Landlord and tenant – Dilapidations – Diminution in value of reversion – Defendants’ lease expiring – Claimant seeking damages for breach of repairing covenants – Whether statutory cap in section 18(1) of the Landlord and Tenant Act 1927 limiting sum recoverable – Claim allowed in part
The claimants together held the relevant reversionary interest in a commercial property known as the Triangle Estate, Willesden, London. The property comprised 39 units which were used as light industrial or warehouses. The defendant local authority held a lease of the property dated 21 February 1986 which demised to them the whole of the property for a term of 25 years from 21 February 1986. The lease contained full repairing covenants including a covenant to yield up the property in good and substantial repair and came to an end on 21 February 2011 (the valuation date). It was common ground that on that date there were breaches of the repairing covenants. The building surveyors for the parties agreed that the reasonable and necessary cost of remedying the breaches as at the valuation date was £402,887.86 of which remedial work to the value of £183,897.86 had been executed by September 2016. An issue arose as to the diminution in value of the reversion attributable to those breaches.
The first limb of section 18(1) of the Landlord and Tenant Act 1927 provided that damages for breach of a covenant or agreement to leave or put premises in repair at the termination of a lease, whether such covenant or agreement was expressed or implied, and whether general or specific, should not exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises was diminished owing to the breach of such covenant or agreement. The only issue in this case was whether the cap in the 1927 Act limited the recovery to £110,000, as contended for by the defendants, or whether the claimants could recover the entire remedial costs (both incurred and not incurred) of £402,887.86 on the basis that the diminution in value was £500,000.
Held: The claim was allowed in part.
(1) The correct approach was, first, to identify what works the tenant should have done and then to establish the breaches and what remedial work was necessary to remedy them. The landlord’s interest was then valued as at the date of termination of the lease on two bases: first, on the assumption that the premises were in the state they should have been in if the tenant had performed his covenant; and secondly on the basis that the premises were in their actual state and condition. The difference between the two valuations was the damage to the reversion. Damages could not exceed that amount.
(2) In this case the works that should have been done by the defendants and therefore the breaches of the repairing covenants had been agreed, as had the cost of so doing. Where that work had been carried out the authorities established that that cost was prima facie evidence or a very real guide to the damage to the reversion. Equally where the landlord could establish that he really intended to do the repairs then in practice the burden of proving that the damage to the reversion was less than the cost of the works might shift to the tenant. Conversely, the failure to carry out the repairs would clearly be an indication that the repairs were not necessary as the landlords claimed. Whether sums were actually spent on doing repairs was relevant to the question whether the repairs were necessary or not. If they were not necessary, damage to the reversion could not be inferred from them. But even where the repairs had not been carried out there could be other explanations for the failure that could satisfy the judge that the indication was not well-founded, as where the landlord decided not to repair the property himself but proceeded to sell it at a lower price than he could have obtained if the repairs had been remedied: Latimer v Carney [2006] 3 EGLR 13 applied.
(3) In this case both propositions applied since some work had been carried out and some work had not. The work in fact carried out represented or was equivalent to a diminution in value in the reversion, a total of £170,773. The court would reduce that sum by the amount that the hypothetical purchaser might reasonably assume would be recoverable from the “holding over” tenants i.e. £10,000. However, that figure had to be increased to allow for financing: £25,000 calculated on the assumption of a budget cost of about £500,000. Taking account of the actual costs expended, the financing costs would be reduced to £5,000. Thus, the diminution in value which could properly be deduced from the fact that the claimants had in fact carried out repair works to the value of about £170,000 was £166,000 (i.e. £165,773 rounded up).
(4) As regards the work not carried out, the claimants had not explained why such work had not been done, some six years after the valuation date. There was no evidence to suggest that such work would ever be carried out or that those outstanding works were serious or substantial. Therefore, the court could not deduce or assume that that further element of cost should be taken into account in arriving at the diminution of value. There was no other evidence to suggest that, notwithstanding those outstanding repairs, the reversion had been diminished by an amount equivalent to or to be derived from the cost of remedying the remaining defects. Accordingly, the common law assessment of damages attributable to the breaches of covenant by the defendants was £402,887.86. However, by reason of section 18(1) of the 1927 Act, the recoverable damages were limited to £166,000.
(5) In addition to the diminution in value, the claimants were entitled to recover the fees for the preparation and service of the defects schedule, claim summary and drainage report in the sum of £21,416.25 since that was a head of loss attributable to the breaches of covenant.
Neil Mendoza (instructed by IBB Solicitors, of Uxbridge) appeared for the claimants; Tiffany Scott (instructed by Browne Jacobson) appeared for the defendants.
Eileen O’Grady, barrister
