This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
The High Court has recently reiterated the correct approach to valuing disrepair and reinstatement in a case involving a property in Milton Keynes.
The condition of the property had deteriorated significantly
In Consortium Commercial Developments Limited v ABB Limited [2015], the lease of a property was granted in 1996 and expired in 2011. The property had been vacant for four years before lease expiry and had suffered significant deterioration because the tenant had done no repair works.
The property had little prospect of being re-let whilst out of repair. The landlord did not carry out remedial works because it did not want to pay for them without having first recovered the costs from the tenant, and it wanted to wait until the market improved and achieve a better rent, rather than incurring the cost of the works and having to offer the property at a lower rent.
The landlord claimed for the cost of work and loss of rent
The landlord claimed the costs of the remedial works and the reinstatement of various items (which were agreed by the parties' surveyors before trial), and for the loss of rent and rates (and interest) for the 12-week period following expiry of the lease that it was estimated the remedial works would take.
Issues for the court
The court had to decide three issues:
- The diminution in the value of the property as a result of the disrepair and whether the landlord's claim for repair was capped by section 18(1) of the Landlord and Tenant Act 1927.
- Whether the correct measure of damages for the reinstatement items was the remedial costs, or the effect on diminution in value.
- Whether the landlord could recover rent and rates (and interest) for the estimated period of the remedial works.
Issue 1: Valuing the property
Determining the in-repair value
At the expiry date of the lease, market conditions were poor, and the parties' surveyors agreed the best price was to be obtained by selling the property to an owner-occupier rather than to an investor.
The landlord's surveyor considered the in-repair rental value of the property was £77.12 per square foot.
The judge based the correct in-repair value on what he considered to be the best comparable (which had a rental value of £54.44 per square foot), adjusted upwardly to take account of certain advantages the property had over that comparable. He reached a figure of just over £60 per square foot, resulting in the property being valued in repair at £900,000.
Determining the out-of-repair value
Given the market conditions at lease expiry, the judge held that it was not appropriate to calculate the out of repair value of the property on a "pound for pound" basis, and considered this calculation was based on the amount a likely purchaser would factor in for works that it would want to undertake.
The judge was critical of the approach and the figures provided by the parties' surveyors and decided that the out of repair value was £675,000 (a figure he described as being lower than the tenant's surveyor and higher than the landlord's surveyor). Accordingly, the diminution in value of the property was £225,000.
Issue 2: The measure of damages for the reinstatement items
The agreed costs of the reinstatement items were approximately £15,000.
The judge confirmed the correct measure of damages for these items is governed by the common law. Where a landlord claims reinstatement, it is necessary to consider whether the reinstatement is reasonable, and the key question is what, in all the circumstances, is the landlord's loss. If the landlord has no intention to carry out the works, the measure is likely to be the diminution in value of the reversion. If, however, the landlord reasonably intends to carry out the works, the measure will be based on the costs of the works.
The judge considered that the landlord intended to re-let the premises in a good condition in better market conditions, and he consequently held it was reasonable for all the alterations to be reinstated in full.
Issue 3: The landlord's claim for loss of rent and rates (and interest)
The landlord's claim for loss of rent and rates for the estimated 12-week period failed, as the judge decided that the market conditions at the expiry of the lease were such that it would have been difficult to re-let properties in Milton Keynes that were in good condition, let alone in disrepair.
The judge finally considered the rate of interest the tenant should pay on the damages awarded. The landlord claimed interest at six per cent and the tenant claimed interest at between one per cent and two per cent above the base rate. The judge decided it was inappropriate to penalise the tenant and awarded him interest at a "commercial rate" of 2.5 per cent above the base rate (three per cent per annum).
Key points to note
- The landlord's claim of £361,000 was reduced significantly to £192,910 (plus interest). However, this award was still much more than the £75,000 cap sought by the tenant.
- It is important that any subjective comments made by valuers and surveyors in their reports are supported by evidence and substantiated by objective reasoning.
- Provided reinstatement is reasonable, the measure of damages awarded by the courts for the loss incurred by a landlord as a result of a tenant's breach of its reinstatement covenant is dependent on whether the landlord intends to carry out the reinstatement works.
- The appropriate interest rate normally awarded on damages will be the commercial rate of interest which should take into account the category of the claimant, although recent judicial commentary suggests this categorisation may no longer be applicable.
