Lease – Breach of covenant – Dilapidations – Claimant landlord seeking damages from defendant tenant for breaches of covenant, loss of rent and rates – Whether repairing costs being capped by section 18(1) of the Landlord and Tenant Act 1927 – Whether damages for reinstatement and statutory items being remedial costs or effect on diminution in value – Whether claimant entitled to recover loss of rent and rates for duration of works – Whether credit overpaid rent including VAT – Whether court awarding appropriate rate of interest – Claim allowed in part
A lease of business premises known as Capella House, Snowdon Drive, Milton Keynes, was granted on 1996 by the claimant to a predecessor of the defendant for a term of 15 years expiring in June 2011. Under the terms of the lease, the defendant undertook a full repairing obligation subject to a limit of not being required to put the premises into any better state than evidenced by an agreed schedule of condition attached to the lease.
It was common ground that, given the weak state of the market in 2011, the property had little prospect of being let while out of repair. The estimated cost of remedying breaches of covenant at the end of the lease were agreed to be £315,258.77. It was also agreed that the remedial works would take 12 weeks. The claimant claimed the loss of rent and rates during that period. It was common ground that the defendant had overpaid rent at the expiry of the lease and that there should be an appropriate credit for that sum. The experts’ valuations of the premises in good condition and in actual condition were: for the claimant, £1,150,000 and £600,000; and for the defendant, £775,000 and £700,000.
Issues arose between the parties: (i) whether, in the light of the diminution in value of the reversion by reason of the lack of repair, the head of claim for repair costs was capped by section 18(1) of the Landlord and Tenant Act 1927, which capped the amount payable by reference to the diminution in the value of the landlord’s reversion and prohibited landlords from recovering damages for terminal dilapidations if the premises were to be demolished or structurally altered in such a way as to render the repairs useless; (ii) whether, on the facts of the case, the correct measure of damages of the reinstatement items and statutory items was their remedial costs or their effect on diminution in value and, if the later, what damages should be awarded; (iii) whether or to what extent the claimant could additionally recover rent and rates for the estimated duration of the remedial works; (iv) whether the credit to the defendant for overpaid rent should include VAT; and (v) the appropriate rate of interest.
Held: The claim was allowed in part.
(1) The court placed greater reliance on the evidence of the defendant’s expert who had looked at a range of comparables, applied his judgment and identified the most relevant, stating his reasons, whereas the claimant’s approach had been to consider the state of the market, list out three market letting and fourteen vacant possession comparables and to state his in repair and out of repair valuations. Whilst valuation was more an art than a science, and an important element in valuation was the judgment made by an experienced and well-informed practitioner, the weakness in the claimant’s approach was its excessive subjectivity. One would expect a valuer’s subjective judgment to be informed a backed up by careful reasoning based on objective criteria.
On the evidence, the value of the building in repair would be assessed at £900,000 and out of repair at £675,000. Accordingly, applying section 18, the maximum that claimant was entitled to recover by way of damages for the dilapidations was £225,000, representing the diminution in value of the claimant’s reversion.
(2) The measure of damages for reinstatement items and statutory items was governed by common law. The question was what, in all the circumstances, was the landlord’s loss. Where the landlord claimed reinstatement, it was necessary to consider whether reinstatement was reasonable. Where the landlord had not, and did not intend to, carry out the work, the measure was likely to be the diminution in the value of the reversion. Where the landlord reasonably intended to carry out the works, the measure would be based on the costs of the works, sometimes with the addition of ancillary losses.
In the present case, approaching the question as depending upon the balance of probability, the likelihood was that the works would be carried out by the claimant in due course. That was reasonable course of action. Accordingly, the appropriate measure of damages was the agreed cost as claimed.
(3) On the evidence, the market had been very difficult in 2011, even for properties in good condition, and the court was unable to conclude that a prompt letting would probably have been effected if the property had been in good condition at the expiry of the term. On the facts of the case, the claimant had not succeeded in establishing, on the balance of probabilities, a loss of rent and rates resulting from the defendant’s breaches of covenant.
(4) The overpaid rent had been paid by mistake and needed to be reversed. When a transaction carrying VAT was reversed, the reversal needed to include the VAT. A credit note was normally issued for the VAT-exclusive amount and the VAT that was charged upon it. The appropriate amount of credit had to include the VAT, and it was for the parties to make the necessary adjustments as between themselves and HM Revenue and Customs.
(5) The claimant claimed interest on damages at 6%, on the basis that the defendant, a large corporation, had negotiated a payment by its sub-tenant to release it from its terminal dilapidations liabilities under the sub-tenancy, but had not applied that sum to comply with its covenants under its own lease, electing to leave the premises in gross disrepair. However, that did not take the case out of the norm so as to justify an increased rate of interest. The appropriate commercial rate had to take into account the category of claimant. With base rates at a low level, the differential between base rate and the rate at which commercial parties could borrow had tended to increase: see Challinor v Juliet Bellis & Co [2013] EWHC 620 (Ch). In the light of that general trend, but constrained by the limited information provided in the present case, it was appropriate to award 2.5% above base rate, constituting a rate of 3.0% pa.
Stan Gallagher (instructed by Wannops LLP, of Chichester) appeared for the claimant; Simon Pritchett (instructed by DLA Piper UK LLP) appeared for the defendant.
Eileen O’Grady, barrister
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