Key dilapidations issues

Determining in any one case whether actual disrepair has occurred is probably the most complex area in dilapidations. Dowding and Reynolds recommend working through a five-part analysis which provides an excellent method of establishing the existence of disrepair:

1. What is the physical subject matter of the covenant?
2. Is the subject matter in a damaged or deteriorated condition?
3. Is the nature of the damage or deterioration such as to bring the condition of the subject matter below the standard contemplated by the covenant?
4. What work is necessary in order to put the subject matter of the covenant into the contemplated condition?
5. Is that work nonetheless of such a nature that the parties did not contemplate that it would be the liability of the covenant party?

The authors and publisher wish to thank Messrs Dowding and Reynolds for permission to reproduce the above material.

1. What is the physical subject matter of the covenant?

Identifying the physical extent of the demised property to which the terms of the lease relate is a crucial part in the dilapidations process but is not always straightforward.

Where a whole building is let by the lease, the task of identifying the physical extent of the building should be straightforward. However, where the demise is only part of the building there is greater scope for confusion or ambiguity, as the lease will describe those parts of the building that are demised and, either expressly or by implication, those that are retained by the landlord. There may also be parts of the demise that are specifically excluded from the tenant’s obligations (such as pipes serving the whole building that happen to pass through the demised area).

If there is a plan of the building this may be considered when interpreting the lease. However, care must be taken when doing so - as a rule, the plan should only serve as an aid to the interpretation, unless there are clear words to the contrary, in which case the plan will take precedence over the words used to describe the demise.

Sometimes the lease leaves an issue unresolved, for example, whether window frames are demised. Moreover, while a particular part of a building may be referred to as part of the demise, the item concerned may be made up of a number of constituent parts and there may be confusion over the extent of the building incorporated in the demise. For example, where window frames are specifically demised to the tenant will this also include a responsibility for the glass within them?

Where there is uncertainty one must examine the precise, individual circumstances of the case. In Dr A T Ibrahim v Dovecorn Reversions & Others [2001] 30 EG 116 the court had to decide whether a roof terrace demised to and enjoyed by a flat owner was part of the ‘roof’ for which the landlord had responsibility. On the facts of that case, the landlord had responsibility. However, in George Petersson and Others v Pitt Place (Epsom) Ltd [2001] EGCS 13, there were overlapping obligations. On the facts of that case, the court decided that the tenant was responsible for the repair of the roof terrace.

For a detailed analysis of the problems and issues that have arisen in this area generally, and in relation to particular parts of a building, see chapter 7 of Dilapidations – The Law and Practice (4th edition).

Leases and tenancy agreements should be specific to particular areas of property. In the same way that the inspection must include all demised areas and not include areas additional to those demised, the items recorded in the schedule must reflect precisely the extent of the property for which the tenant has responsibility.

2. Is the subject matter in a damaged or deteriorated condition?

Case law (for example, Quick v Taff-Ely Borough Council and Post Office v Aquarius Properties) requires that the item in question must have deteriorated from a previous physical state for there to be a breach of covenant to keep in repair or good condition. This is particularly relevant when considering items such as asbestos, as the mere presence of such an item does not represent a breach of a repairing covenant even though it is known to be dangerous under certain circumstances. The material must have deteriorated from the state in which it would have been found at the time the lease commenced for there to be a breach of a repairing covenant, assuming it had been properly maintained up to that time.

3. Is the nature of the damage or deterioration such as to bring the condition of the subject matter below the standard contemplated by the covenant?

Cases such as Proudfoot v Hart, Calthorpe v McOscar and Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd [2013] EWHC 1161 (TCC) have also considered the extent to which an item needs to deteriorate in order constitute a breach of covenant. It is based on the notion that at the time the lease was entered into, the parties had a preconception of the extent to which the property was likely to deteriorate under normal circumstances due to the effect of time, weather, and any naturally occurring forces. This, it is suggested, would include an estimation of the average life of plant and machinery giving an indication of which items would require replacement within the lease term and, on the understanding that that was carried out, the condition of the new plant at the end of that time.

