Peachside Limited v Koon Yau Lee & Anor

In a terminal dilapidations claim, the tenant’s liability is assessed by the reasonable cost of works necessary to remedy breaches, subject to mitigation, proportionality, betterment and supersession. The landlord may recover the cost of more extensive works to the extent that they include work required by the covenant. Under the first limb of s.18(1), diminution is assessed objectively by comparing the reversion’s value in and out of repair at the term date, without hindsight. The second limb depends on the landlord’s actual intention to demolish or carry out structural alterations shortly after the term. A claimed repair must be shown to be reasonably necessary, likely to be carried out and beneficial to the reversion. Loss of rent may be assessed globally where the period of loss reflects both the tenant’s breach and the landlord’s reasonable decisions concerning remedial works.

The claimant, the freehold owner of commercial premises in Manchester, sought terminal dilapidations damages from former restaurant tenants. The lease contained repairing, decorating, yielding-up and related covenants. The defendants admitted or accepted many breaches but disputed the necessity and cost of particular works, alleging betterment and supersession. They also relied on both limbs of s.18(1) of the Landlord and Tenant Act 1927, contending that the claim exceeded diminution in value and that planned redevelopment would render repairs valueless.

The claimant had undertaken works in phases, initially placing the premises into a repaired shell condition and later carrying out office-conversion works. The principal disputes concerned the valuation of the reversion, the effect of potential redevelopment involving adjoining premises, particular items including windows, fire escape, stairs and lifts, and loss of rent and insurance rent.

1. Outcome. Judgment was entered for the claimant in the principal sum of £542,671.17. The goods lift claim of £95,000 was rejected. Other remedial works, management costs, surveyors’ fees and a global award for rental losses were allowed.
2. The court adopted the general principles stated in Sunlife Europe Properties v Tiger Aspect Holdings [2013] EWHC 463 (TCC). A tenant may perform its covenants in the least onerous manner. The required standard is judged by the condition of the premises at the time of demise. The landlord cannot recover avoidable loss or disproportionate remedial costs, but more extensive works do not prevent recovery of the reasonable cost of work needed to remedy the breach. Work rendered abortive by necessary upgrading or refurbishment is excluded through supersession.
3. Under the first limb of s.18(1), the court conducts an objective hypothetical valuation at the term date, without hindsight, comparing the value of the reversion in the actual condition with its value had the covenants been performed. Under the second limb, the relevant intention is the claimant landlord’s actual intention. The defendants had to show that, at the term date, structural alterations shortly thereafter would render the repairs valueless. That was not established.
4. The claimant’s phased works were not an elaborate device to postpone letting until adjoining premises became available. The repaired premises could reasonably be marketed as office accommodation despite access limitations. Most disputed works were therefore reasonable and value-affecting. The internal staircase claim was reduced to the one flight shown to be structurally unsafe.
5. The goods lift was excluded because the claimant had prioritised a new passenger lift, had installed services in the goods-lift shaft, and had not proved that replacement would occur, would be reasonable, or would benefit the relevant reversion. The value of the claimant’s ownership of the whole property could not substitute for proof of benefit to the reversionary interest in the premises.
6. Loss of rent and insurance rent was not calculated mechanically. The tenant’s breach caused extended loss, but the claimant had taken additional time while determining how to undertake the works and considering the adjoining tenancy. A global award of £100,000 was appropriate.