In Van Dal Footwear Ltd v Ryman Ltd, Ryman's lease of premises had expired. Prior to expiry, Ryman had made two offers to its landlord, proposing terms on which it would take a new lease of the building. However, neither of these offers was acceptable to the landlord, and so Ryman vacated the premises.
The building was left in disrepair, and the landlord claimed damages against Ryman. 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. The application of section 18 normally involves two calculations, each based on an assumed sale: one 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.
The lower court found that, on the face of it, the value of the building in repair would have been £1,068,838. The value of the building in its actual condition would have been £950,000, giving a diminution in value of £118,838.
However, Ryman argued that, in relation to such an assumed sale, it would have repeated its offers to take a new lease to a prospective purchaser of the building. The lower court found that a hypothetical purchaser would have accepted that offer, because the purchaser would have had the benefit of a "blue chip" covenant and would not have suffered a void period while trying to find a new tenant. The result of this would be that the purchaser would have had a contract in place with Ryman, committing Ryman to take a new lease at the same time as the purchaser committed itself to purchase the property. This would increase the price payable by the purchaser for the property to £1,020,300. The diminution in value of the property would therefore only be £48,538.
The landlord appealed to the Court of Appeal.
The Court of Appeal ruled in the landlord's favour. What had to be valued under section 18 was the freehold as it had come back into the landlord's hands, before it was re-let. Any reversionary lease, whether made with the same tenant or a different tenant, was left out of account. What the court had to do was value the rights the landlord actually had on the valuation date. As at the date of expiry of the lease, the landlord did not have the benefit of an agreement for lease with Ryman. The lower court had therefore valued the wrong thing.
Things to consider
In this case, the premises were vacant following lease expiry and there was no lease or agreement for lease in place at the valuation date. However, what if the tenant leaves behind him a sub-tenant, whose tenancy is continuing by virtue of Part II of the Landlord and Tenant Act 1954? Case law has established that this must be taken into account in assessing the loss to the reversion.
The landlord will become entitled to the benefit of any obligations to repair in the sub-lease. The sub-tenant will be entitled to a new tenancy under the 1954 Act and the new lease will normally be on the same terms (including repairing covenants) as the existing sub-lease. The rent will be fixed by the court without taking account of any disrepair which is attributable to the sub-tenant's breaches of the repairing covenants in the current sub-lease. On that basis, there may be no diminution in the value of the landlord's reversion. The position may be different where the sub-tenant's solvency is in question, with the result that there is a doubt as to whether it will be able to meet the cost of repairs.