Landlord and tenant – Lease — Repairing covenant – Claimant landlords seeking damages for breach of covenant against defendant headlessee and sublessee – Whether claimants entitled to damages for breach of repairing and reinstatement covenants – Whether sublessee liable to indemnify headlessee – Claims allowed
The landlords of a six-storey office block (the property) granted a headlease to K for a term of 35 years from 24 June 1973. The lease required the tenant to keep the property in good and substantial repair and to yield up the premises “in repair” at the end of the term.
The first defendant became the tenant of the property in 1997. With the consent of the then landlord, it sublet most of the building to the second defendant; a licence to alter the property was also granted. The sublease expired four days before the headlease and required the second defendant to remove any alterations, additions or improvements made to the property and to make good any damage caused by such removal to the landlord’s reasonable satisfaction. The first defendant was obliged to repair and keep the main structure in good and substantial repair.
In 2007, the claimants acquired the freehold of the property. In 2008, a report prepared by the claimants referred to a potential refurbishment scheme and “possible re-cladding required through a dilapidations claim”.
The sublease and the headlease expired in June 2008 and the claimants obtained vacant possession. A revised schedule of dilapidations and reinstatement was served and the claimants issued proceedings against the first defendant, claiming damages for breach of the repairing, decoration and reinstatement covenants, and against the second defendant in respect of reinstatement. The first defendant claimed damages against the second defendant for disrepair and failure to reinstate in breach of covenant.
Held: The claims were allowed.
Under section 18(1) of the Landlord and Tenant 1927 Act, the court had to assess the value of damages required at common law that would reasonably compensate a landlord for the tenant’s breach of covenant to repair at the end of the lease. The damages that the landlord could recover might not exceed the statutory cap. It was first necessary to assess the common law damages, which had to provide reasonable compensation for an established loss to the aggrieved party and not a gratuitous benefit. The reasonableness of the damages was to be linked directly to the loss sustained. The common law principle was that the courts were not usually concerned with how the plaintiff used its damages, but current intention was relevant when determining the reasonable level of damages. That principle also applied under the 1927 Act: Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 applied
Damages were to be assessed as at the date of the termination of the lease. A landlord’s intention at that date was an important part of reasonableness. In accordance with the statute and common law principles, a landlord would not recover damages for dilapidations if it had formed the intention, at the date of the termination of the lease, that it would then or shortly afterwards demolish the premises or make such structural alterations as to render valueless the repairs covered by the agreement. It would not be reasonable to award damages on that basis. Applying the principles laid down in Ruxley, if the landlord had not reached a decision at the termination date, but only one reasonable decision was open to it, it might provide reasonable compensation to assess damages on the basis that the landlord had reached that decision: Cunliffe v Goodman [1950] 2 KB 237 considered.
Both the 1927 Act and Ruxley were concerned with present intention as at the date of the termination of the lease. The fact that the property had development potential was irrelevant to the assessment of common law damages. Under the Act, the award could not exceed the value by which the reversion was diminished as a result of the breach of covenant. The value was to be determined as at the date of termination. There would be no diminution in the value of the reversion, if a decision had been taken by the termination date that, then or soon after, the property was to be pulled down, or to be so altered structurally as to render valueless the repairs covered by the covenant or agreement.
The Act provided a landlord with reasonable compensation for the tenant’s breach of covenant. The purpose of the statutory cap was to achieve that result and not to deprive the landlord of damages to which it would otherwise be justly entitled. If there were no immediate intention to redevelop should the property be put in repair, the basis of the valuation of the damage to the reversion would include the value of having the property for reletting. The standard of repair was that which was reasonable in the circumstances, and the court had to take into account all relevant circumstances, including the locality and the age of the building.
Where the landlord chose to act in the same way as it would have done had the premises been returned in repair, it could recover the reasonable cost of carrying out the dilapidations less that relating to any works that were superseded by others that it had carried out. If the landlord could prove that it would have acted differently if the tenant had returned the premises in repair, it would be able to recover the reasonable cost of the dilapidations less the cost of any subsequent work that it would have undertaken and that rendered valueless the works that the tenant should have carried out.
In the instant case, the claimants had not, at the date of the termination of the lease, reached a decision to replace the cladding because they had reasonable alternative options. The decision on how to proceed depended on what sum they would recover from the dilapidations and on the uncertain economic circumstances at the date of the termination.
As regards, the first defendant’s claim against the second defendant, the latter was obliged to maintain the exterior of the building and, in particular, the cladding. The reasonable cost of preparing a schedule of dilapidations was the direct consequence of the tenant’s breach and was recoverable.
The claimants’ claims against both defendants and the first defendant’s claim against the second defendant would be allowed.
Jonathan Small QC and Edward Peters (instructed by CKFT) appeared for the claimants; Timothy Harry (instructed by Maples Teesdale LLP) appeared for the first defendant; Martin Hutchings (instructed by IBB Solicitors) appeared for the second defendant.
Eileen O’Grady, barrister
