Baroque Investments Ltd v Heis & Ors

A surrender releases a tenant’s contractual liability only if the relevant breach or liability existed before the surrender. An obligation to reinstate works by the end of a lease is not breached before the lease ends unless the contract provides otherwise. A repairing covenant contains separate obligations to repair during the term and to yield up in repair. For breach of the obligation to repair during the term, Landlord and Tenant Act 1927 s 18(1) limits recovery to the diminution in the value of the reversion. The reversion must be valued in its actual and repaired states, assuming that it remains subject to the lease and its covenants. Subsequent surrender and reletting cannot replace that statutory valuation exercise.

Baroque Investments Ltd owned premises leased to Teathers Ltd under leases containing repairing covenants and licences requiring reinstatement of alterations. After Teathers entered liquidation, the leases were surrendered and the premises were relet. The surrender released the parties from liabilities arising on or after the surrender date.

Baroque sought to prove in the liquidation for dilapidations, comprising reinstatement costs and losses attributed to the poor state of repair on reletting. The preliminary issue was whether those liabilities had been released and, for the repairing liability, whether the claimed sum was properly calculated under s 18(1) of the Landlord and Tenant Act 1927.

1. Reinstatement. The licences gave Teathers the whole contractual term, ending on 30 March 2014, in which to dismantle the works and reinstate the premises. No breach had occurred when the leases were surrendered on 13 November 2009. Any breach would have arisen only after the surrender, so the potential reinstatement liability was released and was not provable.
2. Repairing covenant. The covenant imposed two distinct obligations, as recognised in Ebbetts v Conquest (1900) 82 LT 560: to keep the premises in repair during the term, and to yield them up in repair when the term ended or was sooner determined. The latter obligation was released by the surrender.
3. Measure of loss. Under s 18(1) of the Landlord and Tenant Act 1927, damages for breach of the obligation to keep premises in repair during the term cannot exceed the diminution in the value of the reversion caused by the breach. The assessment requires valuation of the reversion in its actual state and in its repaired state. Each valuation assumes that a purchaser takes the reversion subject to the lease, with its benefits and burdens for the remainder of the term, consistent with Hanson v Newman [1934] Ch 298.
4. The landlord’s claimed rent-free period and rent reduction did not constitute the required valuation exercise. The Bwllfa principle could not be used to undermine the statutory requirements, and the assessment date could not alter them. The restriction of claims by s 1(2) of the Leasehold Property (Repairs) Act 1938, as amended, further explained the limited availability of such claims.
5. The court declared that no reinstatement liability was provable and that the alleged debt of £1,212,395 had not been calculated in accordance with s 18(1) and was therefore not provable. The court left open the possibility of a provable debt calculated by the proper statutory process.

First-instance determination of a preliminary issue in insolvency proceedings. The judgment does not state any earlier appellate decision.