Repair works to a ‘warzone with grease’

Louise Clark analyses a judge’s ruling on a landlord’s terminal dilapidations claim over a former Chinese restaurant left in an unlettable state. Key points A landlord is entitled to consider its own interests when undertaking repair works with a view to reletting the property Contemplating redevelopment is insufficient to satisfy the second limb of section 18(1) In Peachside Ltd v Koon Yau Lee and another [2024] EWHC 921 (TCC); [2024] PLSCS 78, a rare case on terminal dilapidations, the Technology and Construction Court has considered whether a landlord is prevented from recovering the cost of repair works carried out in phases and where a redevelopment is in contemplation. Background The case concerned a former textile warehouse owned by the claimant since 1963 and located at 33 George Street and 14 Nicholas Street, in the Chinatown area of central Manchester. In 2003, the defendants were granted a business tenancy of the first to fourth floors of the building for a term expiring in February 2017. The premises were run as a Chinese restaurant, known as Pearl City. The upper and lower ground floors were let to a bookmaker, Betfred, on a business tenancy which expired in February 2024. The lease contained standard covenants to repair and redecorate, not to make alterations without consent and to yield up the property in compliance with the tenant covenants at the end of the term. The defendants sought a new tenancy under Part II of the Landlord and Tenant Act 1954, which was not opposed in principle, but they later abandoned their claim and the lease expired in November 2020. The defendants vacated the property in March 2021, removing various trade fittings but otherwise failing to comply with their repairing obligations. 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 works The state of the premises on the defendant’s departure was, in the words of the claimant’s director, “a warzone with grease”. Initial attempts to let them in their existing state failed. On advice, which the defendants did not contest, the claimant decided that the premises as yielded up were unlettable, that it was uneconomic to put them into repair because of depressed demand for restaurant premises in Chinatown and the most advantageous use was as commercial office space. Also on advice, it undertook works in two phases: Phase 1 – works required to put the premises in repair pursuant to the schedule of dilapidations, comprising a strip-out and repairs to the main structure and fabric, in the expectation of letting them as shell commercial premises. They were completed around March 2023 but did not result in a letting. Phase 2 – a redevelopment to create fully lettable office space available for immediate occupation. Works are due to complete in June 2024. The bulk of the remedial costs – around £360,000 – were agreed in principle by the building surveyors on the basis that the defendants were in breach of covenant and that the remedy and costs incurred were appropriate. The dispute The defendants argued that the landlord’s claim was an elaborate charade intended to extract from them as much as possible and that both limbs of section 18(1) of the Landlord and Tenant Act 1927 applied: a) Due to access issues, the premises were never realistically lettable as office space without recovering possession of the Betfred premises and it was the claimant’s intention all along to carry out a full redevelopment once Betfred’s lease expired. So, the works of repair were rendered valueless under the second limb of section 18(1). b) The cost of the works exceeded the diminution in value of the reversion due to the disrepair of £150,000 under the first limb of section 18(1). The claim also involved betterment. The law The judge drew the following principles from the judgment of Edwards-Stuart J in Sunlife Europe Properties v Tiger Aspect Holdings [2013] EWHC 463; [2013] 2 EGLR 55): A tenant is entitled to perform its covenants in the least onerous manner and such performance should be the starting point for any assessment of damages. Its obligation is to return the premises in good and tenantable condition and with the mechanical and electrical systems in satisfactory working order, not with new equipment or equipment with any particular life expectancy. The standard of repair is to be judged by the condition at the time of the demise. Where there is a need to carry out work as a result of a tenant’s breach, the fact that the landlord carries out more extensive work does not prevent it recovering the cost of work necessary to remedy the breach. A tenant is not liable for the cost of remedial work which would be superseded by upgrading or refurbishment works required by market conditions at lease expiry. Where the tenant is in breach, the court is entitled to infer that remedial work is necessary unless the tenant demonstrates otherwise. The decision The court preferred the evidence of the claimant and its experts, particularly on a market for the premises in repair, as offices, and a diminution valuation, factoring in the repair costs, of £700,000. The claimant’s motive – to undertake as little work as possible in order to let the property and obtain some income – was genuine and consistent with its position as a small property investor. By carrying out the works in phases, the claimant was hedging its bets as to whether to carry out the phase 2 works should vacant possession of the Betfred premises be secured, but there was no evidence that it never intended to do them or that the works to the premises would be fundamentally altered or superseded even if the whole building was vacant. The claimant was awarded damages of £542,671.17. Louise Clark is a property law consultant and mediator Photo by Prince Photos/Pexels