Summary and implications
The Court of Appeal has confirmed some fundamental points in relation to liabilty for dilapidations (Sunlife Europe Ltd v Tiger Aspect Holdings Ltd [2013] EWHC 463 TCC):
- A landlord's more extensive works caused by a tenant's breach will not prevent recovering the cost to remedy the breach.
- Where market conditions require upgrading in order to re-let premises, a tenant is not liable for works that would be subsequently abortive by supersession.
- A tenant must comply with its lease obligations although he is entitled to perform his covenants in the manner that is least onerous to him.
Tiger's occupation of the premises
The tenant, Tiger Television Ltd, occupied commercial premises in Soho under two leases granted in 1973. When the leases were granted the premises were built to a state-of-the-art standard and the leases contained full repairing covenants.
Tiger acquired the premises in 2000, by which time they were already in a poor state of repair. Tiger carried out some works of refurbishment and repair to the premises but simply to make them suitable for its own needs.
Tiger's leases came to an end in 2008 and the landlord at the time, Sunlife Europe Properties Ltd, brought a terminal dilapidations claim against Tiger and its guarantor, Tiger Aspect Holdings Ltd.
Tiger's repairing obligations
Tiger acknowledged that it had not complied with the repairing covenants in its leases at the end of the term. However, it disputed the value of Sunlife's dilapidations claim, which, at the time of the trial, was £2.172m plus interest.
Sunlife argued that it was entitled to the sum claimed (which was less than the actual amount that Sunlife had spent) in order to put the premises into the condition in which they should have been left by Tiger.
The issues to be decided
The court had to consider two main issues:
- the standard to which Tiger should have repaired the premises; and
- whether the additional work by the landlord might make the work required by Tiger worthless (known as supersession).
Standard of repair
The standard of repair required should be judged by reference to the condition of the fabric of the premises, their condition and fittings at the time of the demise. The standard was not the condition that would be expected of equivalent premises at the expiry of the leases.
The judge found that a tenant is not obliged, nor even entitled, to deliver up the premises in a condition that involved any material alteration to the premises or the fixtures demised if there is a covenant against making alterations (even if the landlord could consent).
However, whilst the tenant was not required to deliver up the premises with new equipment or with equipment that had any particular remaining life expectancy or remained state-of-the-art, the tenant was required to replace equipment on a like-for-like or nearest equivalent basis.
Supersession and section 18 of the Landlord and Tenant Act 1927 (the Act)
Under a contract to carry out works, where the works have not been properly performed, the starting point is that the claimant is entitled to be put in the position that he would have been in if the works had been carried out in accordance with the contract.
In relation to dilapidations claims, a "statutory cap" is imposed by section 18(1) of the Act. The statutory cap limits damages for breach of a repairing covenant to the diminution of value of the reversion caused by the disrepair at the date of expiry of the lease.
If a landlord has a firm and settled intention to redevelop the premises or to carry out structural alterations which would make the repair worthless, no damages are recoverable.
An objective test
If the landlord has done, or intends to do, the remedial works, the cost of the works is prima facie evidence of the damage to the reversion.
However, the court confirmed that, when discussing supersession arguments, the issue is an objective one. Supersession does not depend on the works the landlord actually performs, but relates to the work a hypothetical purchaser would factor into its bid for the reversion.
Tiger argued under section 18 of the Act that, in order for the premises to be re-let in 2009, Sunlife had to (and did) significantly upgrade and refurbish the premises. However, the court found that, if Tiger had complied with the standard as at the date of the leases, it would have created lettable premises, to the standard required in 2009.
Where premises are left in disrepair, and the landlord takes the opportunity to improve the premises by replacing parts of the premises, rather than simply repairing them, the landlord can still recover the costs of repairing that particular part if it can be established that, left in repair, it would not have replaced it.
Tiger's liability for dilapidations
In this case, the statutory cap under section 18 of the Act did not limit the damages recoverable.
The judge himself carried out the valuations and a detailed review of each item of repair in dispute. He found that the cost of the works carried out by Sunlife exceeded the diminution in value and awarded Sunlife the sum of £1,353,254.
The court also confirmed that interest is recoverable at the rate the landlord would have expected to pay if it had borrowed the money to undertake the works.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
