Dilapidations – Case Law Update

10 December 2014

In Sunlife the Court of Appeal ruled that they were satisfied with the trial judge’s method of valuing the demised premises for dilapidations purposes.

The case centred on a dispute over leases of a 1970s Soho office block, which were granted in 1973 for 35 years.  The premises were built to a state-of-the-art 1973 standard.  The present tenant obtained the leases in 2000 when the premises were already in a poor state of repair and due to the shortness of time that remained on the leases, he did not want to incur the considerable cost required to put the property back into repair.

In the High Court the Judge ruled that the cost of repair works and value of the common law claim for damages was £1.35 million. 

At common law, the traditional measure of damages for breach of a repairing covenant, ie a covenant to leave the premises in repair at the end of a lease, is the cost of the works necessary to put the property back into the state it should have been left if the repairs had been undertaken, together with any foreseeable consequential loss which has arisen.  Credit is also given for any betterment to the premises caused by the tenant.  This assessment is often referred to as the expectation measure, as it aims to put the claimant in the position it would have been had the tenant’s obligations under the lease been properly performed.

During the High Court trial, the tenant argued that as damages are capped under section 18 of the Landlord and Tenant Act 1927 (“the LTA 1927”), the amount of damages should be restricted to the reduction, or diminution, in the value of the landlord’s reversion as a result of the premises being in a state of disrepair.  Under section 18(1) of the LTA 1927, damages for breach of a covenant to leave premises in repair “…shall in no case exceed the amount by which the value of the reversion in the premises is diminished owing to the breach.”  The conventional means of calculating the diminution in the value of the reversion is to compare the value of the reversion as it stands, ie out-of-repair, with the value of the reversion if it was in-repair.  The difference between the two is the diminution in value. 

Therefore, the correct way to quantify damages for breach of a repairing covenant is as follows:

  1. calculate the common law claim for putting the premises back into repair; and
  2. then apply the section 18(1) cap to limit the damages to the diminution in the value of the reversion. 

In Sunlife the tenant asserted that the diminution in value was no more than £240,000.  However, the High Court  Judge did not share his view and found that the diminution was in fact £1.41 million.  As this figure exceeded the total value of the claim (£1.35 million), the full amount was recoverable.

The tenant argued that the premises would have required further refurbishment before it could be re-let, even if the premises were in-repair.  Accordingly, the Judge arrived at an in-repair value of £5.87 million by adopting a residual valuation method, which involved taking the value of the building if it had been refurbished so to be capable of being let and then deducting the costs of getting to that position.  The resultant residual value is what a purchaser would pay for the building, given its exposure to refurbishment costs (although some of these refurbishment costs would be tenant repair costs and thus would need to be deducted from the residual value).  

The tenant appealed the High Court’s decision, on the basis that he disagreed with the methodology the Judge had used to calculate the in-repair value of the landlord’s reversion.  The tenant took issue with the fact the Judge had used the tenant’s own valuation as the basis for calculating the residual valuation, as the tenant’s expert valuer had not been called to court to give evidence.  The Court of Appeal held that the tenant’s own decision not to call his expert valuer did not cause his report to disappear.  Furthermore, the Judge was entitled to amend the figures in order to include the correct inputs for the cost of works.  On this basis the tenant’s appeal was dismissed.

The above is not legal advice; it is intended to provide information of general interest about current legal issues.