In 2010, the case of PGF II SA v Royal & Sun Alliance Insurance Plc1 challenged some long-standing conventions dating back to the late 19th Century about the way in which lease-end dilapidations claims are calculated.
The case may have been timely, but arguably it lacked the clarity needed by surveyors and solicitors to put the law into practice. Thankfully, the case of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Limited2 in March this year picked up where PGF left off, and has provided a useful and relatively concise guide to calculating damages for dilapidations.
The 1891 case of Joyner v Weeks3 established that the common law measure of damages for dilapidations was the cost of putting the premises into repair, less betterment, plus loss of rent. That rule seemed inflexible and prone to causing injustice. It took no account of whether the cost of repair was a true reflection of the landlord’s loss.
Section 18(1) of the Landlord and Tenant Act 1927 introduced a statutory cap on the common law liability, being the diminution in the value of the landlord’s reversion caused by the disrepair. The valuer is required to carry out two valuations of the landlord’s interest in the premises as at the last day of the term. First, with the premises in their actual state and, secondly, as if they had been left by the tenant in the state of repair required by the lease. The difference between the two values is the amount of the cap.
The common law calculation of damages was further honed by the introduction of the rule in Ruxley v Forsyth4 – a leading authority from the 1990s about a breach of a contract for works. This well-known case concerned a swimming pool built 6 feet deep rather than 7 feet and 6 inches, the practical consequences of which for the home owner were nominal. The House of Lords said that in such a case the aggrieved party should be reasonably compensated for the damage he has actually suffered. That loss is usually measured as the cost of reinstatement but if the cost would be out of all proportion to the benefit obtained from carrying out the works, such that it would be unreasonable to do them, then the correct measure of damages will be the difference in value between the premises with the actual work done and with the work that ought to have been done.
The judge in PGF adopted the same reasoning and applied it to dilapidations. He held that the landlord’s claim for the cost of repairing cladding was not unreasonable. Even though the landlord had replaced the cladding, making any works of repair unnecessary, he would not have done so had the cladding been delivered up in repair. He dismissed the tenant’s argument that regard should be had to the fact that the building was “ripe for development” such that a hypothetical purchaser would not care about the condition of the property but would inevitably redevelop the building.
However, commentators were concerned that in marrying Ruxley v Forsyth, Joyner v Weeks and section 18(1), the court had left a number of questions unanswered, particularly in relation to the question of supersession. The Tiger Aspect decision has brought welcome clarification.
Like PGF, Tiger Aspect concerned a 1973 building returned to the landlord in disrepair. Tiger had obtained and ignored maintenance advice throughout its eight year tenure. The original HVAC system had not been maintained or replaced, and one building had been entirely neglected for three years. The landlord issued a claim for £2.172 million in dilapidations.
Tiger argued that its obligation was to give back the systems which had been demised to its predecessor in 1973 “in a satisfactory state of repair for a system of that type and that age, nothing more, nothing less”. It argued that if the 1973 building and its systems had been put into repair, a hypothetical purchaser would still have had to extensively modernise the building to bring it to current market standards, meaning that the value of the property in its 1973 condition was not much higher than its value in a dilapidated state.
Roadmap for calculating damages for disrepair
The judge confirmed that in a contract to carry out works where the works have not properly been performed, the basic common law rule is that the claimant is entitled to be put in the position that he would have been in had the works been carried out in accordance with the contract; in other words, the cost of making good the defects.
The principle set out in Ruxley v Forsyth is also applicable, so that the cost of reinstatement will not be the appropriate measure if the expenditure would be out of all proportion to the benefit to be obtained.
Section 18(1) of the 1927 Act adds a further, statutory cap on liability, being the amount by which the value of the reversion is diminished owing to the breach.
The starting point in relation to supersession is to ask whether or not, if the tenant had performed its covenants and delivered the premises in repair, the landlord could have let or sold the building, without a significant discount. That will depend on evidence as to the available market for the hypothetically repaired but arguably outdated building.
If the answer to that question is “yes” then the measure of the landlord’s loss will be the cost of putting the property into a condition commensurate with compliance with the tenant’s covenants capped at the difference in value between the value of the building in its actual state and the value of the building in the state in which it should have been delivered up.
If the answer is “no”, then the court will have to consider what work would have been required, irrespective of the state of repair, to put the property into a condition that would enable it to be let to the appropriate type of tenant at a fair market rent. The landlord cannot recover the cost of that additional work. Also, to the extent that the necessary works make worthless some of the works that ought to have been carried out by the tenant, the cost of that work will not be recoverable. That is supersession.
Tiger Aspect has confirmed that the rule in Ruxley v Forsyth tempers the common law rule for dilapidations that has existed since Joyner v Weeks. If the cost of reinstatement would be out of all proportion to the benefit obtained from doing the works then the difference in value is the correct measure of damages.
Perhaps more significantly, the case has clarified the effect of supersession in dilapidations claims. A tenant cannot simply walk away from its repairing obligations by arguing that the repaired building would be updated in order to be sold or relet. The law is more subtle than that. Only if there would have been no market for the repaired property (without a significant discount) can the tenant argue supersession. Even where this is the case, and whilst the landlord will have to pick up the cost of the necessary upgrade works, the tenant will still have to meet the cost of any repair works not rendered obsolete by the upgrade.
Adapted from a lecture given at the RICS Building Surveying Conference 2013