UK: Put A Cap On It

Last Updated: 18 October 2013
Article by Faye Hyland

Section 18(1) of the Landlord and Tenant Act 1927 is frequently referred to as the "statutory cap on damages". It places a statutory cap on the amount of damages a landlord can recover from a tenant for breaches of the repairing covenants in a lease.  The main principles are:

  • Damages for breach by the tenant of its repairing covenants cannot be more than the reduction in the value of the landlord's reversionary interest; and
  • No damages are payable if the landlord is going to make structural alterations which would render the repairs valueless.

Hammersmatch Properties (Welwyn) Limited v Saint-Gobain Ceramics and Plastics Limited (2) Saint-Gobain Abrasives Inc [2013]

The Landlord ("Hammersmatch") made a claim against the Tenant ("Saint-Gobain") on the termination of a lease of a building in Welwyn Garden City.

The main issue which the Court considered was the ability of Hammersmatch to recover the cost of the repair works from Saint-Gobain, or whether the statutory cap would apply.

To establish what repair works Saint-Gobain should have carried out, the Court had to take into account the age, character and locality of the building (a 1930s purpose built manufacturing unit). Instead of finding that the tenant was required to repair to today's requirements, the Court held the correct test was what a "reasonably minded tenant of the relevant user class" would reasonably have required at the start of the lease.

Taking this factor into account the Court determined that the cost of works which Saint-Gobain should have carried out amounted to £3,087,712. However, the property in repair was only valued at £3,061,251 and therefore the costs of putting the building into repair actually exceeded the value of the property in repair.

Hammersmatch's claim was therefore limited by the Section 18 cap to the reduction in the value of its reversion.  The Court held that the reduction in value in this case was the difference between the "in repair" value and the "site value".  The site value was found to be £2.1 million and therefore Hammersmatch's damages were limited by s.18(1) to the difference – i.e. approx. £900,000. 

As the figure awarded was less than a third of the cost of the repair works, this case illustrates powerfully the influence of the Section 18 cap.

Sunlife Europe Properties Ltd v (1) Tiger Aspect Holdings Ltd (2) Tiger Television Limited [2013]

Sunlife was the landlord of premises in Soho under two 35 year leases. The premises were built in the 1970s as state of the art offices with high quality heating, ventilation and air-conditioning systems. By the time Tiger took over the leases in 2000 the premises were in a poor state of repair. At that time Tiger carried out limited refurbishment work and before the leases expired in 2008.

Sunlife claimed £2.172 million in damages, which largely reflected the cost it had incurred after the lease had ended in modernising the premises, including installing a new modern heating and ventilation system. The Court was asked to consider (amongst other things) whether Tiger would have met with its repairing covenants by having maintained the 1970s equipment, or whether Tiger should have upgraded the equipment with a modern equivalent (as the landlord did).

The Court found that the works carried out in this case exceeded what was necessary under the terms of the Lease. The Court held that Tiger was not required to upgrade the premises / equipment to modern standards. The fact that Sunlife had carried out more work than was caused by the tenant's breaches did not prevent it from recovering any costs, but its recovery was severely curtailed.

The Court held Sunlife was entitled to recover approx. £1.3m work of repair works. This was marginally below the reduction of Sunlife's interest in the premises which was approx. £1.4m. Accordingly, the Court held the landlord was entitled to approx. £1.3m and, in this case, the Section 18 cap did not serve to further limit the landlord's recovery.

The case is an important reminder to landlords that they need to consider very carefully what repairs it can claim against a tenant – especially if it chooses to carry out those works from its own pocket.  If those works are held not to be within the tenant's obligations, those costs will not be recoverable and the landlord will be very significantly out of pocket.

An appeal is currently underway.

First appeared in Informer: Real Estate Newsletter - Autumn 2013

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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