Jonathan Seitler QC and Miriam Seitler debate moot points in property law – this time, section 18 of the Landlord and Tenant Act 1927.
Question: Is the first limb of section 18 fair enough?
NO: Miriam Seitler, barrister at Landmark Chambers, offers four reasons that the section 18 provisions are entirely unnecessary.
1. The first limb of section 18 of the Landlord and Tenant Act 1927 (the 1927 Act) puts a limit on the damages recoverable for terminal dilapidations. It says: “Damages for a breach of a covenant… to leave or put premises in repair at the termination of a lease… shall in no case exceed the amount (if any) by which the value of the reversion… is diminished owing to the breach of such covenant…”
This might look fair enough, but it is entirely unnecessary. It only confuses the already complex process of managing tenants’ dilapidations liability.
In Ruxley Electronics and Construction Ltd v Forsyth [1995] 3 All ER 268, a firm of builders agreed to construct a swimming pool with a diving area 7ft 6 inches deep. In error, the pool was constructed to a depth of only 6ft. The cost of rebuilding the pool to the contractual depth would have been £21,560. The trial judge found, as a fact, that the pool owner did not intend to use any damages awarded to reconstruct the pool. He therefore awarded the pool owner the sum of £2,500, which he expressed as compensation for “a loss of amenity brought about by the shortfall in depth”. The Court of Appeal ([1994] 3 All ER 801) set aside the £2,500 award and substituted an award of the cost of rebuilding – the £21,560. However, the House of Lords restored the trial judge’s order.
In short, damages for breach of a contract or lease in any event only reflect the loss to the claimant (in this context, the landlord). There is no need to have the first limb of section 18. It might have been necessary in 1927 when it came into law, but damages have caught up now, so it is otiose. Judicial support for this view can be found in Latimer v Carney [2006] 3 EGLR 13 and PGF II SA v Royal & Sun Alliance Insurance plc [2010] EWHC 1459 (TCC); [2010] PLSCS 250.
2. The attraction of the first limb of section 18 is cosmetic only; in practice it can short-change a landlord. It works by ascertaining the diminution in value by comparing the open market value of the property in repair with its open market value out of repair as at the date of determination of the term. But it may well be that the open market value out of repair does not reflect the full scope of the disrepair because, for instance, the highest bid which would be made by the hypothetical purchaser (the darling of open market value) would reflect the fact that such purchaser was buying it for redevelopment or otherwise for a use which renders the disrepair irrelevant. Such an instance would seriously depress the value of the damage to the reversion.
Yet the actual landlord may want to carry out the repairs. In that situation, recovery is artificially constrained by the hypothetical purchaser’s intentions. That is unfair. Section 18 should protect actual landlords, especially ones who only want to put the property back into the physical state it would be in, had the tenant complied with its obligations.
3. Section 18 can cause untold unfairness for a landlord when something happens between the date of determination of the lease and the trial of the terminal dilapidations claim, which the landlord could not possibly have foreseen at the former date. Maybe in that interim period, while the case joins the court-listing queue, the demand for the building changes (to that of a site ripe for redevelopment) and this gives the tenant the ability to say that there is no damage to the reversion because the hypothetical redeveloping purchaser would be unperturbed by disrepair.
The landlord would have recovered full damages for the costs of repair had the trial been heard immediately on the date of determination of the lease, but the waiting time for a trial date means the first limb of section 18 blocks this.
Inequitable? I’d say so.
4. As usual, clever drafting can avoid the effects of section 18(1), but with arbitrary and unprincipled results. The best example of this is the non-application of section 18(1) to Jervis v Harris clauses (Jervis v Harris [1996] 1 EGLR 78). A landlord’s claim on a covenant allowing it to enter and repair the premises and then recover the cost of repair from the tenant is a debt claim, not a damages claim, and therefore is not caught by section 18(1).
Similarly, a covenant requiring a tenant to either spend a fixed sum on repairs each year or pay the landlord the difference between the sum actually spent and the prescribed sum has been held to give rise to a claim in debt, not damages, and therefore is free from the application of section 18: Moss Empires Ltd v Olympia (Liverpool) Ltd and another [1939] 3 All ER 460. The ability to effectively contract out of the effects of section 18(1) seriously undermines it.
