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Commercial Property Briefing: Dilapidations and Rent

The 2016 case of South Essex Partnership University NHS Foundation Trust v Laindon Holdings Ltd  has raised two important principles for commercial property disputes, neither of which will be popular with landlords.

The case surrounded two arguments that arose out of dilapidations (the typical claim for repair/reinstatement by a landlord at the end of the lease).
The first issue – Carpet Tiles
Before the lease there was an agreement (for lease) that provided for a substantial programme of tenant’s fitting out works, consisting mainly of the installation of a lift and internal partition works by contractors engaged by the landlord but at the tenant’s expense. Those works included the lifting, cleaning and re-installation as far as possible, of an existing system of tiled carpeting throughout the building, it being contemplated that the upper floors would all be carpeted by re-use of the existing tiles and the ground floor by a mixture of re-used and replacement to the extent necessary.
Shortly before the end of the term of the lease, the tenant informed the landlord by letter that it would be replacing the tiled carpeting system with broadloom carpet of the same colour and specification (ie carpet in strips rather than tiles). In the absence of any complaint by the landlord, the tenant then installed a broadloom carpeting system in place of the previous carpet tiles.
Following the termination of the lease, the landlord claimed that the re-carpeting had not been in compliance with the repairing covenant “to repair or replace from time to time the Landlord’s fixtures and fittings in the Premises as may be or become necessary.”
The Court of Appeal decided that carpet tiles were indeed landlord’s fixtures, despite having been re-laid at the start of the term at the tenant’s cost. However, because of the wording of the Agreement for Lease, crucially, the tenant was not in breach of covenant in replacing them as fixtures as this amounted to a permitted internal non-structural alteration.
The Second Issue – a claim for rent during a ‘void period’
The landlord noted that some £500,000 was to be spent on the building, and for (sensible?) cash flow reasons the landlord was not interested in spending that sort of money without having the next tenant lined up. At trial the landlord estimated that it would take some time to find a tenant and then some time to do the works. An attempt was made to claim unrecovered rent for both.
On the facts the court found that only 20% of the money to be spent was due to the claim against the tenant. While it may make sense to wait and spend all repair cost at the same time, that was a matter for the landlord, not the tenants. The tenant would not be liable, under the dilapidations provisions, for a void period which was due to the landlord’s commercial decision to delay the remedial works further.
The Court of Appeal concluded that, once put in funds by payment of damages, further delay by the landlord in carrying out the repairs, including those necessary to remedy the tenant’s breach, ought not to be visited as a further recoverable loss upon the tenant. This they said was a matter of legal analysis rather than fact finding.
What does this mean for Landlords (and those advising them)?
The decision will be unpopular with landlords.
While the circumstances surrounding the replacement of the carpet tiles turn on the particular facts, the wording of the lease covenants is fairly standard. Landlords should be vigilant and ensure that if they are notified of any planned works by the tenant at the end of the term, they take advantage of any remedies they have as soon as possible. Here, the landlord could not rely on the repairing clause as part of the dilapidations claim, but could have relied on the reinstatement clause if it had taken action prior to the end of the term.
The decision also clarifies that a landlord cannot recover from a tenant compensation for a delay in re-letting which is the result of its own commercial decision.
Care must be taken in the wording of any agreement for lease, and the Commercial Property Team at Wilson Browne are here to help with that, and indeed the detailed wording of the lease itself.
The Commercial Litigation Team can help when you are considering enforcing (or defending) your rights under a lease.
For more information please contact Tom Warrender or Kevin Rogers.