Dilapidations Case Update

PCE Investors Ltd. V Cancer Research UK

This recently determined case revolved around a conditional break clause. As anyone who has been involved in a conditional break clause will tell you, they are often complicated matters with any number of pitfalls to trip up unsuspecting Tenants. A large proportion of break clauses are conditional upon the payment of "rents" and this case provides much needed clarification on that issue.

Background

In 2010 the tenant served notice on the landlord that they wished to exercise their break option. The Landlord subsequently invoiced the tenant for the full Quarter's rent as per the lease. The Tenant only paid from the quarter date up until the intended break. Following this, the Tenant emailed the Landlord asking for confirmation that no further rent was owed but the Landlord did not respond.

Following the break date the Landlord asserted that that the break was frustrated since the tenant had not paid the rents and thus not complied with the break clause. The Landlord argued that the full quarter's rent should have been paid and the fact the tenant did not meant that at the break date, rents were outstanding.

The Judgement

The Tenant argued that it should not have been obliged to pay the full quarter's rent. The Court ruled against this argument and said that all obligations under the lease subsisted until the actual termination date; the Landlord could not be certain the lease would determine on the break date as the Tenant may have failed to meet other break conditions. The Court also held that the Tenant had known the full quarter's rent was due as the Landlord had invoiced them. For this reason the Court ruled that the break was invalid and the lease continued.

Following this the Tenant applied for permission to amend its defence to estoppel on the grounds that the Landlord had not responded to the Tenants' email requesting confirmation that nothing further was owed. The Court stated that this argument would not succeed as it was not the Landlord's duty to notify the tenant of its obligations.

Lessons Learnt

For Tenants:

  1. It is vital to understand the conditions attached to a break at the earliest opportunity. Don't wait until the last minute, as you may not leave yourself enough time to comply.
  2. Take legal advice and surveyor's advice on those conditions to determine what they actually mean in practical terms.
  3. If the break is conditional upon the payment of "rents", check the lease definition of rents. Often the word "rents" will include service charge demands and sometimes it will mean any sums demanded by the Landlord.
  4. Don't assume the Landlord has a duty to notify you of potential breaches. They don't, and if they are trying to frustrate the break they will probably remain silent for that reason.
  5. Don't assume that common sense will prevail. It won't. See item 2!

For Landlords:

  1. Take early advice on the conditions the tenant has to meet and the implications this may have.

Sunlife Europe Properties V Tiger Aspect Holdings Ltd.

This case reviewed a number of leading dilapidations principles which are relied upon in nearly all dilapidations negotiations . For this reason this case is considered to be one of the most important dilapidations judgements for years.

The principle issue was whether the repair covenants in a 35-year lease would have been met by yielding up the premises with adequately maintained 1970s equipment, or whether the equipment ought to have been upgraded by the tenant in line with modern standards.

Background

Tiger Aspect Holdings Ltd was the tenant of a 1970s office building in Soho Square for 35 years. At the end of the Lease the Landlord submitted a dilapidations claim in the sum of £2.172 million. The tenant responded that the remedial works required amounted to no more than £700,000.00 and further argued that the claim should be capped by the diminution in the value of the Landlord's reversion - valued at £240,000.00.

The Judgement

In his judgement, Mr Justice Edwards-Stuart made a number of references to the case of Ruxley V Forsyth [1966]; he made clear that this case (Ruxley) set the general rule "that the cost of reinstatement is the appropriate measure of damage does not apply if the expenditure would be out of all proportion to the benefit obtained". However there is another famous case which most surveyors rely on - Joyner V Weeks [1981] which set out the principle that the cost of repair works is generally the correct measure of damages.

As you can see, it appears that the Judge in Sunlife Europe Properties V Tiger Aspect Holdings Ltd. seems to indicate that the principle set down in Joyner V Weeks is not correct. In addition the Judge has clarified the complicated issue of supersession (see f and g below). In essence, if the landlord has upgraded an element purely due to market forces, then he cannot recover the cost at all; however if the landlord's upgrade was driven by the original disrepair but upgrading was the only viable repair then he can recover the costs for the original breach. This is in line with the PGF II SA v (1) Royal & Sun Alliance Insurance Plc (2) London & Edinburgh Insurance Company Limited case.

This case set out some general rules for dilapidations claims which can be summarised as follows:

(a) a tenant is entitled to perform his covenants in the manner least onerous to him;
(b) a tenant is obliged to return the premises in good and tenantable condition and with mechanical and electrical installation systems in satisfactory working order. He is not required to deliver up the premises with new equipment or with equipment having any remaining life expectancy. The standard of repairs was to be judged by reference to the condition of the equipment and fittings at the time of the demise, not the condition which would be expected of an equivalent building at the expiry of the lease;
(c) where there were covenants against making alterations, the tenant is not entitled or obliged to deliver up the premises with any material alterations;
(d) the tenant is only obliged to replace broken plant on a like-for-like, or nearest equivalent, basis. He is not required to upgrade it in line with current standards (unless required to do so by statute and he is required to comply with statute);
(e) a landlord seeking the cost of repairs cannot recover a loss which he could reasonably have avoided, or the cost of remedial work which is disproportionate to the benefit obtained;
(f) where there is a need to to carry out works by virtue of a tenants breach, the fact that a landlord has carried out more extensive work does not, of itself, prevent him from recovering the cost of the work that would have been necessary to remedy the breach;
(g) where more extensive works (upgrading for example) have been carried out by virtue of market conditions a tenant is not liable for for those costs, even if they were in breach of the lease covenents;
(h) where a tenant is in breach of a repairing covenant, the court is entitled to infer that remedial work performed by the landlord was necessary to remedy the breach unless the tenant demonstrated to the contrary.