When it comes to dilapidations, unless the lease contains a payment obligation the landlord has to prove the loss it has suffered. If the landlord intends to carry out works which amount to betterment (i.e. upgrades which go beyond the tenant's repairing obligation) then it may not be able to recover anything from the tenant for those works. But might there be circumstances where a landlord can make improvements to the premises and still recover a proportion of the cost from the (former) tenant?
This was one of the questions facing a Scottish court in Sane Investments Limited v Astrazeneca UK Limited.
Background to the case
The landlord (Sane Investments) raised a dilapidations action against the tenant (Astrazeneca) after the end of the lease. The parties appointed a court reporter to decide whether certain contested items amounted to wants of repair.
One such item was redecoration. The tenant had not complied with its obligation to redecorate before lease expiry. The premises were covered by a mixture of (cheaper) painted anaglypta wallpaper and (more expensive) vinyl wallpaper. The tenant could have met its redecoration obligation by replacing all of the wall coverings with the cheaper paper, but it didn't do so.
After lease expiry, the landlord redecorated using the more expensive wallpaper. The tenant argued that this was betterment which superseded its repairing obligation, meaning that the landlord was not entitled to recover any costs for redecoration.
The reporter agreed that use of the more expensive wallpaper was an improvement to the premises, so the landlord wasn't entitled to the full cost of those works. But he did not agree that this meant the landlord was entitled to nothing. Instead, he found that the landlord was entitled to a lesser sum based on the cost of hanging and painting the cheaper wallpaper.
The tenant objected to this finding and the court had to decide whether the reporter was right.
The court's decision
The court upheld the reporter's decision. While landlord could only recover losses which were caused by the tenant's breach of contract, the reporter had in fact followed that approach.
The landlord was entitled to be put in the same monetary position that it would have been in had the tenant's breach not occurred. If the tenant had redecorated with the cheaper wallpaper before the end of the lease then the landlord might have accepted that and may not have done its own redecoration. The landlord was entitled to recover the cost of redecorating with the cheaper paper, even though it had chosen to use higher quality materials.
This raises the question for future dilapidations disputes – can a landlord carry out other improvement works to premises at lease expiry and recover a proportion of the costs equal to what the tenant would have spent in order to meet its repairing obligation? For example, if an office tenant fails to replace broken fluorescent lighting at lease expiry, can the landlord replace all the lighting with LED lights and still recover some costs from the tenant?
It depends. Each case will turn on its own facts and circumstances. If the landlord planned to upgrade the lighting to LED regardless of whether all the fluorescent lights were working or not then it may be difficult to prove any loss. But if the situation is more complicated than that then the Astrazeneca case shows that a landlord may be able to claim for the cost of cheaper works (i.e. replacing the fluorescent lights) and put this towards improvement works (such as LED installation).
As sustainability and energy performance become ever greater issues for landlords, situations like this will arise even more often, so we can expect further guidance from the courts in another case in the future.
For advice on dilapidations, or any other commercial property dispute, get in touch with our market-leading Real Estate Litigation team or your usual Brodies contact.