Commercial leases often contain covenants requiring property to be returned in a certain condition at lease end. A failure by tenants to meet the required standards may lead to landlords seeking damages for breach of those covenants (a 'dilapidations' claim). In England and Wales, section 18(1) Landlord and Tenant Act 1927 places a statutory cap on these claims, limiting them to either the loss in value to the property as a result of the state of repair or, entirely unrecoverable if it can be shown that the property would be demolished or altered in a way that would render any repairs valueless (Statutory Cap).
The recent High Court decision in Peachside Limited v Lee and Keung offers interesting insight as to how the courts will decide damages, where both the hypothetical purchaser under limb (1) and the landlord's actual intentions under limb (2) have to be considered.
Background
The tenants occupied the property, which formed part of a larger building in Manchester's China Town. The property was utilised as a restaurant. Under the terms of the lease, the tenants were subject to repair, decorating, cleaning and yield up obligations. The lease also contained restrictions on alterations, obstructing windows and placing strain on structural parts.
The tenants ceased occupation and, aside from removing their belongings, had failed to comply with the lease covenants. The landlord attempted to re-let the property in its then state, but was advised that substantial and expensive works to re-let as a restaurant or a change of use to commercial offices would be required. The landlord described the property as a "warzone with grease". The landlord subsequently undertook works to re-let the property as a restaurant but, finding no demand for lettings, undertook further works to change the property to commercial offices; and sought damages from the tenant, in respect of terminal dilapidations.
The tenant's defence was that the property was not suitable for use as self-contained offices due to access issues and that the landlord's claim was an "elaborate charade" as it intended to redevelop the whole building.
Decision
With the exception of lift and hoist works claimed by the landlord (which the landlord was said to lack intention over), the landlord was awarded damages against the tenant. Of the Statutory Cap, it was held:
- For the amount of diminution where the landlord has undertaken works, the starting point is the cost of the works. The cap under limb (1) had not therefore been exceeded.
- The landlord's intentions for the property were genuine and the cost of the works would not be rendered valueless by a redevelopment of the whole property. As such, limb (2) of the cap had not been engaged.
The landlord's evidence was favoured in this case, because the tenant's expert was considered too invested in advancing the tenant's interest due to a long-term commercial relationship.
Take-away
The case provides a useful reminder to landlords and tenants alike of the engagement of the Statutory Cap in claims for terminal dilapidations. It is also a sage reminder that an expert's duty is to the court and not a client.
If you are a landlord or tenant of commercial property and would like further advice on dealing with claims for dilapidations and engaging the Statutory Cap, or if you have any questions about how these issues may affect you or your business, please do not hesitate to get in touch with our Real Estate Disputes Team or your usual Brodies' contact.
