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Whilst
the tenancy is continuing, the landlord has a number of potential remedies.
At the end of the tenancy, the only remedy available to the landlord for
a tenant's breaches of covenants is damages. The essential principle in
a dilapidations claim is that, under English law, no one can claim more
in damages than he has lost. Both in its statutory form - s18(1) of the
Landlord and Tenant Act 1927 - and in its common law form, the law on
damages provides that no-one can normally recover more than he has lost.
In a property context, that loss is expressed as the loss in value of
the landlord's property, usually described as "damage to the reversion",
or more formally, "diminution in the value of the landlord's reversion".
So, once the contractual claim has been established in the form of a schedule
of dilapidations, with consequential costs and VAT, if any, added, the
parties then have to proceed to the true claim, being for the actual loss
to the landlords. If the property is to be demolished, there is no claim.
The routine method of carrying out an assessment of the landlord's loss
is to make a forensic comparison of the position he would have been in,
had the covenants of the lease been complied with, with the situation
he actually is in - which is that they have not been complied with. In
the authors' view, this involves a point-by-point comparison of the Schedule
with the ascertainable future for the property. An example of the methodology
is found in Shortlands Investments Ltd v Cargill plc [1995] 08 EG 163
("The Shortlands case"). Two valuations, "A" and "B",
were compared and appended to the judgement, giving the diminution in
value as the difference between the two. These valuations gave a line-by-line
comparison of the effect of the breaches on value, calculated to the pound.
In cases where valuation is relevant, the essential principle is to isolate
the effect on value of the tenant's breaches of covenant only. Logical
comparison between the value of the property in compliance and its actual
value is the routine approach. It eliminates margin of error, whereas
most other methods do not.
There are some cases in which this is not the right approach - for example,
Shane v Rumwell [1967] EGD 88. Here the building was worth £5m in
compliance, and £3m in its actual condition. However, the property
was worth some £4m as a site, resulting in damages of only £1m,
even though £2 million of damage to the building had accumulated.
Because of the routine approach, which is rooted in the schedule of dilapidations,
the cost of works can be said, in a typical case, to be some indication
of loss. Moreover, it's the first port of call in every case. If there
is a difference between the cost of the works and the effect of those
works on the value of the property, this will certainly have to be explained.
Indeed, in a simple case, it can be said that cost equals diminution.
In such a case, there is no need for a valuation - see Jones v Herxheimer
[1950] 2KB106, where the landlord did the work. The Court found that there
was no need for a separate valuation; the cost of the works was an adequate
indication of the impact of the works on the value of the property. See
also Drummond v S & U Stores Ltd [1981] 1 EGLR 42, where the ingoing
tenant did the work. The landlord suffered by the reduction in the tenant's
bid to account for the cost of that work.
"Supersession" is not mentioned in the Act or in the cases,
but it's a useful theoretical construct for thinking about the impact
of the cost of works. For example, suppose a wall within a building is
in disrepair, poorly decorated, cracked perhaps, and with blown plaster.
It may well be that the lease discloses a contractual obligation to repair
that wall and redecorate it. However, if it be established that in any
likely future life of the building the wall is to be demolished, that
breach of covenant cannot have any effect on value. It cannot benefit
the landlord, a subsequent purchaser, or a subsequent tenant of the building,
let alone the outgoing tenant, for the works to be carried out. There
is no point (or value) in repairing something that is due to be demolished.
It costs no more to demolish a wall in disrepair than one in repair.
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Peter Beckett is a Valuation Specialist at
Beckett and Kay
Tel: (020) 7439 6667
Fax: (020) 7439 6668
Beckett & Kay LLP
87 Regent Street
London
W1B 4EH
peterbeckett@beckettandkay.co.uk
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