UK: Terminal Dilapidations – The Facts, Law And A Practice Example

The lack of development prospects has meant that many commercial landlords have looked to their tenants to fully comply with their repairing obligations at the end of their leases. In the light of difficult trading conditions many tenants have vacated, often having carried out very limited or no repairs. This has led to a significant rise in terminal dilapidations claims.

The case Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited (1) Tiger Television Limited (2) (2013) deals with many of the current issues to be considered in assessing a tenant's liability for terminal dilapidations.

The facts

The Claimant (Sunlife) was the owner of combined office and retail premises at Soho Street and Soho Square, London. The premises had been let to the Second Defendant (Tiger) under two leases with full repairing covenants. The leases were for a term of 35 years and came to an end on 14 November 2008.

Sunlife claimed £2.172 million in terminal dilapidations.

It was Tiger's case that Sunlife's claim was capped by the amount of the diminution in value of the premises as a result of Tiger's breaches of the repairing covenants, which its expert said was no more than £240,000.

The thrust of their argument was that in order to let the premises in 2009, Sunlife would have had to carry out a significant upgrade and refurbishment. If Tiger had carried out the maintenance and repair required by its obligations, the premises could only have been let at a very substantial discount.

Tiger later accepted that, subject to some fairly minor improvements (such as an upgrade of the main toilets), the premises could be let to a tenant of the appropriate type if Tiger had complied with its covenants.

The law

Mr Justice Edwards-Stuart found that the measure of recoverable loss in a terminal dilapidations claim is the lower of:

  1. The total of (a) the cost of remedying the defects and (b) any rent actually lost and other expenses actually incurred whilst the defects are being remedied; and
  2. The diminution in the value of the landlord's reversion, as at the term date, caused by the breaches – i.e the statutory cap contained in section 18(1) of the Landlord and Tenant Act 1927.

He also reached the following conclusions on the law in relation to arguments frequently advanced by tenants who fail to carry out repairs:

  1. The tenant is entitled to perform its covenants in the least onerous way open to it and this should be the starting point in any assessment for damages.
  2. The tenant is required to deliver up the premises in good and tenantable condition and with the M&E systems in satisfactory working order but not with new equipment or equipment that has any particular remaining life expectancy.
  3. Where there are covenants against making alterations to the premises the tenant is not entitled to deliver up the premises in a condition that involves any material alteration to the building or fixtures as demised. The fact that the landlord can consent to any such alteration does not affect the basic obligation.
  4. Where the requirement to put and keep the premises and fixtures in good and tenantable condition involves the replacement of plant that is beyond economic repair, the tenant is required to replace it on a like for like or nearest equivalent basis. The tenant is not required to upgrade it or bring it into line with current standards.
  5. Any claim by the landlord is subject to the general rules that: (a) he cannot recover costs that he could have avoided by acting reasonably; and (b) he cannot recover the cost of remedial work that is disproportionate to the benefit obtained.
  6. Where there is a need to carry out remedial work, however, the fact that the landlord has carried out more extensive work than was caused by the breach does not prevent the landlord from recovering such costs as would have been necessary to remedy the breach.
  7. Where market conditions at the end of the lease mean that some sort of refurbishment or upgrade is required to enable the landlord to re-let, a tenant is not liable for costs to the extent that such works would be rendered abortive by the need to upgrade or refurbish the building (i.e supercession).
  8. Where a tenant is in breach of covenant the court is entitled to infer that the remedial work is necessary to remedy the breach unless the tenant demonstrates to the contrary.

Upon applying these principles the Judge found that the landlord was entitled to recover £1.4 million, being the diminution in value of the premises.

Despite numerous arguments raised by Tiger, this case is a useful reminder of what will and will not be assessed in this type of claim and that tenants should not expect to escape liability for the cost of reasonable repairs.

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.

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