Going, Going, Gone – A Tenant’s liability for disrepair to obsolete or near-obsolete buildings

 

Introduction

s.18(1) of the Landlord & Tenant Act 1927 imposes a well-known cap on the damages recoverable by a landlord for disrepair at the end of a tenant’s term. In summary, the effect of this section is to limit recoverable damages to the diminution in value of the reversion.

In many cases, diminution in value may well be roughly equivalent to the cost of repairs, and in such circumstances s.18(1) will obviously make little or no difference to the quantification of damages. In other cases however the cost of repairs will give less of an indication of the diminution in value. This is particularly likely to be so when the building is obsolete, or nearing that state. It is in these circumstances that the application of s.18(1) is of greatest importance.

Recent cases on obsolescence

The problem of obsolescence has confronted the Court in two recent cases: Craven (Builders) Ltd. v Secretary of State for Health [2000] 1 EGLR 128 and Ultraworth v General Accident Fire & Life and another [2000] 2 EGLR 115.

In Craven, Neuberger J was required to determine the diminution in value of a late 19th century mill building in Leicester against the background of a recession and a dormant market. The mill’s established planning use was as a warehouse. It had been left in a substantial state of disrepair. There was no obvious buyer for the property.

The approach taken by the Court was to consider who the most likely purchaser – or as Neuberger J put it, the “least unlikely” purchaser – would have been. The conclusion reached was that it would have been a speculator who would have been only moderately concerned about the level of disrepair. Adopting that approach, Neuberger J arrived at the conclusion that the diminution was closer to the tenant’s figure of zero than the landlord’s figure of £340,000. He awarded damages of £40,000.

In Ultraworth, HHJ Havery QC faced a similar problem in relation to a five storey office block of 1970’s construction. HHJ Havery considered that the most likely fate for the block in question was that it would be purchased for redevelopment. He found that the disrepair did not make any difference to the price payable for that purpose. Applying s.18(1), he found that no damages were payable.

The relevance of the second limb of s.18(1)

The “second limb” of s.18(1) provides that no damages will be recoverable if it is established that there existed an intention to pull down or make significant structural alterations to the premises at or shortly after the termination of the tenancy. In neither Ultraworth nor Craven does it appear to have been argued that the second limb was engaged. The onus of establishing the requisite intention is (probably) on the tenant – Crown Estates Commissioners v Town Investments Ltd [1992] 1 EGLR 61 at 64K-65C.

What constitutes the necessary intention?

There are two elements to intention. First, it must be shown that the landlord has the necessary desire that the demolition or structural alteration should come about. In the case of Cunliffe v Goodman [1950] 2 KB 237, Asquith LJ memorably suggested that the landlord’s desire needed to have “moved out of the zone of contemplation – out of the sphere of the tentative, the provisional and the exploratory – into the valley of decision”.

Second, the intended development must be a viable proposition. If for example planning restrictions or enforceable user covenants render any planned development impracticable, the necessary intention will not be found irrespective of the landlord’s state of mind. The test is whether the prospect of accomplishing the development is strong enough to be acted on by a reasonable landlord who was minded to proceed – see Cadogan v McCarthy & Stone [1996] EGCS 94, Dolgellau Golf Club v Hett [1998] 2 EGLR 75, and Gatwick Parking Services v Sargent [2000] 2 EGLR 45.

What period of time constitutes “at or shortly after” the termination of the tenancy?

There is little case law on this point. At first blush the statute might be thought to be open to abuse. What is to stop a landlord from waiting until a sufficiently short time has elapsed before carrying out his works, solely to ensure that his claim is not caught by the second limb of s.18(1)?

It is suggested that the very possibility of such abuse should colour the attitude of the Court to the question of how short is short. Where a dilapidations claim is valuable, it may be cost-effective for a landlord to defer redevelopment for a lengthy period – years, even – pending its resolution. In such cases, the phrase “at or shortly after” should be generously interpreted so as to extend to the duration of that period – otherwise, dilapidations damages recovered by the landlord will represent the windfall which it is the intention of the statute to prevent.

Andrew Butler
Tanfield Chambers

1. “Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of covenant or agreement as aforesaid and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made as would render valueless the repairs covered by the covenant or agreement.”