Most commercial leases include obligations in relation to repair, decoration and yielding up at the end of the lease.
Where a tenant is in breach of those obligations, the landlord will seek to bring a claim against the tenant for the losses which it suffers as a result of those breaches.
However, the assessment of those damages is often complicated, particularly where a landlord has planned significant changes to the property.
In today's market, such changes are becoming increasingly common, as landlords are required to adapt work and retail spaces for changing tenants' needs.
In this property litigation blog, we look at the common law assessment of damages and the limitations on landlords' claims imposed by statute.
Common law assessment of damages
A landlord's claim for dilapidations is intended to put the landlord in the position they would have been in had the tenant complied with its repair covenant.
Where a landlord has to spend money on repair works or has to agree to lower rent for future lettings due to the condition of the property, the landlord will have a common law terminal dilapidations claim for damages – this claim crystallises on the expiry of the lease.
In practice, the common law assessment of damages is evidenced by a Schedule of Dilapidations, which sets out the reasonable costs of the works plus loss of rent, service charge and rates for the period until the works have been completed.
In addition, the landlord may be able to claim professional fees if it is reasonable for the landlord to incur those costs.
However, this claim is limited by s.18 of the Landlord and Tenant Act 1927, which limits the amount the landlord can recover.
s.18 of the Landlord and Tenant Act 1927
Section 18 is split into two limbs.
Section 18(2) is the "subjective" limb and deals with supersession.
If the landlord intends to do works to the property which would make any repair works undertaken by the tenant a complete waste, the landlord cannot recover damages for that disrepair.
The onus is on the tenant to show that the landlord has a firm intention at the end date to undertake the works and that those works will render any repair works on the part of the tenant futile.
Landlords should therefore be careful that board minutes record that they are only considering redevelopment – and not that they have firm plans/a clearly formed decision to undertake these works. Minutes recording a decision would potentially limit a dilapidations claim.
Section 18(1) is the "objective" limb and puts a cap on the damages the landlord can recover.
This limb caps the landlord's claim to:
- The costs of the repairs; or
- The diminution in value of the property as a result of the disrepair.
To ascertain the diminution in value, a s.18 valuation must be undertaken.
This identifies what difference the actual disrepair falling within the covenant makes to the value of the landlord's interest.
It involves completing two valuations:
- In the first, the valuer assumes an auction sale of the property in repair – they identify who will pay the most and the amount that the bidder will pay for the property in repair.
- The second valuation assumes an auction sale of the property in disrepair, which the tenant has left the property in and identifies what a bidder would be prepared to pay for the property in that disrepair.
The difference between these two values is the diminution in value which the tenant is responsible for.
Tenants should push for an s.18 valuation with a view to limiting the landlord's damages claim.
Historically, the courts decided that the costs of repairs in the schedule of dilapidations were the correct measure of damages (even if the landlord was not going to carry out the repairs).
As a result, many landlords received a windfall where they did not carry out repairs and suffered no loss.
Section 18 prevents this windfall and forces the landlord to evidence that loss.
Landlords should bear in mind that s.18 applies to terminal dilapidations.
Therefore, they should consider undertaking significant works (such as those to the roof) before the term end date as part of interim dilapidations claims to avoid the s.18 cap on expiry of the term of the lease.
Often dilapidations negotiations become protracted because a tenant has not made sufficient provisions in their accounts for the liability.
By producing a schedule of dilapidations in advance and starting discussions early, landlords stand a better chance of tenants making that provision – therefore increasing recovery.
Both landlords and tenants must obtain professional advice during the term of the lease to ascertain the best way to deal with disrepair.
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.