Termination of lease – Dilapidations – Measure of damages – Section 18(1) of the Landlord and Tenant Act 1927 – First defendant transferring freehold of premises and taking lease back – Claimant becoming successor landlord – Dispute arising as to dilapidations on termination of lease – Whether first defendant acting in breach of covenant – Whether statutory limit applying to measure of damages for diminution in value of reversion – Claim allowed in part.
The claimant was the landlord of a large 1930s industrial and office building in Welwyn Garden City under a lease for a term from 1 October 1984 to 28 December 2009. The rent at the time of termination of the lease was £675,000 per year. In February 1984, the first defendant had acquired the freehold of a site which included the building. It sold off the remainder of the site for redevelopment. In November 1984 it arranged to take a lease-back by transferring the freehold to J Ltd which led to it entering into the Lease. Under the lease, the second defendant acted as guarantor. In 1987, the claimant, which was originally a joint-venture partner with J Ltd, bought out that company and became the successor landlord under the lease.
The first defendant vacated the site in 2003, after which it stood empty. Discussions between the parties had taken place about a redevelopment of the site, but came to an end ahead of the expiry of the lease at the end of 2009. The claimant made a claim for dilapidations on the termination of the lease which was disputed by the defendants.
Issues arose, inter alia, as to what works the first defendant should have carried out under the lease and the reasonable and proper cost of the necessary works in relation to disputed items; and the measure of damages for diminution in value of the reversion under the first limb of section 18(1) of the Landlord and Tenant Act 1927.
Held: The claim was allowed in part.
(1) A covenant to keep in good repair and condition was not engaged unless there was a deterioration from some previous physical condition. If there was a state of disrepair it had to be established that the item was below the standard of repair contemplated by the covenant and, if so, what remedial work was needed to restore that item to that standard. The appropriate standard of repair was such as, having regard to the age, character and locality of the premises, would make them reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take them. The standard of repair was objective. The question was what would be required to make the premises reasonably fit for occupation, not what an incoming tenant would require at the end of the lease. The appropriate standard of repair had to take account of the age of the building. The obligation was not to return the premises to the condition that they were in at the start. It was for a claimant to prove relevant disrepair of such an extent or nature that repair was not reasonably or sensibly possible. Where a reasonable surveyor might equally well advise either repair or replacement, damages were to be assessed by reference to the cost of repair unless replacement would be cheaper: Post Office v Aquarius Properties (1986) 281 EG 798, Fluor Daniel Properties v Shortlands [2001] 2 EGLR 103, Mason v TotalFinaElf (UK) [2003] 3 EGLR 91, Riverside Property Investments v Blackhawk Automotive [2005] 1 EGLR 1114 and Carmel Southend Ltd v Strachan and Henshaw Ltd [2007] 3 EGLR 15 considered.
In the present case, the court had to take into account the age, character and locality of the building which was a purpose-built manufacturing building which was about 50 years old at the date of the lease. It was necessary to consider what a reasonably minded tenant of the relevant user class would reasonably require in December 1984 to render the building fit for occupation for the purposes contemplated by the lease, being an industrial building with ancillary offices and a wholesale warehouse or repository on the ground floor. In all the circumstances, the reasonable and proper cost of the necessary works which the defendants should have carried out under the lease was £2,399,104.
(2) However, the claimant’s damages were limited by section 18(1) of the 1927 Act to the value of the diminution of the reversion assessed at £900,000. The first limb of section 18(1), on which the defendants relied, limited damages to the amount by which the value of the landlord’s reversion had been diminished by breaches of the repairing obligation. It considered, objectively, the reduction, if any, in the market value of the landlord’s interest on the term date because of those breaches. The first limb therefore put a ceiling on the recoverable damages so that they could not exceed the diminution of the value of the reversion. The question of diminution in value depended on how the notional buyer on the term date would have assessed the value of the premises in and out of repair.
In the present case, the court had first to consider the value of the premises in their covenanted state on the term date and, secondly, the value in their actual state as at that date. In the end, the court’s assessment of the evidence depended less on the forensic criticisms of the experts and more on the cogency of the views expressed by the experts and the reasoning for their conclusions. Whilst there was often a degree of subjective assessment, some explanation needed to be provided.
On the evidence, the claimant could neither obtain nor afford the funding necessary to put the building in repair. The court accepted the defendants’ submission that, at least in any sense which was probative of the diminution in value on the term date, the claimant did not intend to carry out the dilapidations for which it claimed. The diminution in value was to be based on the difference between the value of the property in repair, rounded to £3m, and the site value of £2.1m.
Judith Jackson QC (instructed by Thomas Eggar LLP) appeared for the claimant; Nicholas Dowding QC and Elizabeth Fitzgerald (instructed by Shulmans LLP) appeared for the defendants.
Eileen O’Grady, barrister
