Section 18 of the Landlord and Tenant Act 1927 limits the amount of damages a landlord may recover for breach of a tenant's repairing covenant to the amount by which the reversion is diminished as a result of the breach.
In Ravengate Estates Ltd v Horizon Housing Group Ltd, the landlord sought damages for dilapidations following the expiry of the leases of several flats to a housing association. Subsequently, the landlord applied for planning permission to significantly extend and subdivide a number of the flats which would mean carrying out major building works.
Planning permission was obtained. However, the cost of the development turned out to be much higher than anticipated, and so the landlord did not proceed with it at that time.
The landlord claimed the cost of the repairs from the tenant. The tenant argued that a purchaser of the reversion would look at the property and see the potential for development in accordance with the planning permission. The development would render the repair work unnecessary.
The application of the cap in section 18 normally involves two calculations: one of a sale of the property in proper repair, and one of the property not in repair. The difference between those two values is the diminution in the value of the reversion. In order to ascertain the two sale prices it will usually be necessary to identify the nature of the market and therefore the nature of the purchaser.
The tenant's surveyor put forward persuasive evidence as to why it would make financial sense for a purchaser to implement the planning permission. The Court of Appeal agreed with the lower court that any purchaser would buy with an eye to development. Such a purchaser would not require any reduction in price because of the disrepair.
Things to consider
Tenants who wish to defend dilapidations claims where landlords are intending to redevelop usually avail themselves of the second limb of section 18. This provides that no damages can be recovered if the premises would, at or shortly after the end of the lease, be pulled down, or structural alterations made which would render the repairs valueless.
In this case the planning permission was obtained some time after the leases had terminated and so it may have been difficult for the tenant to rely on this part of the section. Instead, the tenant successfully argued its case on the diminution in value point.
It seems that the landlord may have been waiting for its dilapidations payout before implementing the planning permission. Landlords who have redevelopment plans should not count on being able to finance these partly through enforcing the repairing obligations of their tenants.