Dilapidations: To repair or to pay?
You're coming to the end of your commercial lease, and the premises aren't in a good way. Your priority is keeping costs to a minimum, so the questions you need to ask are:
- What has to be done to get the premises in good repair, in compliance with the lease? and
- Should I get contractors in now, or wait until the landlord serves a terminal schedule of dilapidations and then negotiate a sum in respect of damages?
The answer to the first question has been considered by the High Court and the Court of Appeal in the case of Sunlife Europe Properties Limited v (1) Tiger Aspect Holdings Limited (2) Tiger Television Limited (2013). The repairing obligations in the relevant leases were fairly standard, requiring the tenant, amongst other things:
"well and substantially to repair cleanse maintain and amend and keep in good and substantial repair and condition the premises and all additions thereto … and the fixtures and fittings therein…"
In considering the repairing obligations of the tenant, the Courts confirmed three central points:
- The tenant is obliged to return the premises in good and tenantable condition – by reference to the condition of its fabric, condition and equipment at the time of the demise, not the condition which would have been expected of an equivalent building at the expiry of the lease. The tenant is entitled to comply with his obligations in the manner that is least onerous to him;
- The tenant's obligation extends to keeping the M&E systems in satisfactory working order, which involves replacing plant which is beyond economic repair. However, he is only required to replace it on a like-for-like basis or nearest equivalent basis, not necessarily to upgrade it to bring it in line with current standards; and
- A tenant will remain liable for damages for his breach, even if the landlord carries out more extensive works than the tenant would have been required to do: "even if there is an element of betterment because the landlord chooses to carry out more extensive work than was necessary to put the building in the condition in which it should have been left by the tenant, this does not mean that the tenant escapes liability for the cost of the reasonable repair". However, where market conditions require premises to be upgraded in order to be relet, the tenant is not liable for the costs of any works which would be superseded by such upgrade. Crucially, it was common ground in this case that the subject premises could, if the tenant had complied with its obligations, have been relet on the open market without the need for the landlord to carry out significant further works. This must therefore be distinguished from the position many tenants find themselves in where, in a sluggish market (particularly outside London), higher specification premises are sought by incoming tenants;
The answer to the second question is partially addressed in 3 above, and often turns on how easily the premises will be relet, and what the landlord intends to do with the premises after your lease comes to an end.
If, for example, the landlord intends to demolish the dilapidated office block and replace it with a brand new residential development, you will be able to rely on section 18(1) of the Landlord and Tenant Act 1927, which provides two defences to any claim by the landlord:
- That the amount of damages should not be more than the amount by which the landlord's interest has been diminished by the breach; and
- That the disrepair for which damages are sought would be superseded by demolition or structural alterations at or shortly after the lease comes to an end.
If that is likely, it is sometimes advisable to wait until the landlord's intentions become clearer, before incurring the costs of engaging contractors early. However, that can be a risk, and it is worth noting from the above case that a tenant's lack of ongoing maintenance throughout the term of the lease can be used against him.
In considering whether or not it was reasonable for the landlord to be awarded the cost of replacing rather than repairing the boilers, the High Court judge found that:
"… I consider that Tiger's standards of maintenance were so poor that it could not be safely assumed in their favour that the boilers were in good working order."
Whether or not a tenant decides to carry out works themselves or tries to agree a financial settlement with the landlord, it is always advisable to turn your mind to the issue of repair in good time before the lease comes to an end.