Landlord and tenant – Dilapidations – Damages – Respondent tenant breaching repairing covenants in leases of commercial premises dating from 1970s – Premises delivered up in poor state of repair at end of leases – Respondent landlord carrying out extensive works to premises – Damages awarded to respondent for cost of works necessary to put premises in condition required by lease – Whether judge erring in conclusion that cost of works not capped by reference to diminution in value of reversion – Appeal dismissed
The respondent was the landlord and the appellant was the tenant of combined office and retail premises in Soho, London, under two leases for terms of 35 years from 1973 containing full tenant’s repairing covenants. The leases came to an end when the first defendant vacated the premises in November 2008. The premises were left in a very poor condition and the respondent carried out extensive works in order to re-let them. It then claimed damages for breach of the repairing covenants in the leases. Much of the sum claimed related to the cost of the remedial works.
The judge assessed the common law measure of damages at £1,353,254, by reference to the cost of the works that the appellant should have carried out to put the premises in the condition required by the lease. In that regard, he held that some of the respondent’s works went beyond what was required by the lease covenants, but that the cost of the rest was recoverable as damages. Since he found that the cost of the necessary works was less than the diminution in value of the reversion caused by the disrepair, he concluded that the cost was recoverable in full and was not affected by the statutory cap in section 18 of the Landlord and Tenant Act 1927, which would otherwise have limited the damages to the amount of the diminution in value: see [2013] EWHC 463; [2013] EGILR 5.
On appeal, the appellant sought to challenge the judge’s conclusions on diminution in value. It contended that: (i) where the respondent had done work that differed from that which the appellant could have been compelled to do in order to comply with its covenants, the judge should have placed on the respondent the burden of establishing that the statutory cap did not apply; and (ii) the judge had erred in using the report of the appellant’s expert as the template for his valuation of the premises in their required condition in circumstances where the appellant had not called that expert to give evidence and where the report of the respondent’s expert contained an alternative figure which the appellant did not challenge.
Held: The appeal was dismissed.
(1) The judge had been entitled to find that the amount of the diminution in value was to be inferred from the costs of the repairs reasonably necessary to make good the loss caused by the appellant’s breach, in the absence of any satisfactory evidence that it was any lower amount. This was not a case where the respondent landlord would inevitably have carried out substantial works to improve the premises in any event; on the judge’s findings, the respondent would not have carried out the works it did if the appellant had left the premises in the state in which they should have been left: Mather v Barclays Bank plc [1987] 2 EGLR 254 distinguished.
(2) The fact that the appellant had not called its expert to give evidence did not prevent the judge from adopting that expert’s valuation as the template for his valuation. Where a party had disclosed an expert’s report, any party could use that expert’s report as evidence at the trial: see CPR 53.11. If a party could use the report as evidence, there could be no objection to the judge doing so. The equivalent valuation of the respondent’s expert was based on the assumption, which he himself believed to be wrong, that a purchaser of the building would have to spend a large sum in order to make it lettable. The judge agreed with him that the assumption was wrong. In those circumstances, it would have been inappropriate simply to take a headline valuation figure made on an erroneous assumption. The valuation was a residual valuation, which assumed that what a purchaser would pay was the surplus after it had met, out of the proceeds of sale of the finished building, its construction, its costs of purchase, the time and money costs of finance and an allowance for profit. The eventual output was therefore heavily dependent on the inputs. Having made his findings, the judge had been entitled to adjust the report of either expert in order to insert the correct inputs for the cost of works and he could not be faulted for doing so.
Mark Wonnacott QC (instructed by Mishcon de Reya) appeared for the appellant; Martin Hutchings QC (instructed by Forsters LLP) appeared for the respondent.
Sally Dobson, barrister