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Disrepair Damages - If The Cap Fits

» Posted on: 28 March 2007
» Posted by: David Bailey
» Service area: Commercial Property / Commercial Trading Disputes

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Tenants of business premises are nearly always required to “yield up” in good repair at the end of their lease. Before the parties rush to instruct their surveyors, they should both check whether the Lease in question obliges the Tenant to put the property in a state of repair no worse than recorded in a Schedule of Condition attached to the Lease.

Taylors recently acted for a tenant who was threatened with a substantial dilapidations claim at the end of its Lease. However, the Landlord’s surveyor had overlooked the Schedule of Condition. At a stroke, this reduced the Landlord’s claim by over £100,000!

The normal measure of damages for breach of a covenant to repair at the end of a Lease term is the cost of putting the premises into the state in which the Tenant ought to have left them. However, Landlords and Tenants should take note of the “cap” on damages imposed by Section 18(1) of the Landlord and Tenant Act 1927. This limits damages to the diminution in value of the reversion (usually the freehold). In certain circumstances this can reduce a claim which may be substantial on a “cost of works” basis to virtually nothing – a happy day indeed for a Tenant served with a depressingly long list of defects by its former Landlord.

If a Landlord can establish that it has or will carry out the requisite work (which should be set out in a “Scott” Schedule of Dilapidations) this does make a strong case for an entitlement to damages on that basis (subject to the section 18 cap).

However, where there is little chance of the Landlord actually doing the repairs the estimated cost is unpersuasive evidence of the existence of any damage or its amount. In such a case it is even more important for the Landlord to put forward evidence of an actual reduction in the value of the premises as a result of them being in disrepair. This is where section 18 can be a powerful weapon for a Tenant.

In two recent cases the Court found that at the end of the Lease the properties were effectively obsolete and were worth just as much in their dilapidated state (for example to a developer) than in a full state of repair. In one of these cases the Landlord costed the works at £340,000. However, since the Court found the most likely buyer of the property would have been only remotely concerned about the level of disrepair, applying the section 18 “cap” the Court only ordered damages of £40,000.

Another part of section 18 also provides that if the Landlord intends to pull the property down or make significant structural alterations shortly after termination (which would render the repairs effectively useless), again, it is not entitled to damages.

The recent case of Latimer –v- Carney [2006] highlights the importance of the parties’ obtaining expert surveyors’ evidence upon diminution in value at an early stage, otherwise it is extremely difficult to predict what approach the Courts will take in assessing the appropriate level of damages.

The following points should therefore be considered by both Landlords and Tenants in any dilapidations dispute:

  • Take legal advice upon the terms of the Lease. Your solicitor will advise upon the extent of your repairing obligations including the precise effect of any Schedule of Condition.
  • The Landlord’s surveyor should inspect the property as soon as possible after the end of the Lease and provide a Schedule of Condition. The Tenant’s surveyor should then provide a Schedule responding to each item. Both surveyors should give their opinion upon the difference in value (if any) between the property in its current state and its state if the Tenant had complied with its repairing obligations (is the property obsolete/ripe for redevelopment?).
  • Both parties should follow the procedure for such disputes set out in the catchily titled Pre-Action Protocol for Damages in Relation to the Physical State of Commercial Property at the End of a Lease. If the matter proceeds to Court, sanctions can be imposed on parties who fail to follow the procedure.
  • If the Landlord moves in with huge bulldozers, call your solicitor immediately!
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