This case concerns a claim for dilapidations in relation to premises known as Capella House, Snowdon Drive, Milton Keynes which was let for a term of 15 years expiring on 16 June 2011
Even though the lease expired over 4 years ago, the disrepair and failure to re-instate that existed at lease expiry has not been remedied and the case concerned the amount that should be awarded to the landlord in relation to such breaches of covenant. Such damages being limited by S.18 (1) of the landlord and Tenant Act 1927 to the diminution in value caused by the disrepair.
By the time of the trial, the parties’ surveyors had agreed that the total costs of remedying the breaches of covenant came to £315,258.77 and that these works would take 12 weeks to undertake. The landlord claimed a further sum of £45,666.24 in relation to loss of rent and rates during this 12 weeks period based upon the previously passing rent of £160,000 per annum and rates at £728.60 per week.
The expert valuers for the landlord and the tenant valued the premises in repair at £1.15millon and £775,000 respectively and, in disrepair, at £600,000 and £700,000 respectively. Accordingly, it was the landlord’s case that the diminution in value was £550,000 whereas the tenant claimed that the diminution in value was only £75,000.
Capella House was built in the early 1990s. It is a detached single-storey glass-fronted building of just under 15,000 sq.ft. It is a typical B1 hybrid business unit of its era and it is located on a business park on the fringe of the central business district of Milton Keynes. Buildings in the immediate vicinity are primarily used for warehousing or office purposes, whereas buildings somewhat closer to the Town Centre have been redeveloped for out-of-town retail purposes.
The property was sublet in 2003 and, when the sub-tenant vacated about 4 years later, it paid the tenant a sum of £160,000 in relation to its dilapidations liabilities. The tenant then sought to relet the property in its unrepaired condition but it remained vacant for the remainder of the term and ever since. When the lease expired in 2011, the market was weak and the property had very little prospect of being re-let whilst out of repair. However, the landlord did not want to fund the costs of the works without having first recovered the same from the tenant. Furthermore, it took the view that it would make better sense to wait until the market improved and a better rent was achievable, rather than to incur the costs at this stage and then having to offer the premises at a low rent.
In valuing the property, both valuers considered that the best price that would be obtainable would be by way of a sale to an intending owner/occupier rather than to an investor. Based upon what they considered to be relevant comparables, the valuers considered that the property had a rental value of £77.12 psf. (so far as the landlord’s valuer was concerned), and just over £52.00 psf. so far as the tenant’s valuer was concerned. However, the Judge was critical of the approach of the landlord’s valuer and his lack of proper analysis. He also considered that the tenant’s valuer had not made appropriate adjustments to comparables to reflect the true rental value. The judge based his view of the correct value of the property in repair upon what he considered to be the best comparable. This had a rental value of £54.44 psf. The judge adjusted this upwards to take account of the advantages that Capella House had over this comparable and he reached a value of just over £60.00 psf. which resulted in Capella House being valued in repair at £900,000.
The judge then went on to consider the out of repair value and he accepted that it was not appropriate to approach this on a pound for pound basis i.e. he held a purchaser would not deduct from the sum of £900,000 the full cost of the repairs.
The judge approached the calculation of the deduction for disrepair based on the amount a likely purchaser would factor in for works that it would want to undertake and, having considered comparable evidence, the judge considered that a purchaser would seek a reduction based upon £15.00 psf. which would equate to £225,000. Accordingly, the judge concluded that the value of the property in disrepair was £675,000 and the diminution in value was £225,000.
The judge then considered the claim for costs of some £15,000 for re-instatement works that had not yet been undertaken. The judge concluded that these items did need to be carried out and would be undertaken eventually to help re-let the premises in good condition. Accordingly, the Judge allowed this claim in full.
However, the judge was not sympathetic to the claim for loss of rent and rates. The Judge did not think it was correct to simply award rent and rates for 12 weeks just because the works would take that long. The simple fact of the matter is that the property would have been extremely difficult to relet in 2011 in repair and the claimant could not prove that the disrepair had caused it any loss of rent and rates.
Finally, the judge went on to consider the rate of interest the tenant should pay on the damages awarded. The landlord claimed interest at 6% on the basis that the tenant should be penalised for having retained the sum of £160,000 from its sub-tenant and not having paid any sum at all to the landlord. The Jjdge, though, considered it inappropriate to penalise the tenant and he awarded interest at what he regarded as a commercial rate of 2.5% above base rate i.e. 3% per annum.
In conclusion, the landlord recovered approximately 40% of the amount it was claiming and the tenant paid just over three times the amount that it considered it was liable for. It would seem likely that the parties’ total legal costs exceeded the amount of the damages awarded and it would be interesting to know who has to pay such costs i.e. whether either party successfully protected their position by way of a Part 36 Offer?
Jonathan Ross is head of commercial property litigation at Forsters LLP