After premises are delivered up in disrepair the landlord often upgrades or refurbishes. Sometimes this work is so extensive that, had repairs been carried out by the tenant, they would not have survived the refurbishment. In these cases the tenant will say that the landlord gets a windfall. The landlord will say that the tenant should not be able to disregard its obligations without financial consequences. Who is right?

In Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited [2013] EWHC 463 (TCC) the judge considered when “supersession” applies and, on his analysis, both the landlord and the tenant can be right.

Sunlife concerned prime Soho office premises let in 1973/74 on fully repairing leases which expired in 2008. The tenant vacated at the end of the term leaving behind significant dilapidations which the landlord’s surveyor said would cost £2.42 million to remedy. Before re-letting the premises the landlord carried out a significant upgrade and refurbishment to the building. The tenant argued that had it complied with its obligations, the land-lord would still have had to carry out a significant upgrade to attract a new tenant because otherwise the premises would have been in line with 1970s’ standards. The tenant contended that, because this work would “supersede” the work that it should have carried out, the diminution in value to the reversion was only £240,000.

The judge accepted that the standard to which the tenant had to repair was the standard at the date of the demise and that if the plant was beyond economic repair the tenant was only bound to make a like for like (or nearest equivalent) replace-ment and did not have to bring it into line with current stand-ards.

However, on the question of “supersession” the judge did not accept that the fact that the landlord had carried out more ex-tensive work prevented the landlord from recovering the costs of repairs necessary to remedy the breach. The judge said that the starting point was to ask whether, assuming that the tenant had complied with its obligations, the landlord could have let or sold the building without any significant discount on the price to reflect the actual condition of the building.

If the answer to that question was “yes” then “supersession” would not apply and the diminution in value would ordinarily reflect the cost of putting the building back into the condition in which it should have been delivered up.

If the answer was “no” then the court must consider what further work would have been required to put the premises into a condition that would enable it to be let to the appro-priate type of tenant (as to which see Proudfoot v Hart (1890) 25 QBD 42) at a fair market rent. The judge explained that:

“This additional work may make worthless some of the work that would have been necessary to put the building into repair with the result that, if such work has not been done, the landlord has suffered no loss and accordingly cannot recover any damages in respect of that breach. This is known as "supersession".”

This analysis reflects that what is in issue is a valuation question under the first limb of section 18(1) of the Land-lord and Tenant Act 1927. The issue is an objective one and does not depend on the works the landlord actually did or might carry out but what work a hypothetical pur-chaser would factor into its bid for the reversion.

Importantly, the exercise assumes that the tenant has fully performed its obligations under the lease. “Supersession” can only apply to any further work needed for the premises to be let to an appropriate tenant at a market rent. This limits the scope for a tenant escaping the financial conse-quences of disregarding its obligations and means that the focus of a dispute about “supersession” should be on what further work (if any) is needed to achieve a market letting at the end of the lease.

In the Sunlife case the tenant was unable to challenge the landlord’s valuation evidence that, if the tenant had com-plied with its obligations, in 2009 the building could have been let to an appropriate type of tenant with only fairly minor improvements (including refurbishment of the toi-lets). The landlord was therefore entitled to substantial damages despite the fact that its refurbishment scheme had gone beyond what the tenant had been obliged to do.

The judge awarded £1,353,253 to the landlord, a sum just under the statutory cap as assessed by the judge. And yes, that is almost the exact mid-point between the parties’ starting positions.