In Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd the High Court provided a useful summary of the legal principles which apply when considering dilapidations at the end of a long lease.
This particular case concerned a 35 year lease granted in the 1970s and which expired in 2008. At the time the lease was granted, the property had been built and fitted out to a very modern standard. The main issue for the Court to determine concerned the equipment; could the tenant hand the property back with the equipment maintained to a 1970s standard, or did it have to upgrade the equipment so that it was of a ‘modern’ standard.
The Court held that the starting point was to consider whether, if the tenant had complied with its repairing obligations under the lease, the landlord could have let or sold the property without any significant discount on the price. If it could, the usual rule about recovering the lower of the cost of the works or the diminution in value applies.
If, however, the landlord cannot sell or let the property if the tenant complies with its repairing obligations, the Court will need to consider what work would be required to put the premises into a condition that would enable it to be let to an appropriate tenant at a fair market rent.
Clearly, a landlord cannot recover the additional costs of modernisation if these go beyond that required by the repairing covenant. However, what if such modernisation works may well render repairs required by the original lease pointless?
It is on this point that the Court gave some useful guidance. The Court summarised the general principals as follows:-
- A tenant can comply with its obligations in the manner least costly to it.
- A tenant has to deliver up the property with equipment and electrics in satisfactory working order; the equipment does not have to be new or have any remaining life expectancy. The standard is by reference to the condition of the equipment at the time of the demise, not the condition that would be expected in an equivalent building on the expiry of the lease.
- If there are covenants against alterations, the tenant is not entitled to or obliged to make any alterations.
- A tenant is only obliged to replace like for like and is not required to upgrade in line with a modern standard.
- A landlord cannot recover costs which might reasonably have been avoided or which are not in proportion to the benefit gained.
- A tenant in breach of its repairing covenant will not be liable for the cost of refurbishment works if such costs are rendered pointless because of modernisation works.
- The burden is on the tenant to demonstrate that the works carried out by the landlord were unnecessary.
The headline in this case is good news for tenants; it will not be liable for the cost of works that it would have been required to carry out under the lease if such works are rendered pointless by modernisation works. As ever, each case will very much turn on its own facts, but this is a useful checklist for all involved with dilapidations claims. For more information, please contact Michael Clark, OTB Eveling’s specialist property litigator.