Dilapidations - Looks Matter

Blue Manchester Limited v North West Ground Rents Limited [2019] EWHC 142 (TCC) was listed by the Estates Gazette as one of the Top 10 cases of 2019.  David Marsden, a property litigation partner at Freeths LLP who acted for the successful party in that claim, sets out the new law and dilapidations lessons to be learned from that case. The case involved a claim by a long-leasehold tenant of a hotel, seeking specific performance against the hotel's freeholder, ordering it to comply with its repairing obligations under the lease.  The case is noteworthy in that not only did it involve an order for specific performance, but it also clarified new issues of law.

What are Dilapidations?

Usually brought at the end of a lease term, a dilapidations action is a claim for breach of various covenants in the lease.  These covenants typically include:

• Covenant to repair;
• Covenant to reinstate alterations;
• Covenant to decorate; and
• Covenant to comply with statutes

Usually, internal repairs are the tenant's responsibility whereas responsibility for external repairs can be either the tenant or the landlord's responsibility, depending on the wording of the lease.

In determining liability for disrepair the test applied by the courts in this particular case (and which should apply in most cases) was:

• What is the physical subject-matter of the covenant?
• Is the subject-matter in a damaged or deteriorated condition?
• Is the nature of the damage or deterioration such as to bring the condition of the subject-matter below the standard contemplated by the covenant?
• What work is required in order to put the subject-matter of the covenant into the contemplated condition?
• Is that work nonetheless of such a nature that the parties did not contemplate that it would be the liability of the covenanting party?

The court recognised that there will inevitably be some overlap between the above questions in many cases. The standard of repair is assessed by reference to the circumstances at the date on which the lease is granted, albeit having regard to the age of the premises at the relevant time:"

Good and substantial repair means more than just that the building must be capable of occupation. It means in this case that the building must be in a state of repair which is appropriate for a high class office building in a prime office location in Birmingham."

New Law

All of the above are fairly standard considerations in any dilapidations claim.  However, Blue Manchester Limited v North West Ground Rents Limited [2019] EWHC 142 (TCC) clarified (in some cases for the first time):

• Looks matter - it was confirmed for the first time that aesthetic considerations (i.e. how a building looks) may be relevant in assessing the standard of repair.  The starting point is the position as it existed at the time of the lease, so if the proposed repairs are likely to affect that an alternative repair may be ordered. As a word of caution though, there will also undoubtedly be cases where it would be unreasonable for a landlord to insist on contractual obligations reflecting solely aesthetic considerations being performed;
• Part Disrepair - for the repairing covenant to be breached it is not necessary for the disrepair to be so serious as to make the property currently non-functional;
• Temporary Repair - it is not open to a party to argue that the property is in repair because they have carried out a temporary fix that is currently working and so the property (or that part of it) isn't in disrepair “right now”. It was held that there would have to be a compelling reason for a party to have to accept a time-limited repair on a permanent basis.
• Do as you're Told - whilst specific performance of repairing covenants are relatively rare, if a court orders the repairs to be carried out, make sure you do them.  If you fail to do so it is punishable as a contempt of court.

Practical Steps

• Whether you are a landlord or tenant, plan ahead.  If you are within a year of the contractual termination date, or have just served a break notice, you should already be considering your dilapidations strategy.
• Work out what you want to achieve.  Do you want the works to be done or a financial settlement?  Your strategy will depend on your ultimate goal.
• Don't assume.  Dilapidations cases require a careful reading of the lease to work out the parties' obligations.