Damages payable for terminal dilapidations were limited to the diminution in the value of the landlord’s reversion
Section 18 of the Landlord and Tenant Act 1927 limits the damages payable for breaches of a tenant’s repairing covenants to the amount by which the value of the landlord’s reversion is diminished as a result of the dilapidations. It also prohibits landlords from recovering damages for dilapidations at the end of a lease if it can be shown that the premises are to be demolished or structurally altered in such a way as to render the repairs useless.
Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd [2013] EWHC 1161 (TCC) concerned a claim for dilapidations on the termination of a lease of a large 1930s industrial and office building. The landlord first valued the claim at £6.8m, but conceded that it was having difficulty obtaining the funding needed to effect the repairs.
The tenant did not allege that the landlord planned to carry out any work that would supersede the repairs. However, it did argue that there was no demand for old-fashioned buildings in the current lettings market and suggested that no reasonable landlord would plough such a large sum of money into the work described in the terminal schedule of dilapidations that it had received. Therefore, the damages payable should be calculated by reference to the diminution in the value of the reversion. The tenant suggested that a speculative developer might pay £100,000 more than the property was worth in its current state, had the building been in good condition. Consequently, the diminution in value was £100,000.
When the case came to trial, the agreed cost of putting the building into repair was £1,785,000. The agreed cost of mechanical and electrical dilapidations was £436,000, to which the court added a further £177,600. As a result, the cost of the work that the tenant should have done to leave the premises in good repair totalled nearly £2.4m.
The judge assessed the value of the property in repair at just over £3m. He calculated this figure by reference to the rents that the landlord might obtain after subdividing the property into lettable units, and applying a yield of 10% (which he discounted slightly to allow for the time that it was likely to take to secure tenants for the units). Finally, he deducted the cost of the work required to create the lettable units and all the other expenses that the landlord would incur until the property was fully let.
The judge accepted that the landlord did not intend to effect the repairs (which, after factoring in the cost of arranging and financing the work, as well as the cost of the work itself, would probably cost the landlord more than the value of property in repair) and calculated the diminution in the value of the reversion by reference to the difference between the value of the property in repair and the value of the site as it stood, which he assessed at £2.1m. Therefore, the diminution in the value of the reversion was £900,000.
Allyson Colby is a property law consultant
