Disagreeing over Dilapidations

For many tenants a big risk in moving premises is what your ex-landlord may claim in dilapidations costs. A case in the Court of Appeal has looked into exactly this issue.

As leases become shorter in length, more and more tenants struggle to see why they should pay for repairs to the building they are vacating but landlords can find it difficult to relet a property that is not in tiptop condition.

The common law rule is that a landlord is entitled to damages equal to the cost of repairs that the tenant should have carried out, plus loss of rent during the period needed to carry out those works. The Landlord and Tenant Act 1927 imposes a cap on this amount equal to the reduction in value of the freehold resulting from the tenant’s breach of repair covenant.

However, within this generally accepted rule, there is substantial room for disagreement and it was this that was explored by the courts in the case of Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited.

A 3 step process was put forward:

1. What does the repairing obligation in the lease actually say?

2. What is the reasonable cost of putting the building back to the condition which it should have been in if the repairing obligation had been complied with?

3. What is the difference between the value of the building in its actual condition and the condition that it should have been in? (This is often assessed using the “residual value” approach which takes the value of the building following the works, adds to that the period of time needed to carry out the works, then deducts the cost of works plus a developer’s profit on those works. The courts were happy with this approach but cautioned landlords against using professionals who are not qualified building surveyors).

The result was that the court decided that not all work that the landlord wanted to do in order to relet the property could be charged to the tenant.

Where work is required to entice a new tenant into the property, and that work would make some of the repairs which the tenant should otherwise have done redundant then a landlord cannot claim for those repairs. In this case, even if the tenant had left the facade in good repair, the landlord would have re-rendered the facade to make the building more attractive and so this was discounted.

Provided that the tenant returns the premises in good repair and condition and with mechanical and electrical systems in satisfactory working order, they are not required to return the premises with new equipment or with equipment with any particular life expectancy. A lift that works, even though it might be old, does not have to be replaced unless the lease expressly requires this.

Summary

Madhvi Panchal comments, "Claims for dilapidations are often hotly contested. Any claim for repairs must result from an actual obligation in the lease and so it is important to review the lease to see what can and cannot be claimed for from the outset. A well drafted repairing covenant in a lease can avoid expensive claims for costs later on."

 

For more information call Lawson-West on 0116 212 1000.

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