Cap on Liability - To repair or not to repair that is the question

At lease expiry, whether the tenant has complied with all the repair covenants in their lease in relation to the required standard will always be a challenging question. Even if the tenant has complied with the obligations to fully repair the premises in accordance with their lease, the premises may not be in an immediately re-lettable condition and the landlord may decide to upgrade or refurbish the premises in order to secure a re-letting. Often this work is so extensive that any repair work that may have been undertaken by the tenant would have been superseded by the refurbishment undertaken by the landlord. The tenant’s argument is that if they did the work this was wasted or if they subsequently make a dilapidations payment, the landlord simply receives a windfall? The landlord’s argument is that the tenant should not be able to disregard their obligations without penalty.

The recent case of Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited [2013] EWHC 463 (TCC) considered this question and determined that both landlord and tenant can be right. The facts of Sunlife are simple enough. The tenant vacated without completing the significant repair work it was required to, to put the property back into the condition it was in when the property was let. The landlord’s surveyor said it would cost £2.42 million to repair. The landlord then went on to undertake a significant refurbishment.

The Court had two questions to consider:

1          The standard of repair to be applied.

2          Whether the work the tenant would have done would have been superseded by the refurbishment and therefore whether the diminution in value should only be, as suggested by the tenant, £240,000.

The Judge ruled that:

1          The standard to which the tenant had to repair was the standard at the date of the lease and that if the plant was beyond economic repair the tenant was only bound to make a like for like (or nearest equivalent) replacement.  They did not have to bring it into line with current standards.

2          The fact that the landlord had carried out significant repair work did not prevent the landlord from recovering the costs of repairs necessary to remedy the breach. The question to ask was whether, if the tenant had complied with its repair obligations, the landlord could have re-let or sold the building with ease.

In the Sunlife case the tenant couldn’t argue with the evidence provided by the landlord that if they had undertaken the repair in 2009 then the premises could have been re-let with only minor improvements. The judge therefore awarded the landlord £1,353,253. To those who deal with dilapidations it is often joked that judges like to award a sum half way between the parties respective starting positions and this is exactly what happened in this case.

Posted on 03/12/2014 by Ortolan

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