Repairs and dilapidations

Citation

Dowden, M. (2000), "Repairs and dilapidations", Journal of Property Investment & Finance, Vol. 18 No. 6. https://doi.org/10.1108/jpif.2000.11218fab.001

Repairs and dilapidations

Landlord and tenant update – July 2000

Malcolm DowdenNabarro Nathanson

1. Repairs and dilapidations

Section 18(1) of the Landlord and Tenant Act 1927 limits the damages recoverable by a landlord in respect of a breach of the tenant's covenant to repair. The section provides that damages for such a breach "shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant".

The application of section 18(1) is a matter of great significance when considering claims for terminal dilapidations (in effect, claims for breach of the tenant's obligation to leave or put the premises in repair at the end of the lease term). In particular, former tenants faced with a claim for the costs of repair are well advised to consider the final part of section 18(1), which reads:

In particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of the lease, if it is shown that the premises, in whatever state of repair they might be, would shortly after the termination of the tenancy have been pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement.

In effect, section 18(1) provides the tenant with two main lines of argument to limit, or even to extinguish, the landlord's claim for damages for terminal dilapidations. The first line of attack is to show that there has been no diminution in the value of the reversion. The second is that, even if some diminution can be shown, the works of repair will be overtaken by the demolition or alteration of the building so that they will be valueless.

Both lines of argument were run in Ultraworth Ltd v. General Accident Fire and Life Assurance Corporation PLC and another [2000] EGCS 19. The case concerned an office building let on a 25 year full repairing lease in 1973. The lease expired on 4 July 1998. Following the expiry of the lease the landlord sold its interest in the premises to a developer, whose plans for the property involved the conversion of all but the ground floor to residential use.

A dispute arose over the tenant's liability in respect of the elderly heating and air conditioning system at the premises. The landlord argued that the system was beyond economic repair and that it should be replaced at a cost of approximately £420,500. The tenant argued that repair costing somewhere in the region of £100,000 would suffice but that in any event the landlord was not in a position to recover even that lower figure, having disposed of its interest in the premises shortly after the expiry of the lease.

Richard Havery QC, sitting as a deputy judge of the Technology and Construction Court, agreed with the tenant and held that since the landlord had suffered no loss it could claim no damages. He was satisfied that even if the heating and air conditioning system had been put in repair no higher price would have been obtained from the developer – not least because the developer's proposals for the building required an entirely different system. Consequently, even if the disposal to the developer had taken place before the end of the lease it is likely that the tenant would have been on strong ground in arguing that the works of repair to the existing system would have been rendered valueless by the proposed conversion works.

In P&O Properties Holdings Ltd and anor v. Secretary of State for the Environment Transport and the Regions [2000] PLSCS 37 the Technology and Construction Court was called upon to consider the position where an agreement for sale of the reversion was entered into before the expiry of the occupational leases. The agreement expressed the sale to be "subject to but with the benefit of" the leases. Completion of the transfer took place after the leases had expired. Again, the dispute related to a claim for terminal dilapidations.

In the P&O case the tenant's argument was that the landlord had suffered no loss, having disposed of its reversion before the expiry of the occupational leases. Further, they argued that the right of action that would otherwise have subsisted in favour of the seller had not passed to the buyer and so could not be asserted by the buyer, nor by the seller as trustee for the buyer. This second argument rested on the premise that the only rights capable of passing to the buyer by virtue of the agreement for sale were those accruing before the date of the agreement.

The tenant's arguments, if successful, would have provided a neat escape route from liability. The seller would have no right of action because by virtue of entering into the sale contract it had disposed of its interest by the time the lease expired; the buyer would have had no cause of action because the breach of contract arose at the end of the lease – being after the date of the contract but before the date of the transfer. Consequently, at the date of the breach the buyer was not the landlord, having no legal title to the reversion, and its equitable interest arising under the contract carried with it rights only in respect of breaches occurring before the date of the surrender.

The Court was not swayed by the tenant's argument. There being no contrary indication in the contract, the benefit of the claim passed to the buyer for three related reasons:

1. 1.

   it was an incident of the reversionary interest which directly affected it;

2. 2.

   it was not collateral to that interest; and

3. 3.

   the contract was expressly made subject to and with the benefit of the occupational leases.

On completion of the sale the title of the buyer related back to the date of the contract, and with that title went entitlement to any benefits. Accordingly, the claim was to be pursued in the name of the seller, which held both the claim and its proceeds on trust for the buyer.