Case law is clear that the properties handed back at the end of the lease do not need to be in perfect repair, nor do they need to be in the condition in which they were let. Allowance has to be made for the effect of time and, further, the properties must be considered in context of the area in which they are located and the use to which they could reasonably be expected to be put. If the standard of the property at the end of the lease falls below that reasonably anticipated at the commencement of the lease, a breach of covenant can exist. If the general condition and state of repair is as would reasonably be expected, or better, then no breach of the repairing covenant can exist.

The standard of repair will be laid down by the covenant of the lease. For example, the obligations may merely be to leave it wind and water tight, habitable, or only to a standard comparable with a schedule of condition.

The standard of repair will also take account of the age, character and locality of the premises such that it is fit for occupation by the reasonably-minded tenant of the nature who would occupy it. Thus, if the premises are in a rundown industrial estate that only achieves short, cheap lets, it is probable that quite a number of items of disrepair would be tolerated by an incoming tenant. However, more significant disrepair such as leaking roofs or dangerous electrical installations would not be acceptable, so would be likely to amount to a breach of the lease. Alternatively, if the premises were a modern, high specification city office block, very few, even minor, items of disrepair would be tolerated, so the standard of repair to be achieved would be higher.

All of these issues were considered in Twinmar Holdings Ltd v Klarius UK Ltd & anor.

4. What work is necessary in order to put the subject matter of the covenant into the contemplated condition?

Various cases (for example, Lister v Lane and Nesham) confirm that when considering the appropriate repair, the overriding principle is that the tenant is not required to give back to the landlord a completely different thing to that which the tenant took on in the first place. In other words, the tenant’s liability is to give back the building that was originally demised in a state and condition consistent with the performance of the covenants. It follows, therefore, that if the landlord chooses to alter, change or improve the property following the end of the lease, not only is the tenant not responsible for those changes or improvements, but the tenant’s liability to repair the altered items is potentially negated.

The construction case of Richard Roberts v Douglas Smith suggests that:

‘if the only practicable method of overcoming the consequences of the defendant’s breach of contract is to build to a higher standard than the contract has required, the plaintiff may recover the cost of building to that higher standard. If, however, the plaintiff chooses to build to a higher standard than is strictly necessary, the courts will, unless the works are so different as to breach the chain of causation, award him the cost of the works less a credit to the defendant in respect of the betterment.’

Whether or not the payment of a credit is appropriate in dilapidations cases is, at best, debatable. However, the current thinking is that where a landlord voluntarily alters a property, the tenant’s liability is completely negated.

The second area to be considered is the nature of the repair. The landlord is entitled to recover the cost of repairing the building to its original format. In assessing the appropriate remedy there are four strands to consider which are demonstrated by four separate cases.

The first strand to consider is whether it is physically possible to repair the defective item. In Hammersmith v Creska, the court was asked to decide whether an alternative, yet similar, method of heating was an appropriate repair if it was possible to physically repair the original installation. The court found that because it was physically possible to repair the heating system as originally installed, that was the tenant’s obligation under the repairing covenant. The manner in which required work is carried out is generally a matter for the tenant and if the covenant can properly be performed in a number of different ways the tenant cannot be criticised for choosing the least expensive option. It will certainly not always be the case that the tenant will have to carry out the work as the landlord would wish (see Riverside Property Investments Ltd v Blackhawk Automotive, TCC, 8 December 2004).

The second strand applies to situations where either it is not possible to effect a repair, or the market has moved on technologically such that improvements render the strict repair obsolete. The case of Elite Investments v Bainbridge considered a situation where the asbestos cement sheet roof of a Wellington bomber hangar was replaced with a single sheet profiled steel roof and the court was asked to consider whether the change in specification negated the tenant’s liability to repair.

The court found that the nature of the building was fundamentally unchanged. It was still a large shed with a single skin roof and this was unchanged by the change in specification. Further, over the life of the hanger, technological improvements provided other materials and the landlord was at liberty to consider alternatives. However, it is important to note that in this particular instance, the cost of replacing with another asbestos roof was similar to the cost of replacing with a steel roof and under the circumstances the court permitted the change. To supplement a mineral fibre suspended ceiling with a pressed metal tray suspended ceiling may, however, not be permissible due to the difference in cost between the two elements and, under these circumstances, the tenant’s liability for the mineral fibre suspended ceiling would be negated by the installation of a metal tray.

