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It is a well understood principle of dilapidations that landlords are able to hold tenants to account for failure to fully comply with repairing obligations within a lease says commercial property agent, Prop-Search. However, whilst this may appear straightforward, there are a number of traps that can catch unwary landlords and tenants.
From the tenant's point of view it may be preferable to carry out the works prior to determination of their lease, but if it is apparent that the building is likely to be extensively refurbished or redeveloped on vacation, the tenant may be better not carry out certain works on the basis that they would be superseded by the landlord's refurbishment or demolition.
Samantha Jones, a Surveyor at Prop-Search, comments: “Tenants should take into account that if the landlord has to carry out the works, their claim may also include consequential losses. This can include the loss of rent, service charges and rates liabilities.”
A well advised landlord will also be aware that a prudent tenant will seek to cap the claim to the depreciation in the value of the landlord's interest that is a direct consequence of the tenant's failure to repair.
By way of an example, the landlord may consider that the cost of carrying out the repair works and the consequential loss is in the region of say £500,000. However, if the value of the building in disrepair is only £200,000 - less than the value of the building in repair - the landlord's actual loss is £200,000 and Section 18(1) Landlord & Tenant Act 1927, together with common law, would restrict the landlord's claim against the tenant to that amount.
Samantha Jones adds: “Similarly, if it is proved that the value of the building is as a development site rather than in its existing form, the required repairs would not have any impact on the value of the site and the landlord would be deemed to have suffered no loss.”
It is important that these arguments are supported by coherent and reliable expert evidence as illustrated by two recent cases:
Hammersmith Properties v Saint-Gobain Ceramics [2013]
The cost of repair in respect of a large 1930s industrial building was assessed at £2.4m. However, the tenant argued that even in full repair the building was redundant and its true value was as a development site - but failed to provide sound reasoning and valuation evidence. The court dismissed the tenant's valuation as a ‘finger in the air' and held that in repair the property had a value of £3m, compared with a site value of £2.1m and consequently applied a Section 18(1) ‘cap' at £0.9m.
Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd [2013]
The tenant failed to carry out remedial works in respect of a 1970s office building in Soho and the landlord claimed a loss of £2.17m. The tenant took the view that a significant amount of upgrade works had superseded the majority of the remedial works and sought to limit their liability by relying on a Section 18(1) diminution valuation of £240,000. However, the Court took the view that the tenant's valuation was based on incorrect assumptions and that the actual diminution was circa £1.4m. On the basis that the Court had decided that the cost of the remedial works, once account had been taken of supersession, was circa £1.35m the Section 18(1) cap did not apply.
It is important that either as a landlord or tenant if you have a dilapidations claim pending or are about to enter into a lease agreement and require an arbitration clause checked, that professional advice is sought. Prop-Search is able to offer a fully coordinated and holistic approach in terms of dilapidations or any commercial property advice - Tel: 01933 223300 / 01604 492000 or its website www.prop-search.com