Make or break
As tenants continue to downsize, Jonathan Small QC considers how to serve a successful break notice and to minimise a claim for dilapidations.
It is inevitable that the unfortunate cocktail of economic conditions presently on offer will cause many property managers in both the private and the public sector to conclude that certain leases (of office space and the like) must be given up, if possible. Since a local authority tenant will be considered by most landlords to be a good covenant, it will not be easy to negotiate terms for a surrender. These problems are reduced if the lease contains a conveniently‑timed break clause or, better still, where the lease’s end date is on the horizon.
This article considers the question of disrepair in both these contexts. It is not just the tenant who will be concerned with the proper exercise of the break clause and any disrepair claim. Obviously local authorities that are landlords will be equally concerned to defeat the break if they possibly can and hold a good tenant to its obligations.
Conditional break provisions
The first rule is that any conditions to the break clause must be strictly complied with. These conditions can cover anything from the period of notice, the manner of conveying notice to the payment of a capital sum and the performance of the covenants. The potential variety is endless.
A common condition is that the tenant has complied with the covenants in the lease. Two important points arise on this common condition. First, it was held in Bass Holdings v Morton Music (1988) that the break would not be defeated by “spent” breaches i.e. breaches in respect of which the landlord no longer has a subsisting cause of action. Accordingly, if there were historic disrepair which had since been repaired by the relevant date then this would not prevent the operation of the break. Secondly, trivial subsisting breaches will prevent the operation of the break. Thus, in the context of disrepair, if there are a few slipped tiles and these are reckoned to bring the premises below the standard of repair (see below) then this will prevent the successful operation of the break.
Thus one must begin by assessing what needs to be done. What element of the structure has deteriorated so that it has fallen below the required standard? What is necessary to bring it up to the required standard? The standard of repair is that identified over 100 years ago in Proudfoot v Hart, namely that which, having regard to the age character and location of the building would be acceptable to a reasonably minded tenant of the class likely to take it. Thus the standard of repair for smart City offices could be expected to be higher than lesser grade offices situated in a less fashionable part of town.
I would recommend that any tenant contacts their landlord well in advance of the break date to discuss the question of dilapidations with a view to agreeing their scope or a monetary payment in lieu. But do not bank on co-operation. I would advise even more strongly against being lulled into a false sense of security: in the absence of an enforceable agreement (or perhaps an estoppel) the landlord will be able to rely on the full rigours of the break clause. It would be disastrous to leave it too late to do any required repairs before it was realised that there was no deal to be done with the landlord. Similarly if councils are landlords, they would be wise to treat the approach from any tenant with the appropriate mixture of pragmatism, unhelpfulness and/or ruthlessness, depending upon the circumstances.
Of course many break clauses contain a qualified condition, only requiring the covenants to be performed “reasonably”, “substantially”, “materially” etc. As with the number of potential conditions, the number of qualifications to those conditions is also endless. It is impossible to identify any rule of thumb to assist with the application of such qualified conditions: everything will depend upon the precise words and their context and of course what work remains necessary.
Damages for disrepair
Not all break clauses will be conditional upon performing the tenant’s repairing obligation. Further just as a down‑sizing tenant may be fortuitous with his break dates, he may also be fortuitous with the term date of the lease itself. In such cases the lease will come to an end irrespective of the condition of the premises.
If the premises are in disrepair, both public and private landlords will typically seek damages for disrepair. Typically such landlords will want the cost of putting the premises back into repair. However all claims for disrepair are subject to two important statutory qualifications, both to be found in section 18 of the Landlord and Tenant Act 1927.
Section 18(1) is in two limbs and it is convenient to take them in reverse order. The second limb provides that: “no damage shall be recovered for a breach of any … covenant … to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant …”.
The principle enshrined in the second limb is sometimes referred to as ‘supersession’ although this term should be avoided because it is used by different professionals to mean different things. It is well established that for the landlord to be deprived damages under the second limb, he must have formed the intention to do the demolition or structural works by the term date of the lease. It is also important to note that his intention must not be conditional upon the state of the premises when they are handed back. If he forms a decision to redevelop the premises prior to the term date only because he can see that they are going to be handed back to him in serious disrepair, then the second limb would seem to have no application.
Assuming that the landlord has no intention of carrying out works which would engage the second limb then, at common law, he would be entitled to the cost of carrying out the repairs (whether or not he intended to do this): Joyner v Weeks (1891). However the extent of damages which might be paid out under that common law rule is capped by the first limb of section 18(1). This provides that damages are limited to the amount by which the value of the landlord’s reversion might be diminished owing to the breach. That is a question of valuation.
The important practical consequences of this for any property manager is that, when faced with property in disrepair, the landlord should consider the valuation impact of the disrepair prior to deciding what work to do and calculating what he can hope to recover from his tenant. The cynical tenant will also want to take into account the valuation consequences of any disrepair before deciding whether or not to do the work at all prior to handing the premises back to the landlord.
If matters move on to litigation then an early assessment by both parties as to the impact of the section 18 cap should promote a realistic view of the case on both sides. This is all the more important in a faltering market where there is an over‑supply of certain types of premises. In times such as these the relationship between the cost of repair and the value of the premises is unlikely to be straightforward.
Jonathan Small QC is a member of leading property law set Falcon Chambers in London.
