Dilapidations: The ‘two-lease’ problem

In 1959’s film adaptation of The Hound of the Baskervilles, Peter Cushing’s Sherlock Holmes famously referred to a particularly tricky matter as “a two-pipe problem”. An issue which comes up surprisingly often in terminal dilapidations claims (although not one which, as far as we know, was ever placed before the great detective) is what may be called the “two-lease problem”. An example is this. A lease (“the first lease”) is granted. It contains a tenant’s obligation to repair and to reinstate alterations, if so required by the landlord. When it expires, a further lease (“the second lease”) is granted by the then landlord to the same tenant, on substantially similar terms, including the same repairing and reinstatement obligations. When the second lease expires, the landlord makes a claim for terminal dilapidations for breach of the covenants in the second lease. The claim includes damages for disrepair, and for failure to reinstate alterations carried out under the first lease. This example throws up two particular problems. First, is the applicable standard of repair under the second lease to be determined by reference to the circumstances when the tenant took occupation under the first lease, or at the start of the second lease? Secondly, there is the bigger question of whether or not there are any liabilities at all under the second lease for reinstating alterations made during the expired first lease. The standard of repair under the second lease The starting point for determining the standard of repair that is required comes from two well-known and long-standing principles. The first is that the standard of repair generally applicable is such repair as, having regard to the age, character and locality of the premises, would make them reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take them (Proudfoot v Hart [1890] 25 QBD 42). This test must ordinarily be applied at the date of the lease (Calthorpe v McOscar [1924] 1 KB 716). The second is that, although the tenant may be obliged to make good specific disrepair which existed when they took the lease (under the principle that a covenant to keep premises in repair involves a duty to put them into repair if they are out of it when the lease is granted), the general condition of the premises at the date of the lease is nonetheless a relevant factor when identifying the applicable standard of repair (Walker v Hatton [1842] 152 ER 462). How does this work in relation to the landlord’s claim under the second lease? One question that will be asked is: is the reasonably minded tenant someone who would have been likely to take the premises at the date of the first lease, or the date of the second lease? Another consideration is whether the relevant general condition should be that of the premises at the date of the first lease, or the date of the second? Of course, in many cases, the point will not matter very much in practice. But there may be cases – for example where the second lease is granted for a short term as a stopgap to enable the tenant to find alternative premises – where the distinction may be important. The issue is one of interpretation, so the question is what a reasonable person, knowing the background, would understand the second lease to mean. The tenant’s occupation under the first lease, and the terms of the first lease, will ordinarily form part of the admissible background for this purpose. But what would a reasonable person, knowing these matters, conclude about the standard of repair under the second lease? Like all such questions, the answer depends on the particular facts. In some cases, it may be relatively easy to conclude that a reasonable person would understand the repairing covenants in the second lease to take into account the general state of the premises, and the requirements of the reasonably minded tenant, at the start of the first lease. That may be particularly so where the language of the two leases is substantially the same, and there is nothing in the language or background to suggest that the repairing obligations under the first lease were not intended simply to run on in the ordinary way. There may, however, be material which points to the conclusion that the second lease operates as, in effect, a fresh start, without reference to the existence or terms of the first lease. The grant of the second lease will not, of itself, affect any existing liability of the tenant for breach of the repairing covenants in the first lease (although the parties can, of course, agree if they wish that any such liability is released). So, it may still be possible (subject to limitation) for the landlord to bring a claim for damages under the covenants of the first lease. Alterations under the first lease The starting point here is not promising from the landlord’s point of view. Unless the second lease provides to the contrary, alterations done under the first lease will ordinarily form part of the premises let under the second lease, and the covenant against alterations in the second lease will usually be limited to alterations carried out during the term of that lease, and not at any earlier time. Where that is the case, it will be necessary for landlords to explore other possible avenues. It may be possible for the landlord to demonstrate that the second lease contains wording that can reasonably be construed as obliging the tenant to reinstate the works it has previously carried out. If so, the argument that this is the correct interpretation will be helped where the carrying out of the works formed part of the admissible background known to both parties at the time of agreeing the second lease, especially if they were the subject of a reinstatement obligation. The landlord can argue that the tenant has the continuing benefit of the works, and there is no obvious reason why the parties should have agreed that they need not be removed. Where the second lease can’t be construed as requiring removal of the works, it will be necessary to see if the circumstances are such that an argument can be made for an implied term. However, for that to be the case, it will need to be shown that a reinstatement obligation is either necessary to give business efficacy to the second lease or that it is so obvious as to go without saying. These are strict tests, which are unlikely to be satisfied in most cases. Another question is whether the original works were carried out in breach of the covenant against alterations in the first lease. If so, the landlord may be able to bring a claim for damages under that lease. Potential issues to watch out for, however, include whether the limitation period has expired, and whether any right of action has survived the entry into the second lease, as opposed to having been expressly or impliedly released. It will also be important to consider the correct date for assessing damages. If it is the date of breach, there may be questions about what loss the landlord has suffered, given that the breach will have been followed by the grant of the later lease. The position may be more straightforward if the date of assessment can be argued to be the date of trial, because by then the tenant will have given up possession, and the landlord will be in a position to do the works for future occupancy. It will also be important to see whether the tenant was under any obligation under the first lease (or a licence) to reinstate the works and, if so, whether that obligation was dependent on notice. If it was, difficult questions of interpretation may arise as to whether notice can be given once the first lease has expired. If it can be shown that the tenant was in breach of an obligation to reinstate, but the current landlord under the second lease was not a party to the first lease or the relevant licence, further questions will include whether the benefit of the obligation can be argued to have passed to the landlord in some way – and, if not, whether it can it now be validly assigned. Drafting The obvious answer to the “two-lease” problem, as with many similar issues, is to prevent it from arising in the first place through appropriate drafting of the second lease. So, for example, the standard of repair issue might be dealt with by a provision to the effect that the repairing obligations in the second lease are to be construed and applied as if that lease had been granted on the date of the first; and alterations under the first lease can be covered by extending the alterations covenant in the second lease to include them. It is surprising how often drafters of renewal leases fail to see the problem coming: and where it does occur, the solution is rarely elementary. Nicholas Dowding QC is a barrister at Hollis Photo © Hammer/Kobal/Shutterstock