Care is required to preserve dilapidations rights on a lease surrender.
Baroque Investments Limited v Joint Liquidators of Teathers Limited [22 October 2012] considered the impact of release provisions in a surrender document on a landlord’s claims against a tenant for dilapidations and breach of a reinstatement obligation. The decision is noteworthy for those documenting surrender arrangements.
Baroque owned the freehold interest in Beaufort House in London EC3. The fifth floor was let to Landsbanki Securities UK Limited, now called Teathers Limited, on four leases all expiring in 2014. Each lease contained a tenant’s obligation to keep the premises in good and substantial repair and condition.
In 2005 Baroque granted Teathers two licences to alter relating to works to the premises including infill of an atrium area. The licences required the tenant before the end of the leases to dismantle and remove the works and reinstate the premises as if the works had not been carried out.
In 2009 Teathers went into creditors voluntary winding up and Teathers, by its liquidators, surrendered the leases to Baroque. The surrender terms included Baroque and Teathers releasing each other from all liability in respect of any breach of a lease obligation whether arising on or after, but not before, the date of the surrender. On the day of the surrender, Baroque relet the fifth floor to a third party.
Baroque admitted a proof of debt to Teathers’ liquidators of almost £4 million. Part of the claim was settled, leaving outstanding a dilapidations claim of over £1.2 million. That claim had two parts, the liability to reinstate under the licences and the liability to keep the premises in repair. The issue was whether those liabilities were released by the surrender.
The High Court decided in the liquidators’ favour. It agreed with their argument that the requirement to reinstate “before the end of the leases” was designed to allow the tenant the full period of the term until 2014 in which to carry out the works. There was, therefore, no breach of the reinstatement obligation at the time of the surrender in 2009. Since potential future liability for reinstatement was released by the surrender, there was no provable liability under this head.
On the repair point, Baroque argued that because of the premises’ poor state of repair left by Teathers, it had to offer a 19 months’ rent free period and accept a reduced rent for the subsequent lease to the third party.
The measure of a landlord’s loss for breach of a tenant’s repair obligation “during the currency of a lease” is limited by section 18(1) of the Landlord and Tenant Act 1927 so as not to exceed the amount by which the value of the “reversion” (the landlord’s interest) in the premises is diminished due to the breach.
The liquidators contended and the Court agreed that the calculation of the damages under that section necessarily assumes that the lease, to which the reversion is subject, continues. The dilapidations claim had not been calculated in accordance with section 18(1). No attempt was made to value the reversion in either its actual or repaired state and it was assumed that the difference between those valuations would equal the loss sustained on reletting to the third party. That may or may not be so. The liquidators were correct in rejecting the proof of debt.
The Court, generally, stated that ascertaining the amount under section 18(1) necessarily requires the valuation of the reversion in its actual state and in its repaired state. The valuation assumes that a purchaser will take the reversion subject to the lease, with the benefit of the tenant’s lease obligations for the remainder of the term. It may, consequently, be difficult to prove that the effect of the disrepair has been to cause any diminution in the reversion’s value.