Summary

Where a commercial lease provided a tenant with the full term in which to carry out required reinstatement works to the property, a surrender of the lease before expiry of the term released the potential liability. Also, the processes required by the Landlord and Tenant Act 1927 s.18(1) had to be followed in a claim for damages arising from a breach of a covenant to keep a property in good repair during the term of a lease.

Facts

The court was asked to determine preliminary issues concerning liabilities arising on the surrender of a commercial property lease.

The property owner (B) had let the property to a tenant company (T). The lease contained covenants by which T agreed to keep the property in good repair and to yield it up in such condition at the expiration of the lease in March 2014 or sooner determination of the term. Subsequently, B granted T a licence to make certain alterations to the property provided reinstatement occurred before the end of the lease. T went into liquidation in 2009. Liquidators (H) were appointed and shortly afterwards the lease was surrendered on terms releasing the parties from their obligations and from all liability arising in relation to any breach on or after the date of surrender. H refused to accept a dilapidations claim from B. The issue was whether the liability to reinstate under the alteration licence, and the liability under the repair covenant in the lease were released by the terms of the surrender.

B submitted that (1) although it was unable to state when the reinstatement liability arose, it had to have arisen before the date of the surrender, which therefore had not released it; (2) although normally the date of the breach was the date for the assessment of damages, that rule could be displaced if another date more accurately reflected the loss sustained. Also, the court was not bound to assume the continuation of the lease in assessing the amount of damages to the reversion, but was bound to have regard to the subsequent events of surrender and re-letting.

Held

(1) The words "before the end of the lease" in the licence gave T the full term in which to carry out the requisite reinstatement. Accordingly, there was no breach of the reinstatement obligation in 2009. T could only have been in breach if the works were not carried out before 2014, but that would have been after the surrender. In consequence the potential liability was released by the surrender and there was no provable liability under the reinstatement provision (see paras 7-8 of judgment). (2) It was accepted that the obligation to yield the property up in good repair at the determination of the term of the lease was released by the surrender. In relation to the obligation to keep the property in good repair during the term, B had not followed the processes required by the Landlord and Tenant Act 1927 s.18(1) in assessing its claim. There was no attempt to value the reversion of the property in its actual or repaired state. An assumption was simply made that the difference in those valuations would equal the loss B sustained on re-letting the property. Accordingly it was right to reject the proof of debt so calculated. There could be a provable debt if the proper processes were followed. Section 18(1) imposed a limit on what could be recovered. Ascertaining the amount recoverable required the valuation of the reversion to the property in its actual state and in its repaired state. Such valuations assumed that a purchaser would take the reversion subject to the lease and the covenants it contained for the remainder of the term. Given those statutory requirements, there was no room to take account of facts occurring after the relevant date, Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] A.C. 426 considered. Additionally, the valuation date, whether at the date of the breach, or of judgment, could not alter the requirements imposed by s.18(1), as observed in N. Dowding and K. Reynolds, Modern Law and Practice, 3rd edn (London: Sweet & Maxwell, 2004), para.28.21. In insisting that the debt was calculated in the manner required by s.18(1) H were not relying on an "accrued right", but on their statutory right to have the damage sustained in consequence of the breach of the repair covenant limited in the way s.18(1) required, Gagner Property Ltd v Canturi Corp Pty Ltd [2009] NSWCA 413 considered. Therefore, B was not entitled to prove for damage sustained following T's breach of the reinstatement covenant, or for the damages claimed in relation to the repair obligation as they had not been calculated in accordance with s.18(1) (paras 9,11,16-19).

Preliminary issue determined