Previous Real Estate Bulletin articles have considered terminal dilapidations and the considerable importance of both landlords and tenants making their cases on liability and quantum clear at an early stage of any dispute in order to comply with the Dilapidations Protocol. The recent case of Consortium Commercial Developments Ltd v ABB Ltd  EWHC 2128 (TCC) is an example of the court’s flexible approach to analysing the expert valuation evidence should a dispute ultimately proceed to a trial and of the effect this may have on any eventual liability of the former tenant for terminal dilapidations.
Facts of the case
In 1996 Consortium Commercial Developments (“Consortium”) granted a lease to ABB which came to an end in June 2011. The premises were a B1 hybrid unit located on a business park in Milton Keynes. Four years later, the disrepair existing at the expiry of the lease and failure to re-instate the premises had not been remedied. Consortium’s position was that it did not want to fund the costs of the works without first recovering those costs from ABB. Consortium also wished to await an improvement in market conditions, before incurring the costs of the works and re-letting the unit. Therefore Consortium made a claim for dilapidations against ABB. Consortium’s claim was limited by s.18 of the Landlord and Tenant Act 1927 to damages amounting to the diminution in value of the premises caused by the disrepair at the end of the lease.
By the time the case came to trial, surveyors instructed by the parties had agreed that the costs of reinstatement and remedying the disrepair under the lease totalled GBP 315,258.77 and that the necessary works would take 12 weeks. Consortium also claimed for loss of rent and rates over this 12 week period. This claim was based on the previous passing rent of GBP 160,000 pa and rates of GBP 728.60 pw, resulting in a further claim for GBP 45,666.24.
ABB had previously sublet the property in 2003 and, upon vacation, the sub-tenant had paid GBP 160,000 to ABB in respect of its terminal dilapidations liabilities. ABB had then made attempts to re-let the premises in its unrepaired condition with no success. ABB had refused to pay any amount to Consortium for dilapidations (not even the GBP 160,000) and Consortium therefore claimed 6% pa interest (a higher interest rate than the norm), as a means of penalising ABB for not accounting for this recovery, or any dilapidations, to Consortium.
Consortium’s expert valuer valued the premises in repair at GBP 1.15 million and in disrepair at GBP 600,000. ABB’s expert valuer disagreed with these figures and contended for GBP 775,000 in repair and GBP 700,000 in disrepair. Therefore Consortium’s case was that the diminution in value was GBP 550,000, compared to ABB’s case that the diminution amounted to only GBP 75,000.
Consortium’s valuer considered that the premises had a rental value in repair of GBP 77.12 psf whereas ABB’s valuer’s consideration of the relevant comparables produced a rental valuation in repair just above GBP 52.00 psf.
The judge was critical of both expert valuers’ approaches. Judge Bartlett QC found that Consortium’s expert valuer had not carried out a proper analysis of the relative relevance of the comparables used and his evidence lacked a proper explanation in relation to the in-repair valuation of GBP 1.15 million. The judge placed greater reliance on ABB’s expert’s valuation but found that ABB’s expert valuer had not factored in appropriate adjustments to the comparables to reflect a true rental value in repair.
Using what he considered to be the most appropriate comparable, a property with a rental value of GBP 54.44psf, the judge made an upwards adjustment for the subject premises’ advantages to reach a value of GBP 60.00psf (the comparable had been sold in administration, was an older building, lacked suspended ceilings and full air-conditioning and had less capacity to be converted to office use). Accordingly, this produced an in-repair value of GBP 900,000.
Most significantly, in deciding the out-of-repair value, the judge did not consider it appropriate to then use a poundfor-pound deduction ie to simply deduct the cost of repairs from the GBP 900,000 in-repair value. This was because the judge considered that a hypothetical purchaser of the premises would not bid on this basis. The judge considered the likely reduction that a purchaser of the premises would require in order to carry out the works would be only GBP 15.00 psf in the light of the comparable evidence. The result was a reduction in value of GBP 225,000 and therefore the judge concluded that the diminution in value was limited to this figure.
The judge then went on to consider a second issue: Consortium’s claim for reinstatement items and statutory items yet to be carried out totalling just over GBP 16,000. The judge considered that all the reinstatement works were reasonable and recoverable in the circumstances as the items were small and all necessary to re-let the premises in good condition.
Dealing with the third issue and claim for loss of rent and rates for the 12 weeks required to undertake the works, the judge found that, due to the difficult market conditions in 2011 and the over-supply of similar properties, Consortium could not prove, on the balance of probabilities, that this loss was the result of ABB’s breaches of covenant nor that it would not have been incurred if the premises had been left in good condition at the expiry of the term.
The judge also went on to reject Consortium’s penal interest claim of 6% pa and instead awarded interest at 2.5% pa above the base rate, which he considered was the correct commercial rate.
Consortium recovered less than half of its original claim, whereas ABB was found liable for an amount over three times as much as it had contended itself liable. The case shows how the judge was free to use and adapt the expert evidence of both parties to form his own judgment of the appropriate damages due to the landlord. Furthermore the judge did not consider it significant that the tenant had recovered dilapidations monies from its subtenant and had still failed to carry out the required works. It is very likely that the legal costs incurred by both the landlord and tenant were substantial and this once again emphasises the importance of meaningful and realistic without prejudice negotiations.