Dilapidations: tenants fail to address repairing obligations at their peril

It is acceptable for a landlord to hedge its bets and undertake works of repair in phases with a view to reletting as soon as possible. The fact that a redevelopment of the property is in contemplation at lease expiry is insufficient to satisfy the second limb of section 18(1) of the Landlord and Tenant Act 1927. The Technology and Construction Court has considered a complicated dilapidations claim in Peachside Ltd v Koon Yau Lee and another [2024] EWHC 921 (TCC); [2024] PLSCS 78. The case concerned a former textile warehouse in the Chinatown area of central Manchester that the claimant had owned since 1963. The defendants were granted a business tenancy of the first to fourth floors for use as a Chinese restaurant on a 14-year term expiring in February 2017. The upper- and lower-ground floors were let to a bookmaker on a business tenancy expiring in February 2024. The lease contained standard covenants to repair and decorate, not to make alterations without consent and to yield up the property in repair at the end of the term. The claimant had served a section 146 notice in respect of disrepair in June 2019 and in October 2020 a schedule of dilapidations which was updated in May 2021. The defendants abandoned a claim to renew the lease, which expired in November 2020. They vacated the property in March 2021, removing various trade fittings but otherwise failed to comply with their repairing obligations. On advice, the claimant decided that the premises as yielded up were unlettable, that it was uneconomic to put them into repair because of depressed demand in the area and that the most advantageous commercial use was as office space. It carried out works in two phases: (i) works required under the schedule of dilapidations in the expectation of letting the premises as a shell; and, when this proved impossible, (ii) a redevelopment to create fully lettable office space. The defendants argued that owing to access problems the premises were never realistically lettable as office space without recovering possession of the bookmaker’s premises. They contended that it was the claimant’s intention all along to carry out a full redevelopment once the bookmaker’s lease expired, so engaging the second limb of section 18(1) of the 1927 Act and rendering valueless the works of repair. The claim also involved betterment and the cost of the works exceeded the diminution in the value of the reversion due to the disrepair under the first limb of section 18(1). The court preferred the evidence of the claimant and its experts and awarded damages of £542,671. It was satisfied that the claimant’s motive – to undertake as little work as possible as was consistent with being able to let the property and obtain some income – was genuine and consistent with its position as a small property investor. While the claimant was considering a potential redevelopment of the property, there was no positive intention to do so at lease expiry. Louise Clark is a property law consultant and mediator