Substantial office building let on long full-repairing lease – Claim for terminal dilapidations – Whether tenant required to replace ageing heating system – Tenant relying on section 18(1) of Landlord and Tenant Act 1927 – Whether disrepair had caused diminution in value of reversion – Landlord failing to establish loss
In 1973 a 25-year, full-repairing lease was granted of a five-storey office building, Enterprise House, in Station Road, New Barnet. By subsequent assignments the reversion and the lease became vested in the claimant landlord and the defendant tenant respectively. Following the expiry of the lease on 4 July 1998, the landlord, having taken various steps to market the freehold, sold it on 24 March 1999 to a developer (B Ltd) for £1m. Thereafter, B Ltd obtained planning permission to convert all the building, save for the ground floor, into residential flats.
On the question of terminal dilapidations, the parties agreed that the building was not in the state of repair required by the covenant, but fell into dispute over the extent of the tenant’s liability for the poor state of the combined heating and air-conditioning system. The system consisted of 150 units, of a type no longer manufactured, that drew and returned water from and to heating and cooling apparatus located on the roof of the building. The landlord maintained that the covenant could only be performed by substantially replacing the entire system at an estimated cost of £420,500. The tenant claimed that the units were capable of being reconditioned and argued for a figure not exceeding £100,000. The tenant further argued that, in view of the subsequent disposal of the freehold, even the lower figure was irrecoverable as the disrepair had not brought about a diminution in the value of the reversion within the meaning of section 18 of the Landlord and Tenant Act 1927.
In proceedings brought by the landlord, the judge preferred both the technical and the marketing evidence given by experts called for the tenant.
Held: No loss had been sustained by the landlord.
1. The landlord was correct in so far as it alleged that the required works were works of repair as distinct from renewal. It was well established that repair could consist of renewal of parts and that the court should consider, inter alia, the nature, extent and cost of the proposed remedial works, the value of the building and its expected lifespan; the ultimate question being one of degree: see Holding & Management Ltd v Property Holding & Investment Trust plc and others [1990] 1 EGLR 65.
2. However, the landlord had failed to establish that the work proposed by the tenant would be futile. It was sufficient if the repaired system worked substantially as well as the original system, and there was no requirement that it should require as little maintenance as the new system: Elmcroft Developments Ltd v Tankersley-Sawyer [1984] 1 EGLR 47 and Stent v Monmouth District Council [1987] 1 EGLR 59 distinguished.
3. The court was satisfied on the evidence that, even if the system had been repaired: (i) the property would not have attracted a potential occupier or investor; (ii) no higher price would have been obtained from B Ltd, whose scheme required a different system altogether. In those circumstances, no loss had been proved.
Gary Cowen (instructed by Bude Nathan Iwanier) appeared for the claimant; Kirk Reynolds QC and Martin Hutchings (instructed by Iliffes Booth Bennett, of Uxbridge) appeared for the defendant; Stephen Bickford-Smith (instructed by Wedlake Bell) represented the third party.
Alan Cooklin, barrister
