted that, by reason of breach of covenant, Lyndendown had suffered loss and damage and the value of its reversion had been diminished by an amount equal to the cost of repairing the units in accordance with the covenants.
[13] By its defence, Vitamol denied that it had failed “to deliver up possession in the manner contended for”. It also denied that the schedules accurately recorded the defects in the premises or that they fell within the repairing obligations. Vitamol also denied that the value of the reversion had been diminished, whether by reason of any breach of covenant on its part or otherwise. It also asserted that if the value of the reversion had been diminished, it was by less than the cost of the remedial work required.
[14] By letter in September 2003, Vitamol’s solicitor, relying upon the cases to which I have referred (Family Management and Crown Estates Commissioners) suggested that since Pacific was in occupation at the determination of the headlease with a full repairing covenant, the hypothetical purchaser would have regard to that and, therefore, there was no diminution in the value of the reversion.
[15] Following this correspondence, an application was made for the determination of a preliminary issue, and an order to that effect was made in February 2004. The preliminary issue was whether Lyndendown was entitled to “substantial damages” as a result of any breaches by Vitamol of the repairing and delivery up covenants contained in the leases. It was this preliminary issue that is the subject of this appeal.
[16] Before the judge, each side called experts. Lyndendown’s expert was Mr Richard Conn. He was asked to value the freehold reversion as at 31 January 2002 on three different bases. First, assuming that all Vitamol’s repairing covenants had been complied with and that the reversion was subject to a continuation tenancy in favour of Pacific on the terms of the subleases to Pacific but disregarding the letter; second, the same as the above, but on the assumption that the premises were in the condition contended for by Vitamol; and third, on the assumption that the premises were in the condition contended for by Vitamol and that the reversion was subject to a continuation tenancy in favour of Pacific, but on this occasion having regard to the existence of the letter. On the first basis, the reversion was valued at £650,000, on the second at £565,000 and on the third basis at £508,500. It is the third basis that is relevant for present purposes.
[17] The starting point of his valuation was 10 years’ purchase applied to the rent of £65,000 pa, and he then deducted £85,000 for the dilapidations and, in addition, deducted 10% for what he described as a “purchaser’s contingency to reflect the uncertainty regarding repairs liability deriving from” it, then he referred to the letter, and that was the 10%, making a total of £56,500 for this contingency. He described the 10% margin adopted as his best judgment of the market’s reaction to the uncertainty inherent in these circumstances. He also said in his report that he did not believe that it was for him as a valuer to make a judgment on the basis in law as to whether the letter relieved any party nor its relevance to Vitamol’s obligations.
[18] Vitamol’s expert was Mr Paul Lidgley. His report stated that, in his opinion, a purchaser would take the view that the obligations to repair had effectively passed to Pacific, and the landlord would then have been able to enforce the obligations against Pacific under the |page:13| terms of the relevant sublease. He went on to say that the existence of the letter was a private matter. The primary repairing obligation had been transferred to Pacific and did not affect the ability of a landlord to pursue a claim against Pacific on the basis of the sublease or the terms of the licence to sublet. A purchaser of the landlord’s interests would acquire the right to pursue a claim against Pacific and the existence of the letter could be considered a benefit to the landlord as, in effect, it involved BVP in underwriting Pacific’s obligations to the landlord.
[19] The judge’s judgment can be summarised as follows: the key question was whether the letter was a matter that adversely affected the value of the reversion on 31 January 2002. The judge preferred the evidence of Mr Lidgley and concluded that the existence of the letter will have been unlikely to have affected the value of the reversion adversely. He accepted that the letter gave rise to some uncertainties, in particular with regard to the scope and duration of the indemnity.