YES: Jonathan Seitler QC, barrister at Wilberforce Chambers, argues that the section 18 provisions still ensure fairness in the determination of dilapidations claims. This is for four reasons:
1. The rationale of the first limb of section 18 is simple to state and not to be criticised for that. It limits the landlord to the losses it actually suffers and stops it from enjoying a windfall at the end of the term. No landlord should be entitled to recover damages for breaches of repairing covenants when no such loss has actually been suffered. This just reflects the fair and widespread principle of law that you only get damages for damage.
2. The purpose of the first limb of section 18 was to move away from a measure of damage based on “cost of repairs” in all circumstances. This was needed, and remains needed, because not all landlords respond to terminal disrepair by expending money on repairs. This would be because they calculate there to be no advantage in doing so, because, for whatever reason, it is not required to support the value of the reversion.
However, since the 1927 Act, there has developed in the cases a principle that where the landlord (or an incoming tenant at the landlord’s expense) has already, by the time of the claim for damages for terminal dilapidations, carried out the works for which it claims, the cost thereby incurred is good evidence of the damage to the reversion: see, for instance Jones v Herxheimer [1950] 2 KB 106.
Taken together with section 18, this produces a perfectly fair balancing of rights. The landlord will recover the cost of repairs where it has considered them necessary enough to be done (“the proof of the pudding is in the eating”), but the landlord will not necessarily recover damages based on the cost of repairs where those repairs are not carried out because, plainly, it did not, on that hypothesis, consider it necessary. In that situation the landlord has to go on and show that in another way – by damage to the value of the reversion – it has suffered loss by reason of the terminal disrepair.
Thus, in Car Giant Ltd and another v Hammersmith and Fulham London Borough Council [2017] EWHC 197 (TCC); [2017] PLSCS 60 the landlord had carried out some, but not all, of the works for which it claimed. The deputy judge said he saw “no reason why I should not accept that, as regards the work in fact carried out, this represents or is equivalent to a diminution in value in the reversion”.
This principle even extends to circumstances where the landlord can prove a genuine intention to carry out the repair works, despite not having actually done so yet. In Craven (Builders) v Secretary of State for Health [2000] 1 EGLR 128, Mr Justice Neuberger said that the cost of the works can be prima facie evidence of diminution in value where the landlord clearly intends to carry out the works.
The loss recoverable, again, reflects the loss suffered, but only the loss suffered. That sounds fair to me.
3. There is much complaint (see Miriam’s second point) about how the use of open market values to ascertain damage to the value of a reversion can penalise an actual landlord when its intentions differ from those of a hypothetical purchaser of the reversion: these arguments were set out beautifully in the 2013 Blundell Lecture “Section 18 revisited” by Jonathan Gaunt QC.
These points, however, are of academic interest only. It is not uncommon, where unfair outcomes result from statutory interventions, for a judge to note the unfairness of it all and to comment that he or she is bound to reluctantly apply the Act and say that the matter is one for parliament to remedy should it think fit.
However, nobody seems able to find any such cases. The reality must therefore be that, while possible in practice, legal outcomes in the event are more or less fair enough, if only because a hypothetical purchaser whose intentions stray from those of the actual landlord owner may, by definition, be out on a limb and therefore may need to have its intentions adjusted in the interests of accuracy.
4. Miriam’s third point about court waiting times is based on the fact that she is ignoring the valuation date. In any terminal dilapidations claim, you look at the position as at the date of expiry of the lease.
It is true that in some valuation circumstances it is possible to look at values which post-date the valuation date. This is sometimes called “the Bwllfa principle”, based on Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Company [1903] AC 426. It is that, where the court making an assessment of damages has knowledge of what actually happened, it need not speculate about what might have happened but should base itself on the known facts: in other words, why gaze into the crystal ball when you can read the book?
However, the first limb of section 18 is not one of those circumstances. The statutory date of assessment is the date of expiry of the lease and no case law can trump that. See Hanson v Newman [1934] Ch 298; Associated Deliveries Ltd v Harrison [1984] 2 EGLR 76. Events occurring after the valuation date can, at most, only provide evidence of how the hypothetical purchaser would have looked at the reversion on the valuation date.
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With last month’s Moot Point, on Jervis v Harris clauses, Miriam took a 4-2 lead. Who will triumph this time?
