PGF II SA & Anor v Royal & Sun Alliance Insurance Plc & Anor

Under section 18(1) of the Landlord and Tenant Act 1927, the court first assesses common-law damages reasonably compensating the landlord for breach of a repairing covenant, subject to the statutory cap based on diminution in the value of the reversion.

Damages are assessed at the termination of the lease. The landlord’s intention at that date is relevant where it would make reinstatement unreasonable. Future development potential alone is insufficient. The reasonable standard of repair depends on all the circumstances, including the building’s age, character and locality. Where later works supersede repairs, the cost of superseded work must be deducted. A reasonable cost incurred in preparing a schedule of dilapidations may also be recoverable.

The claim concerned disrepair, reinstatement and related losses arising on the expiry of leases of a London office building. The landlords claimed against the head tenant for breaches of repairing, redecoration and reinstatement covenants, and against the undertenant for reinstatement and obligations concerning the building’s structure and exterior. The head tenant also sought damages and an indemnity from the undertenant.

The defendants admitted that repairs and reinstatement were required but disputed liability and quantum. The principal issues concerned the construction and application of section 18(1) of the Landlord and Tenant Act 1927, the effect of Ruxley Electronics Ltd v Forsyth, the relevant date for assessing intention and value, the appropriate standard of repair, supercession, loss of rent, the cost of a dilapidations schedule and the undertenant’s contractual liabilities.

1. Liability and general approach. Judgment was given for the claimants against both defendants. The first defendant succeeded against the second defendant on the disputed issues between them. Under section 18(1) of the Landlord and Tenant Act 1927, the court must assess common-law damages reasonably compensating the landlord, then apply the statutory cap based on diminution in the value of the reversion.
2. Assessment date and intention. Damages and the value of the reversion are assessed at the termination of the lease. Following Cunliffe v Goodman, intention is considered at that date. Applying Ruxley Electronics Ltd v Forsyth, the court may take account of the landlord’s present intention when deciding whether reinstatement is reasonable. If the landlord has decided to demolish or carry out structural works which would render the repairs valueless, damages for those repairs may not be recoverable. The same result may follow where only one reasonable course was open, but not where the landlord was genuinely undecided.
3. Development potential and supercession. Latent development value which may or may not be realised in the future does not by itself eliminate diminution or defeat a dilapidations claim. Where later works would have superseded repairs, the reasonable cost of those superseded works must be deducted. The court found that, at the relevant date, the landlord had not decided to replace the cladding and had reasonable alternatives. The reasonable cost of repair was therefore recoverable, subject to deductions for minor enhancement works.
4. Standard of repair. The standard was that reasonably expected by a tenant of the building’s age, character and locality. The tenant was not required to improve a 1973 building to a 2008 standard. The defendant’s remedial cladding scheme was accepted as an appropriate repair, having regard to its expected life, warranty and the availability of specialist workmanship.
5. Contractual claims and ancillary losses. The undertenant’s obligations concerning the main structure and exterior were separate contractual obligations and were not displaced by the covenant to yield up the demised premises. The undertenant was liable for the agreed cradle repair cost. The claim for most of the alleged cradle testing and design-defect costs failed. Loss of rent was allowed only to the extent proved as actual loss, namely five weeks. A reasonable cost of preparing a schedule of dilapidations was recoverable as a direct consequence of the breach; £6,000 plus VAT was awarded.