Dilapidations’ Claims after the Lease Term has ended

In a recent High Court case, it was ruled that a landlord’s claim for dilapidations may now be limited to the cost of work actually carried out by the Landlord, as opposed to the level of the assumed reduction to the landlord’s freehold reversion.

This is a considerable change from the present position when landlords bring claims against outgoing tenants for all defects but then fail to carry out some of the work.

Following the case of Car Giant v Hammersmith 2017 landlords will face greater scrutiny.  The lease imposed on the tenant the often used onerous repairing covenant “to yield up the demised premises in good and substantial repair and condition”. At the end of the term and Hammersmith had vacated and Car Giant brought a very large claim for dilapidations against Hammersmith.

The parties could not reach a settlement and the case ended up in the High Court.  Car Giant claimed a sum which exceeded the actual cost of the works undertaken by it. In evidence it was established that whilst the Car Giant had in fact carried out some repair works, a considerable amount of the work referred to in its schedule of dilapidations had not in fact been undertaken.

The court considered whether the landlord could recover both the sums actually spent and those not incurred on the basis that there was a diminution in value, or whether the cap contained in section 18(1) of the Landlord and Tenant Act 1927 limited the right of the landlord to recover.

The court ruled that where repairing covenants have been breached, the cost of repair should be the starting point to assessing the damage to the reversion. The court found that because the landlord had not given evidence of any intention to carry out the remaining works, the court was unable to take into account those further costs in calculating the diminution in value.

It is important to point out that Car Giant had waited a considerable time before taking action against Hammersmith and only then stated that it desired to carry out works described contained within its dilapidations schedule.  The court was unconvinced by Car Giant’s assertions but was impressed by the fact that the property had been re-let without the claimed for works having been undertaken.

Landlords should therefore be cautious and should avoid serving a schedule of dilapidations if they lack a genuine intention to carry out all the work listed.   The case also highlights that landlords should proactively progress negotiations for dilapidations and also ensure that any change in circumstances (such as re-letting of the property) is brought to the attention of the tenant and the court at the earliest opportunity. Landlords may, as a result, have to reduce their claims.

Should you have any queries as to your position or liability contained in a commercial lease, then please contact Peter Wilson (peterw@terry-jones.co.uk) or another member of the Commercial Property Department on 01952 297979.

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