[20] He agreed with Mr Lidgley that, from a practical point of view, it could be seen as an advantage since Pacific could pass on the expense and would be more amenable to tackling the repairs. He agreed with Mr Lidgley that the letter was a private matter between Pacific and BVP. Since the letter had been obtained, Pacific was prepared to commit itself to its repairing covenants in the licence and sublease eventually. Any businessman would understand that, and the letter could not possibly be read as reflecting adversely on the willingness or ability of Pacific to comply with its covenants. Quite the contrary, said the judge, if anything.
[21] The passage in the letter dividing the proposed obligations to repair was clear in context. Between themselves, BVP and Pacific were agreeing the division of labour in anticipation that Vitamol and Pacific would both be liable. It was a private matter between BVP and Pacific and that should not be any business of the landlord, which did not reserve any rights to dictate who would carry out covenanted works. For clear commercial reasons, it was evident that the meaning and intent was that the division of labour was personal to the two companies and that the landlord and other successors in title would not be affected. Lyndendown’s rights under the proposed licence and sublease could not be prejudiced and it was not intended to prejudice its rights in any way. A purchaser would not be in any doubt about that.
[22] On this appeal, Lyndendown says that the true construction of the letter is far from clear. It is unclear whether, as between Pacific and BVP, Pacific’s only obligation to do works was limited to keeping the premises, wind- and water-tight, but with the obligation that to do all other works was BVP’s. It is unclear whether, in so far as works in excess of keeping the premises wind- and water-tight were required, Pacific was, as between it and BVP, obliged to do the works or whether, in fact, BVP was undertaking to do the works itself. Furthermore, even if Pacific was agreeing to do all the works, it is unclear whether it was to pay for them in advance of the works being done or after completion of the works. There is also a substantial question as to whether the agreement was to last until the end of the sublease or the continuation tenancy, under Part II of the 1954 Act, or indeed for any new tenancy granted under Part II.
[23] The judge was correct to accept that the letter created uncertainties, but was wrong then to find that the letter gave Lyndendown a benefit or some form of guarantee. Mr Lidgley accepted in cross-examination that had he been advising Lyndendown at the time of the licence to sublet and had he known of the letter, he would have advised that Lyndendown should take a guarantee from BVP or that the sublease be contracted out of Part II of the 1954 Act. That admission demonstrated the falsity of Vitamol’s suggestion that the letter was a benefit to Lyndendown.
[24] The judge rejected a submission that the letter could not have been a benefit in the face of this evidence. He rejected it on the basis that Lyndendown’s counsel did not ask Mr Lidgley why he would have given that advice. In fact, the reason why Mr Lidgley would have given that advice was put to him by Lyndendown’s counsel and Mr Lidgley agreed with it. He would have given that advice precisely because if the lease had been contracted out or if there had been no guarantee at the end of the term, Vitamol could have pointed to the full repairing covenant of the sublease and said that Pacific, as a continuing tenant under Part II of the 1954 Act, was liable under full repairing covenants and, therefore, there was no diminution in the value of the reversion.
[25] If a competent surveyor knowing of the letter would have advised a freeholder not to have permitted a subletting without more, the existence of the letter represented an impediment to the landlord’s interest. The judge did not deal, in his judgment, with the part of Mr Lidgley’s cross-examination in which the scenario was put to Mr Lidgley of two adjoining sites, exactly the same as units 10 and 11 but with one not subject to the letter. Lyndendown criticises his answer, which was that it would not have made any difference. It says that the evidence made no sense and did not sit comfortably with the evidence that he gave earlier to the effect that any uncertainty has an effect upon value.
