Where a commercial property lease is in disrepair at the end of a lease term, Section 18 (1) of the Landlord and Tenant Act, 1927 might apply. This limits the landlord’s claim for damages for breach of the repairing covenant. Other breaches are covered by Common Law Principles usually related to a landlord’s loss as referenced by diminution in value.

There are two limbs to a section 18 (1) argument:-

• The first limits the claim to the amount that the value of the landlord’s reversion is diminished by breaches of the covenant to repair. The landlord cannot recover more than it has cost, in terms of the loss caused to the value of the property. This is the diminution (reduction) in the property’s reversionary value, caused by the disrepair.
• The second part states that damages are not recoverable, if it can be shown on expiration of the lease, the premises would be demolished or altered to the extent that would render the repairs in question as valueless.

In order to assess the diminution two valuations are required. Firstly the property’s value in poor repair; and secondly the value the property would have achieved in the open market if it had been maintained by the tenant.

The second valuation is an hypothetical assessment, assuming the premises are not currently in repair. The obligation is to consider all potential uses for the premises, as it may be more valuable as a redevelopment site or for an alternative purpose. This must also take into account the extent that an alternative or change of use would affect individual elements of the schedule. For instance repairs, to the external areas may still need to be carried out. Redevelopment may render any repairs valueless so the landlord’s intentions for the property must be considered.

In the case of Firle Investments Limited V Datapoint International Limited (2000), the landlord considered refurbishment of an office building following the expiry of the 25-year lease. The judge considered whether at the expiration date, the landlord’s refurbishment intentions had moved “out of the zone of contemplation – out of the sphere of the tentative, the provisional and the exploratory – into the valley of decision,” as described by Asquith L J, in Cunliffe V Goodman, 1950.

The RICS Protocol states the landlord’s claim must include a summary of the landlord’s intentions. Post-termination events are admissible as a means of assessing the diminution in value of the reversion at the end of the term. If the courts are unable to act on fact, then the requirements of a hypothetical purchaser and transaction will be assessed.

Clients sometimes confuse “dilapidation obligations” with those of a “break clause”. It is crucially important to differentiate. Whether the landlord intends to repurpose or redevelop OR NOT the courts are strict in their interpretation of break clause compliance. It is essential therefore tenant side to avoid distraction and potential reliance on a Section 18 argument. This falls by the way side so if a property has to be handed back in full repair with vacant possession and unoccupied – contractually, these are the standards which have to be met, in order to comply with a break.  Conditionality can vary, so it is important to check those which apply – also important when negotiating a lease at the outset, to understand the variances.

Acting as general practice surveyors Christopher Thomas have recently represented claims made by landlords against occupier clients for amounts varying between £35,0000 and £1,250,000. In every instance we have reached amicable agreements and outcomes.

From a tenant perspective, it is important to plan well ahead of a lease expiry, to budget an strategise accordingly.