Peachside Ltd v Koon Yau Lee and another

Landlord and tenant – Dilapidations – Damages – Defendant tenants failing to comply with repairing covenants at end of lease – Claimant landlord carrying out extensive works to premises – Claimant seeking damages to recover cost of works – Whether amount of diminution inferred from costs of repairs reasonably necessary to make good loss caused by defendants’ breach of covenant – Claim allowed The claimant company was the freehold owner of a former textile warehouse in the Chinatown area of central Manchester known as 33 George Street and 14 Nicholas Street. The claimant granted the defendants a business tenancy of the first to fourth floors of the property (the premises) for a term of 14 years from 27 February 2003. The defendants used the premises as a Chinese restaurant, known as Pearl City. The lease contained an express repair covenant in standard terms. It also contained: (a) a five year and final year internal and external redecoration covenant, again in standard terms; and (b) standard covenants to yield up the premises at the end of the lease, not to make alterations without consent, not to obstruct the windows, not to place a strain on the structural parts and to keep the premises clean. When the lease expired, the defendants initially sought a new tenancy under Part II of the Landlord and Tenant Act 1954. However, in August 2020, without warning, the defendants served notice of discontinuance of the Part 2 proceedings so that the lease expired three months later on 26 November 2020. The defendants took no steps to comply with their repairing covenants before vacating the premises. The claimant sought to enforce the defendants’ repairing obligations and served a section 146 notice and a schedule of dilapidations. They subsequently brought proceedings against the defendants claiming damages to recover the cost of renovation works. Held: The claim was allowed. (1) A tenant was entitled to perform their covenants in the manner that was least onerous to them. In general, therefore, such performance should be the starting point for any assessment of damages. A tenant was obliged to return the premises in good and tenantable condition and with the M&E systems in satisfactory working order: they were not required to deliver up the premises with new equipment or equipment with any particular remaining life expectancy. The standard to which the building was to be repaired or kept in repair was to be judged by reference to the condition of its fabric, equipment and fittings at the time of the demise. Any claim by the landlord for the cost of repairs was subject to the general rules that they could not recover for a loss which, by acting reasonably, they could have avoided, and they could not recover the cost of remedial work that was disproportionate to the benefit obtained. By contrast, where there was a need to carry out remedial work as a result of the tenant’s breach of their repairing covenants, the fact that the landlord had carried out more extensive work than was caused by the breach did not of itself prevent them from recovering the cost of such work as would have been necessary to remedy the breach. (2) Where market conditions at the expiry of the lease required upgrading or refurbishment works to be carried out to enable the building to be let to the appropriate type of tenant, a tenant in breach of a repairing covenant was not liable for the costs of any work to remedy the breach to the extent that such work would be rendered abortive by the need to upgrade or refurbish the building, ie where there was supersession. Where the tenant was in breach of their covenant, in the absence of any evidence to the contrary, the court was entitled to infer that remedial work was necessary to remedy the breach unless the tenant demonstrated the contrary. The starting point for analysis in situations where the landlord had done the work was whether the amount of the diminution in value could be inferred from the costs of the repairs reasonably necessary to make good the loss caused by the tenant’s breaches of covenant: Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd [2013] EWHC 463 (TCC); [2013] EGILR 5; [2013] EWCA Civ 1656; [2013] PLSCS 313 considered. (3) This was a case where the defendants had relied on the statutory cap on damages in section 18(1) of the Landlord and Tenant Act 1927. That section had two limbs: the first was to the effect that damages could not exceed the amount by which the value of the landlord’s reversion was diminished by reason of the breach. The second was that no damages were recoverable where the premises were to be pulled down or structural alterations were to be carried out at or shortly after the end of the term. The first limb was an objective assessment, achieved by taking a hypothetical valuation of the reversion on the term date without the benefit of hindsight, on two bases: one on the basis of the premises as it would be in compliance with the covenants in the lease and the other on the basis of the premises in its actual condition. The task for the court was to find the difference between the value of the premises in disrepair on the open market and the value of the premises had there been no breach of the covenant to repair. The second limb was a subjective one, where the relevant intention was that of the claimant, not a hypothetical purchaser. In order to make out that limb in the present case, the defendants needed to demonstrate that as of 26 November 2020 the premises were going to have such structural alterations as would render valueless the repairs covered by the covenant shortly after 26 November 2020. (4) In the present case, the court accepted the fundamental conclusion of the claimant’s valuer that the premises in repair would command a reasonable rental for office accommodation, such that it was reasonable for the claimant to undertake them as and when it did. Save for one exception (in respect of a goods lift/hoist), the claimant’s case was to be preferred and the claimant was entitled to judgment against the defendants in the principal sum of £542,671.17. An award in that amount did not exceed the statutory limit under the first limb of section 18(1) and, on the facts, the second limb of section 18(1) was not engaged. Wendy Mathers (instructed by Bude Nathan Iwanier LLP) appeared for the claimant; Philip Byrne (instructed by direct access) appeared for the defendants. Eileen O’Grady, barrister Click here to read a transcript of Peachside Ltd v Koon Yau Lee and another