Termination of lease – Liability for dilapidations – Construction of repairing covenant – Whether property to be maintained in same condition as at commencement of lease or later date after improvements by claimant landlord – Whether diminution in value of claimant’s reversion – Claim dismissed
In 1998, the claimants granted the defendant a lease of industrial premises consisting of two parts: an older part that had previously been occupied by the claimants’ business and a more recent addition that was already leased by the defendant. The new lease was for a four-year fixed term and contained a covenant by the defendant to keep the property in good repair, with a proviso that “the Tenants shall not be liable to maintain the property in a better state of repair than it is in at the date of the commencement of the Lease period”. The defendant also covenanted to redecorate the entire property in the final year of the lease. The claimants agreed to carry out improvements, including works to the roof, prior to the defendant taking the lease. In the event, most of those works were carried out in 1999. A series of photographs was taken to show the resulting condition of the premises. These were enclosed within a cover sheet labelled “schedule of condition… in respect of lease dated 28 September 1998”.
In 2002, the defendant took a further 15-year lease on the same terms as before “except that the covenants given by the Landlord and Tenant are to be construed as if they had been given at the date of the previous Lease”. Two years later, the defendant exercised a break clause to terminate the lease. The claimants marketed the property and, in 2005, sold it for £800,000 to a company that wished to redevelop the site.
The claimants brought a claim against the defendant for breach of the repairing covenant. They claimed more than £98,000 for dilapidations, calculated by reference to the notional cost of remedying defects, including the repairs to the roof. The defendant denied liability, arguing that the premises were in no worse condition than at the start of the 1998 lease, save for necessary redecorations. In respect of those, the defendant argued that liability was barred in any event, under section 18 of the Landlord and Tenant Act 1927, since there had been no diminution in the value of the reversion. It relied upon evidence from the owner of the purchaser that the price it had offered had not been affected by the condition of the property. The claimants contended that the relevant date was that of the 1999 photographs. They also raised issues as to the burden of proof.
Held: The claim was dismissed.
(1) The claimants bore the legal and evidential burden of establishing the condition of the premises both at the beginning and end of the lease period. The proviso to the repairing covenant could not be regarded as a severable limb of the tenant’s promise or an exception to the extent of its obligation, such that it would be for the defendant to establish that it fell within the exception. Instead, the repairing covenant contained an overarching qualification: Munro Brice & Co v War Risks Association [1918] 2 KB 78 considered.
(2) The standard of condition required to meet the defendant’s repairing obligations fell to be determined by reference to the condition of the premises in 1998. The lease made it clear that the relevant state of the premises was as at the commencement of the 1998 lease period. The 1998 lease did not contain a schedule of condition and the words of the repairing covenant were unequivocal. Accordingly, it was not open to any alternative interpretation unless, on the evidence, there was a separate or collateral contract between the parties that provided for a different state of repair: Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 All ER 98 applied. The 1999 photographs could not be construed as evidence of a contemporaneous agreement, reached at the time of the 1998 lease, to substitute for the clear words of the repairing covenant a more onerous standard of repair. Although it was not unusual for a tenant to require its future landlord to carry out certain work prior to executing the formal lease, but that was very different from imposing a specific repairing obligation on the tenant in respect of those additional works when the lease was clear as to the extent of the tenant’s obligations.
(3) The evidence did not support a finding that the condition of the roof at the end of the lease amounted to a breach of the defendant’s repairing obligations under the 1998 or 2002 leases. Although the defendant’s failure to decorate amounted to a breach of covenant, the damages recoverable were subject to the cap imposed by section 18 of the 1927 Act. The court should treat a failure to repair the decorative state of the premises as a breach of the covenant to repair for the purposes of section 18(1) even if that failure also constituted a breach of the covenant for periodic decoration in the same lease: Latimer v Carney [2007] [2007] EWCA Civ 1417; [2006] 2 EGLR 13; [2006] 50 EG 86 applied; Dowding v Reynolds not followed.
(4) On the evidence, the claimants had suffered no diminution in the value of their reversion as a result of the defendant’s breach, such that section 18 was engaged and no damages were recoverable because no financial loss had been suffered. The fact that the eventual purchaser had bought the property with a view to redevelopment, rather than occupying the existing buildings as they stood, did not alter the value of his evidence that the condition of the premises had not affected the price that his company was prepared to pay. Any buyer that was willing to make an offer was likely to have its own agenda The actual purchaser could not be replaced within a special category of “developer” purchasers in the absence of any evidence of value from a different purchaser whose agenda involved a greater degree of use of the buildings; there had been no such purchasers or any other serious offers.
Charles Auld (instructed by Wolferstans, of Plymouth) appeared for the claimants; Katharine Holland (instructed by Pinsent Masons) appeared for the defendant.
Sally Dobson, barrister