The third strand to consider is the effect of statutory improvements over the life of the lease. Part of the judgement in Postel v Boots (a case in which the landlord had the obligation to repair, but the tenant the obligation to contribute to the cost by a service charge) considers the situation where Building Regulations require improvements to levels of thermal insulation within a built-up roofing system. It was argued that, because the level of insulation required by the Building Regulations was significantly greater than that contained within the roof, significantly thicker layers of insulation were required. In view of this improvement and the additional cost required to install it, it was argued that the work was outside the scope of the repairing obligation. The court decided that the original roof was insulated and the repaired roof was also insulated. The landlord had an obligation to comply with statute and where that statute requires additional thickness of insulation, it was within the repairing obligation to provide it. The repairing obligation included the improvement of insulation to bring it up to standard. The court’s decision may have been different if the original roof in place at the time the lease was entered into was not insulated, as the introduction of a layer of insulation would have substantially changed the specification of the roof such that it had become something totally different.

The fourth strand considers whether there is flexibility within the method of repair for an established breach of contract. In Minja v Cussins the condition of single-glazed metal-framed windows was not in dispute and it was agreed that replacement was required. However, it was proposed to replace them with double-glazed PVC units and the court was asked to consider whether this change in specification was covered by the repairing covenant. Again, an economic argument was brought into play as well as consideration whether the nature of the building had changed. As the comparable costs of the two systems were similar, the court was satisfied that replacement with PVC units did amount to appropriate repair. Further, if there is more than one possible method of repair that complies with the required standard, the tenant can make the choice as to which it undertakes. If there is a cost differential, when it comes to assessing loss, the measure of damages at common law is based on the least expensive option (see Carmel Southend Limited v Strachan & Henshaw Limited (2007)).

Usually, of course, the tenant is keen to fulfill their obligations in the least expensive way, but that is not always the case. In Creative Foundation v Dreamland Leisure (2015) the tenant elected to fulfill their repairing obligation to remove grafitti that had been painted on an external wall by removing a section of wall render in its entirety, rather than simply paint over it or clean it. The graffiti in question was the work of street artist, Banksy and the mural was estimated to be worth around £300,000. The tenant’s clear intention was to enjoy this 'windfall' and sell the mural at auction. At court it was decided that the tenant’s method was not an appropriate one and, further, that, once removed, the mural became a landlord’s chattel. As such the mural had to be returned.

5. Is the work nonetheless of such nature that the parties did not contemplate that it would be the liability of the covenanting party?

This goes back to the fundamental question of the parties’ intent and anticipation at the commencement of the lease. Arguments under this head would be specific and unusual and, it is suggested, would require some form of corroborative evidence to justify them.

It is important to note case law (Credit Suisse v Beegas and Norwich Union Life Insurance Society v British Railways Board) indicating that where a repairing obligation includes the word ‘condition’, the words ‘repair’ and ‘condition’ have distinct meanings, and condition can impose a greater obligation than mere repair.

It is suggested that repairing obligations relate to the fundamental physical properties of the building and it is the intention to provide a consistent stable environment protected from the effects of weather and climate and a firm level base upon which to utilise the space. This is essential for function. Condition, on the other hand, can be said to be more aesthetic and dealing with finish and appearance, although it is accepted that condition has other implications when dealing with services.

The relevant clause(s) may go further and include a requirement to renew or improve the building or parts of it. For example, a covenant that includes an obligation to keep the property in good condition could mean that, even though an element of it is not actually in any worse condition than it was (that is, it is not out of repair), work to it is required. In Welsh v Greenwich LBC [2000] EGCS 84, the court underlined the conclusion that such covenants were rather different from ordinary repairing covenants and, in that case, the effect of its decision was that the landlord was liable to carry out work for which it would not have been liable under the repairing covenant. A similar result could arise where the covenant extended to an obligation to keep the property (or elements of it) in good working order (Langham Estate Management Limited v Hardy (2008)).