If a tenant leaves premises in a state of disrepair at lease expiry, in breach of their repairing obligations, their landlord will often be faced with having to carry out the repairs itself before the premises can be re-let.
As well as pursuing the tenant for the cost of works (if that is the correct measure of loss - see our blog on diminution in value), a landlord will often also include a claim for the loss of rent it suffers for the expected duration of the repairs.
Loss of Rent - Justification
The justification behind claiming loss of rent is clear. A landlord might have a new tenant ready and waiting to take occupation. If they are delayed in re-letting for a number of months because repairs have to be carried out as a result of the previous tenant's breach of contract, why shouldn't the tenant be liable for the loss of rental income suffered by the landlord? If the tenant had complied with the lease, the premises would be in good condition and capable of immediate re-letting.
The claim is not always that straightforward.
A landlord will often have to overcome various hurdles to successfully claim loss of rent. Generally, these will include:
- Market - Landlords will need to show that there is market demand for the type of property in question at the relevant time. If the landlord would have faced a void regardless of whether the premises was left in a condition ready to be re-let, their claim may be challenged. The length of void period due to the market and the length of works (including any time taken to tender the works and appoint a contractor) will be important;
- Scope of Repairs - do all the works being carried out truly fall within the tenant's liability under the lease? If the works that are being done could be considered betterment, a tenant may argue that the landlord cannot claim for the full time taken to carry out those works; and
- Time Taken - linked to the above point, if the landlord is doing any additional works at the same time as carrying out the tenant repairs, a tenant is likely to argue that rent for that period can't be claimed by the landlord as the delay isn't consequential to the tenant's breach of contract. In any event, the landlord will have to show that the time taken was reasonable.
Loss of rent as a payment demand
If payment for loss of rent is transformed into a contractual payment obligation in the lease, the landlord will have a much stronger claim. The issue of loss - could the landlord have obtained a new tenant in the market - will be irrelevant. It will simply be a case of working out the amount of the payment obligation.
Usually, however, the activation of the payment demand for loss of rent is conditional on the works being carried out.
That creates an interesting dynamic when negotiating terminal dilapidations. Technically, until the works have been completed, there will be no liability. The works might never be done and so there may never be a claim - but as a tenant do you try and buy off the risk that the works will be done and a claim for rent intimated by offering a sum of money while negotiating the terminal dilapidations? This is particularly important if the loss of rent clause allows the landlord to recover rent from the end of the lease until the works are done. If the dilapidations are settled sometime after the lease expired, then depending on the wording of the clause, the claim could be substantial if the works are then carried out.
Despite the challenges, loss of rent can certainly bolster a landlord's claim so should not be overlooked. Similarly, a diligent tenant should make sure loss of rent is accounted for in their dilapidations reserve if they haven't kept up with their repairs.