[26] I come to my conclusions. A number of matters canvassed in the judgment are no longer in issue, in particular whether the letter should have been disclosed to Lyndendown. That issue does not arise because the case has proceeded, and, in particular, the expert evidence has proceeded, as though the letter had been known to the relevant parties in January 2002. It is common ground that unless the letter could be said to alter the position, any damage to the reversion was nil or nominal because, as at the date the leases fell in on 31 January 2002, Pacific was in occupation holding under a sublease to which Part II of the 1954 Act applied containing the same or similar repairing covenants that Lyndendown could enforce directly by virtue of section 65(2) of the 1954 Act. The judge determined that the letter would have no adverse effect upon the value of the reversion, first, because he construed it as an indemnity to Pacific and, second, because he preferred the expert evidence of Mr Lidgley to that of Mr Conn. It was accepted by Mr Robert Levy, in his elegant and concise submissions, that he had an uphill struggle to persuade this court to overturn the judge’s findings of fact and his assessment of the experts. It was not seriously suggested that this court could substitute its own findings and assessment and, consequently, if the appeal were to be successful, there would have to be a retrial in a case in which the amount in dispute is well under £100,000.
[27] As I have said, the judge preferred the evidence of Mr Lidgley over that of Mr Conn. In particular, the judge said: (i) Mr Conn’s opinion was that purchasers would think that there was or might be a problem if they saw the letter, but that was not good enough, since businessmen did not negotiate with their heads in the sand; (ii) Mr Lidgley put it very well in saying that the letter would have very little effect upon the value, if any, no material difference; (iii) there were other aspects of Mr Conn’s evidence that undermined the confidence that the judge could have in his assessment. In particular, he did not apparently consider, much less take into account, that, in so far as the letter contained an indemnity, it was an advantage to the reversion; (iv) Mr Conn did not explain what sort of three-party litigation that might be feared would be complex or worry potential purchasers, and his scenario was unrealistic; (v) Mr Conn had no actual experience of the unusual nature of the task that he was being asked to speak to and had no historical knowledge or experience to back up his figure of 10%. It was a guess based upon or informed by general experience of the market; and (vi) Mr Lidgley was in the same position, but he gave reasons that were more comprehensive, accurate and sensible, and the judge preferred his evidence.
[28] I consider that the judge was fully entitled to accept the evidence of Mr Lidgley over Mr Conn and to conclude that the letter did not adversely affect the value of the reversion. In particular, he was plainly right to find that the existence of the arrangement between BVP and Pacific could have no effect upon Pacific’s obligations to repair under the sublease. Whether or not the letter was of benefit to Lyndendown (because it could be seen as encouraging Pacific to carry out works at the expense of a plc), it was, as the judge said, at worst neutral. Although in evidence Mr Lidgley accepted that there was a degree of uncertainty in the letter, and that there was a potential for fallout between Pacific and BVP, his evidence was that he did not think that it was a significant risk and that a reasonable purchaser would not |page:14| worry about the additional uncertainty of the letter; in particular for a property of this kind, a purchaser would accept a much higher degree of risk. He firmly disagreed with a suggestion that a prospective purchaser would want the site without the taint of the letter.
[29] I do not consider that the judge was wrong to take little account of Mr Lidgley’s evidence that had he been advising Lyndendown at the time of the licence to sublet, and had he known of the letter, he would have advised that Lyndendown take a guarantee from BVP or that the sublease be contracted out of Part II of the 1954 Act. The judge was entitled to infer that it would have been because, having seen that BVP was prepared to indemnify Pacific, any surveyor would have advised Lyndendown to try and take advantage of the commercial situation and seek a direct guarantee itself. In 1999, when the hypothetical advice would have been given, Pacific would not have been bound into the sublease, but the position was quite different by 2001 and 2002. It was open to the judge to find: “It is one thing to advise a landlord asked to grant a licence to sublet, it is quite another to assess what a willing seller and purchaser might do and the enquiries they might make when there is a tenant in occupation with a right to renew”.
[30] I see no grounds for disturbing the judge’s findings of fact and his assessment of the experts and I would therefore dismiss the appeal.
Jacob LJ said:
[31] I agree.
Smith LJ said:
[32] I also agree. I should perhaps mention just for the avoidance of doubt that ground 9, relating to costs, was not pursued before us because the parties have reached agreement upon it.
[33] The outcome is that the appeal is dismissed.
Appeal dismissed.
