The Court of appeal has recently given helpful guidance on the liability of Tenants for dilapidations at the end of a commercial lease – Sun Life Europe Properties Limited and Tiger Aspect Holdings Ltd 2013 EWCA Civ1656.

The Tenant, Tiger, had a lease of office premises in central London with comprehensive repairing obligations. At the end of the lease it left the property in poor condition and the Landlord carried out extensive work to re-let the property and sought to recover those costs from the Tenant.

At common law a Landlord is entitled to recover damages equal to the cost of the repairs that the Tenant should have carried out, subject to a cap on such damages as provided for by Section 18 (1) of the Landlord and Tenant Act 1927 (being a sum equal to the diminution in value to the landlord’s reversion caused by the failure to repair ).

At the first hearing before the Court the Judge outlined the procedure to be adopted by the court in making any such assessment.

1. What was the scope of the repairing obligation under the Lease?
2. What was the reasonable cost of putting the property back in the condition which it should have been in if the repairing obligations had been complied with?
3. What was the difference in the value of the property in its actual condition at the end of the lease compared with the condition it should have been in if all repairing obligations had been discharged by the Tenant?
4. The standard of repair at the end of the lease was to be assessed taking into account the age, character and location of the property , its equipment, fixtures and fittings and the class of tenant likely to take a lease of it.
Valuation evidence was used by both parties at the hearing – the valuation method used was a residual valuation- being the value of the building following the repair works less the costs of the work plus a developers profit on those works and the Court of Appeal was content to accept that approach in this case.

It held on the facts of the case that the Section 18 cap was not met.

The Court of Appeal expressly approved the forensic analysis undertaken by the trial judge of each item of repair. For that reason the first instance judgement offers a number of useful insights as to how the court might approach cases like this in the future. By way of example mechanical , electrical and air conditioning plant and equipment should be returned to the landlord in working order and need not be replaced with new ( unless the lease expressly requires it ) and not all of the work needed to make the premises fit for re-letting necessarily fell within the repairing covenant.

It is important the both Landlords and Tenants receive expert advice from lawyers when negotiating the terms of any repairing and re-decoration obligations at the commencement of any lease and on their rights and obligations upon termination of the lease and appoint suitably qualified and experienced Surveyors and Valuers to assist them in this exercise.

Farleys work closely with a number of selected experts in this field and are able to provide practical and cost effective advice to avoid such matters becoming time consuming and expensive litigation. For further information or advice please contact Farleys Solicitors Commercial Litigation team on 0845 050 1958, or alternatively you can email us.