Damages for disrepair will depend on the two limbs of section 18(1)
How can I claim against my former tenant? |
Question I am a landlord of commercial premises that were let on a 10-year full repairing and insuring lease. This came to an end in June 2008, when the tenant vacated. Works are necessary to remedy breaches of covenant, including: repairs to the structure redecoration mechanical and electrical works and works to comply with statutes. I have obtained estimates for the costs of the works but I have not undertaken them. The premises have been vacant since June 2008 and the market for them plummeted at the end of that year. I have recently obtained planning permission to carry out structural alterations. What can I claim against my former tenant and how are damages assessed? Answer Your claim against the former tenant for damages will be the proper cost of putting the premises in repair subject to the operation of the two limbs of section 18(1) of the Landlord and Tenant Act 1927. |
EXPLANATION
Section 18(1) applies to covenants to put, keep and yield up in repair and those that substantially have the same effect as a covenant to repair. It has two limbs. The first provides that damages should not exceed the amount (if any) by which the breach diminishes the value of the reversion. It limits damages and is objective: the question is one of valuation. Under the second limb, no damages can be recovered if at or shortly after the termination of the tenancy the premises are to be demolished or structural alterations will render valueless the repairs covered by the covenant. This provision extinguishes damages. It is also subjective since it requires a consideration of the landlord’s state of mind.
The correct approach is to assess the damages recoverable at common law and to establish the diminution in the value of the reversion. If the common law damages exceed the diminution, the amount recoverable will be capped at the sum of the diminution. If the statutory cap will limit the amount recoverable, the first step might be omitted.
Common law measure
The common law measure of damages is the proper cost of putting the premises into repair – subject to a discount for betterment, where appropriate – together with loss of rent and other heads of damage, such as service charges or void rates suffered as a result of being unable to relet the premises until repairs have been carried out.
If the landlord has undertaken the works or intends to do so, the cost of such is evidence of the damage to the reversion, provided that they are reasonable. If the landlord has not carried out the works and does not intend to do so, the cost of repairs may not be a guide to the diminution in the value of the reversion and the landlord must establish that it has suffered a loss.
The diminution in value of the reversion is assessed at the lease end. Events after that date cannot reduce or extinguish the damages save to the extent that they were operative at the termination date and can throw light on the value of the reversion.
Two valuations of the landlord’s interest at the termination date are required. First, on the basis that the premises are left in repair in accordance with the relevant covenants and, second of the premises in their current condition. The difference between the valuations represents the diminution in the reversion caused by the breaches. The Court of Appeal confirmed this method in Van Dal Footwear Ltd v Ryman Ltd [2009] EWCA Civ 1478.
Whether the premises will be demolished or structural alterations made at the termination date is a question of fact. Events after the term date are irrelevant unless they cast light on an uncertain state of mind or intention at an earlier date.
What can you claim?
? You have not carried out the work. Why not? Your reasons may throw light on the section 18(1) hypothetical purchaser.
? Which elements of the claim are capped by section 18(1)? Decoration may be, but not compliance with statutes.
? You need to establish that despite not having undertaken the works, the value of the reversion has diminished and that the works were necessary. Can you show, for example, that an incoming tenant would bargain for a sum for disrepair.
? The fall in the market after the term date cannot be taken into account in carrying out the section 18(1) valuation.
? What factors are relevant to the section 18(1) valuation? Would a hypothetical purchaser relet the premises and, if so, would it carry out some or all the works? What terms would it seek? Would it refurbish/redevelop so that the works that the tenant should have done, or some of them, would be unnecessary? What additional expenses would it incur?
? The fact that you have recently obtained planning permission may extinguish your claim if it was “operative or potential” at the termination date.
? For those elements of the claim to which section 18(1) does not apply obtain an estimate of the proper cost of works that the tenant should have carried out and ensure that it is proportionate to undertake them. For the remaining works, obtain estimates of the costs and section 18(1) valuations.
? Your claim can be summarised as: (i) cost of compliance with statutes (plus professional fees and non-reclaimable VAT) or diminution attributable to it (ii) cost of works (plus professional fees and non-reclaimable VAT) capped at diminution in value and (iii) loss of rent, service charges and rates only if you were unable to relet because of the need to carry out repairs.
