Summary

The court summarised the legal principles applicable to a situation where the landlord of a long lease claimed damages at the expiry of the lease for the cost of remedying dilapidations. The central issue was whether the repair covenants in a 35-year lease would have been met by delivering up the premises with adequately maintained 1970s equipment, or whether the equipment ought to have been upgraded by the tenant in line with modern standards.

Facts

The claimant commercial landlord (S) claimed damages against the first defendant (T), its former tenant, for the cost of remedying dilapidation to the property after the expiry of the leases.

The two leases had been for a term of 35 years and had expired in 2008. It was common ground that the premises had been built and fitted out to a state-of-the-art standard in the early 1970s, with top-quality mechanical and electrical installations. The first tenant, T's predecessor, failed to comply with the repairing obligations, and the premises were in a poor state when T acquired the leases in 2000. T did limited refurbishment work, but was not keen to incur much cost since the leases had only eight years to run. When they expired, S prepared a schedule of dilapidations and sought £2.1 million for remedial works and associated costs. T's case was that remedial works attributable to want of repair amounted to about £700,000, but that S's claim was subject to the statutory cap in the Landlord and Tenant Act 1927 s.18(1). T believed that the extent of the works carried out by S was much greater than was actually required and would, if T had performed them, have involved making unauthorised alterations or otherwise acting in breach of the terms of the leases. The issue for determination was whether T and its predecessor could have satisfactorily complied with the repairing covenants in the lease by returning the premises with adequately maintained 1970s equipment, or whether installations ought to have been replaced with modern equipment of a similar standard to that originally installed.

Held

(1) The starting point was to consider whether, if T had sufficiently performed its obligations and delivered the premises up in good repair and condition at the end of the term, S would have been able to let or sell the building without any significant discount on the price to reflect the actual cost of the building. If yes, the measure of loss was either the cost of putting the building back into the condition in which it should have been delivered up, or the difference in the value of the building in its actual state and the state in which it ought to have been delivered up. Theoretically those figures ought to be the same but, in practice, they rarely were: the amount payable would be whichever was the least. If the answer to the initial question was no, the court would have to consider what work would have been required to put the premises into a condition that would enable it to be let to the appropriate type of tenant at a fair market rent, in which case, issues of supersession, the duty to mitigate and proportionality might also arise. It followed therefore, that if the cost actually incurred by the landlord in seeking to put the building back into the condition in which the tenant should have left it was greater than the cost of other work which would have been sufficient to put the building in that condition, the landlord was limited to recovering the cost of the latter. The appropriate test was not whether the landlord had acted reasonably in carrying out remedial works, but whether the repairs went further than was necessary to make good the tenant's breaches (see paras 38-43 of judgment). The general legal principles could be summarised as follows: (a) a tenant was entitled to perform his covenants in the manner least onerous to him; (b) a tenant was obliged to return the premises in good and tenantable condition and with mechanical and electrical installation systems in satisfactory working order. He was not required to deliver up the premises with new equipment or with equipment having any remaining life expectancy. The standard of repairs was to be judged by reference to the condition of the equipment and fittings at the time of the demise, not the condition which would be expected of an equivalent building at the expiry of the lease; (c) where there were covenants against making alterations, the tenant was not entitled or obliged to deliver up the premises with any material alterations; (d) the tenant was only obliged to replace broken plant on a like-for-like, or nearest equivalent, basis. He was not required to upgrade it in line with current standards; (e) a landlord seeking the cost of repairs could not recover a loss which he could reasonably have avoided, or the cost of remedial work which was disproportionate to the benefit obtained; (f) the fact that a landlord had carried out more extensive work than was caused by the tenant's breach did not, of itself, prevent him from recovering the cost of the work that would have been necessary to remedy the breach; (f) a tenant in breach of a repairing covenant was not liable for the cost of refurbishment works where there was supersession; (g) where a tenant was in breach of a repairing covenant, the court was entitled to infer that remedial work performed by the landlord was necessary to remedy the breach unless the tenant demonstrated to the contrary (para.46). (2) In the instant case, the dispute between the parties hinged on the factual basis of the valuations, not the applicable legal principles. The court considered the figures in the schedules and substituted its own (paras 89-205).

Damages assessed