Dilapidations – Landlord’s intentions to do works of repair does not mean the landlord can recover the cost of repair if diminution in value is less than the cost of the works

 A review of the recent dilapidations case of Consortium Commercial Developments Limited v ABB Limited [2015] EWHC 2128.

Facts

• The case concerned an office building where the 15 year lease expired on 16 June 2011. The demise was formerly a furniture showroom and offices.
• The agreed cost of repairs was £295,000.
• There was a claim for loss of rent and other outgoings valued at £45,000.
• The premises were normally reached by car, rather than on foot, from central Milton Keynes.
• The building was in the immediate vicinity of premises used for warehousing and offices.
• The Landlord did not do the repair works at the expiry of the lease as it wanted (i) to recover damages from the tenant to pay for the works and (ii) to wait for better letting conditions.
• Despite the trial of the claim being more than four years after lease expiry, the Court accepted the landlord’s evidence that they did intend to do the remedial works once they recovered damages from the tenant.
• The premises were marketed from lease expiry in their unrepaired state but did not secure a new tenant.
• The Court held that the premises were unlikely to have been let at lease expiry either in an unrepaired or in a good condition due to the poor market. There was an over-supply of office accommodation.
• The landlord’s expert evidence on diminution of value under Section 18 of Landlord and Tenant Act 1927 was £550,000. The tenant’s expert evidence on diminution of value under Section 18 of Landlord and Tenant Act 1927 was £75,000.

Judgment

• The Court ordered the tenant to pay £225,000, being the Court’s view of the diminution in value.
• It ordered the full sum claimed by Landlord for reinstatement works on the basis that the landlord intended to do those works.
• The Claim for loss of rent failed in its entirety.

Comment

• The landlord’s intention to do the works seems weak given the length of time that passed after lease expiry and prior to the trial in 2015.
• The measure of damages for breach of the repair covenant is the cost of works plus loss of rent but is also limited by the diminution in value to the landlord’s  (Section 18 Landlord and Tenant Act 1927).
• If a landlord does or intends to do the remedial works, then the cost of those works is normally taken to be the extent of damage to the reversion.
• That did not happen here where the Judge strongly criticised the landlord’s expert valuer and preferred the tenant’s. The Court held the in-repair valuation for the premises to be £900,000 and in-disrepair valuation at £675,000, producing a diminution figure of £225,000, lower than the cost of the works.
• This case shows the importance of having good valuers and the impact of a poor market which contributed to the landlord’s cost of work claim being reduced by almost 24%.
• The loss of rent claim was rejected on the basis that the 12 week period to do the works would not alter the time it would take to obtain a new tenant, so it could not be said that the tenant’s breach caused the landlord loss of rent. The Court thought it could take several years to find a tenant due to oversupply in the market.
• The Judge, in exercising his discretion, looked at the market rates for interest and considered that a 3% p/a rate should be applied to the damages awarded, rather than the 6% pa claimed.

Lessons we can learn:

• Both landlords and tenants should consider a valuation of the diminution in value of the landlord’s interest and not rely on the theory that the landlord will always recover the cost of the repair works.
• Neither expert valuer’s opinion of loss was accepted by the Court. Any valuer’s opinion needs to be scrutinised closely.

For more information please contact a member of our Property Litigation team.