In PEACHSIDE LIMITED -v – (1) MR KOON YAU LEE (2) MR TAK CHANG KEUNG [2024] EWHC 921 (TCC), the TCC ruled on a terminal dilapidations case related to a business tenancy of a former textile warehouse in central Manchester. The claimant, the freehold owner of the property, had leased part of it to the defendants for a Chinese restaurant known as Pearl City. The lease expired, and the defendants remained in possession until March 2021, failing to comply with their repairing obligations.
Case Background
The Claimant described the condition of the premises as “ a warzone with grease” – in other words, seriously dilapidated.
Arguments presented
The claimant sought to enforce the repairing obligations through works to the premises in two phases. Phase 1 involved repairs to put the premises in a re-lettable state, while Phase 2 involved redevelopment into commercial office space.
The defendants argued that the legal consequence of the claimant’s true intentions and conduct was that whatever works were undertaken by the claimant in relation to the disrepair damages could not be recovered because:
1) some elements of the works were unnecessary and/or involved betterment, and claimed that some (relating to a goods lift) would never be carried out;
2) the cost of the works exceeded the diminution in value of the reversion due to the disrepair (referring to s.18(1) of the Landlord and Tenant Act 1927); and
3) given the claimant’s plans to redevelop the whole property in any event, the repairs would be rendered valueless.
In short, they argued that the claimant’s intentions were not genuine and accused them of using the works as a pretext to support a claim for damages.
Legal Principles Discussed
The judge summarised the law, saying:
(1) The tenant is entitled to perform his covenants in the manner that is least onerous to him. In general, therefore, such performance should be the starting point for any assessment of damages.
(2) The tenant is obliged to return the premises in good and tenantable condition and with the M&E systems in satisfactory working order: he is not required to deliver up the premises with new equipment or with equipment that has any particular remaining life expectancy. The standard to which the building is to be repaired or kept in repair is to be judged by reference to the condition of its fabric, equipment and fittings at the time of the demise, not the condition that would be expected of an equivalent building at the expiry of the lease.
(3) Any claim by the landlord for the cost of repairs is subject to the general rules that (a) he cannot recover for a loss which, by acting reasonably, he could have avoided, and (b) he cannot recover the cost of remedial work that is disproportionate to the benefit obtained.
(4) By contrast, where there is a need to carry out remedial work as a result of the tenant’s breach of his repairing covenants, the fact that the landlord has carried out more extensive work than was caused by the breach does not of itself prevent him from recovering the cost of such work as would have been necessary to remedy the breach. And where the landlord has carried out works which exceed the tenant’s liability, one way of identifying the reasonable cost of the works for which the tenant is liable is to reduce the cost of the work actually carried out so as to reflect any element of betterment.
(5) Where market conditions at the expiry of the lease require upgrading or refurbishment works to be carried out in order to enable the building to be let to the appropriate type of tenant, a tenant in breach of a repairing covenant is not liable for the costs of any work to remedy the breach to the extent that such work would be rendered abortive by the need to upgrade or refurbish the building.
(6) Where the tenant is in breach of his covenant, in the absence of any evidence to the contrary the court is entitled to infer that remedial work is necessary to remedy the breach unless the tenant demonstrates the contrary.
Decision
The court found in favour of the claimant, except for one aspect concerning the goods lift. The claimant was awarded £542,671.17.