PGF II SA v Royal & Sun Alliance Insurance Plc  EWHC 1459 TCC
Royal & Sun Alliance was PGF’s tenant at an office block in the City of London. PGF claimed substantial damages against Royal & Sun Alliance for dilapidations at the end of the term.
In reviewing the law the judge set out what he considered to be the correct approach to assessing a claim for damages for dilapidations. First, the landlord’s damages should be assessed at common law. This involved assessing the cost of the works which the tenant should have carried out at lease expiry and then deducting any items which would have been rendered valueless by reason of the landlord’s intended refurbishment works. Where the landlord had not at lease expiry decided what to do with the building (ie repair, refurbishment or demolition) the court should apply a test of reasonabless and where, in effect, one course of action was inevitable damages should be awarded on the basis that the landlord would act reasonably and adopt this course of action. Having assessed the damages at common law on this basis, the court should then apply the cap under section 18(1) of the Landlord and Tenant Act 1927, capping the landlord’s common law damages at the difference between the value of his reversionary interest in the premises in or out of repair.