Summary
This case concerned a claim for dilapidations on the expiration of the contractual term of a lease. The principal issue which the Court considered was the ability of the Claimant landlord ("Hammersmatch") to recover the costs of the works and fees, or whether in the facts of this case the statutory cap would apply. The Court held that the claim for dilapidations would be limited by section 18(1) of the Landlord and Tenant Act 1927 to the value of the diminution of the reversion.
Facts
Hammersmatch was the landlord pursuant to the terms of a lease dated 14 December 1984 expiring on 28 December 2009. The First Defendant ("Saint-Gobain") was the tenant, and the Second Defendant was the guarantor. The property consisted of a large 1930's industrial building known as the Norton Building in Welwyn Garden City.
Aside from a few tenancies at will and two telecommunications masts on the roof, the property had been empty since 2003. Over the period 1999 to 2008, there were various discussions in relation to the Norton Building being redeveloped, which had included an application for planning permission made by Hammersmatch, which was refused.
On 12 February 2008, Hammersmatch instructed surveyors to prepare a schedule of dilapidations which was served on Saint-Gobain on 18 December 2008. A letter of claim pursuant to the Dilapidations Protocol was served on Saint-Gobain on 11 January 2010, referring to a claim of £6.8m. Proceedings were issued and served in June 2011.
The principal issues which the Court was required to consider were:
- the extent of Saint-Gobain's breaches of covenant;
- the reasonable and proper cost of professional fees;
- the measure of damages for diminution in the value of the reversion under section 18(1) of the Landlord and Tenant Act 1927;
- whether Hammersmatch was entitled to recover for loss of rent, damages representing the cost of insuring the premises until re-let, and interest.
The parties' respective building surveying experts had agreed that the cost of building fabric dilapidations amounted to £1,785,578.15, and the Mechanical and Electrical Engineers had agreed that the cost of mechanical and electrical dilapidations amounted to £435,926.
Some items remained disputed between the parties, including works to boilers and lifts.
Decision
In order to establish the appropriate standard of repair, the Court was entitled to take into account the age, character and locality of the Norton Building - which was a purpose-built manufacturing building and which was 50 years old at the date of the lease. The Court noted that a tenant's obligation is not to return the premises to the condition that they were in at the start of the lease. The Court considered what a "reasonably minded tenant of the relevant user class" would reasonably have required in December 1984 (i.e. at the start of the lease) to render the building fit for occupation for the purposes contemplated by the lease.
As far as the disputed items were concerned, the Court considered whether they ought to be repaired/ replaced having regard to existing principles in relation to repair/ replacement. These included the principle that replacement is only required if repair is not reasonably and sensibly possible. The Court also noted that the fact that an item has exceeded its indicative life expectancy - so that it would or might be economic for a prudent owner to replace it - does not mean that it is not in a good and safe working order, repair and condition.
On the evidence, the Court found that two boilers needed to be replaced and three could be repaired, at a total cost of £33,500. Repairs were required to be carried out to switch panels at a cost of £53,000. The passenger and goods lifts were in need of repair, at a total cost of £91,100. Added to the agreed figure for the cost of building fabric dilapidations of £1,785,578.15, and the agreed cost of the Mechanical and Electrical dilapidations of £435,926, the Court held that the cost of the works which Saint-Gobain should have carried out under the lease amounted to £2,399,104. To this figure the Court added an allowance for fees, supervision costs, financing costs and applied a risk and management allowance of 15% - giving an overall total of £3,087,712.
The Court then considered whether and to what extent the breaches of covenant on the term date resulted in a diminution in the value of Hammersmatch's freehold reversion on that date. The starting point was the value of the property in repair, which the Court held to be £3,061,251. The costs of putting the property into repair therefore exceeded the value of the property in repair.
The Court accepted Saint-Gobain's submission that once the resulting figure for the costs of the works falls below the site value, then the diminution in value is the difference between the "in repair" value and the site value. The Court found on the evidence that the site value amounted to £2.1m. The Court rounded down the value of the property in repair to £3m, and held that the diminution in value amounted to £900,000. Hammersmatch was not entitled to recover loss of rent in addition to the cost of repairs, or damages representing the cost of insuring the premises until they were re-let. Hammersmatch was entitled to recover interest at 4.5% per annum from the term date of 28 December 2009 and on the schedule costs (£20,320.40).
Hammersmatch's damages were therefore limited by section 18(1) of the Landlord and Tenant Act 1927 to the value of the diminution of the reversion at £900,000, plus the costs of the schedules at £20,320.40 and to interest at 4.5% per annum.
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