This case raised the issue of the assessment of the diminution in value of a reversion at the end of a lease and looked at the issue of supersession (a term used by surveyors when works of repair carried out by a landlord following the end of a lease go beyond the standard of repair required by the lease).
At common law the measure of damages recoverable by a landlord at the end of the lease for breaches by the tenant of his repairing obligations is the cost of the repairs that the tenant should have carried out, plus loss of rent during the period needed to carry out those works In Joyner v Weeks [1891] 2 QB 31. Lord Esher MR held:
"That rule is that, when there is a lease with a covenant to leave the premises in repair at the end of the term, and such covenant is broken, the lessee must pay what the lessor proves to be a reasonable and proper amount for putting the premises into the state of repair in which they ought to have been left."
The common law measure of damages is capped by section 18 of the Landlord and Tenant Act 1927 which limits damages to the diminution in value of the landlord’s reversion caused by the breaches.
The conventional way of calculating the diminution is by valuing the reversion in the state in which it actually was at the end of the lease and comparing that value with the value of the reversion in the state in which it should have been at the end of the lease. The difference between the two values is the diminution in value of the reversion.
In this case it was the Judge’s assessment of the value of the reversion in the condition in which it ought to have been against which the tenant appealed.
Background
The tenant (Tiger) left the premises offices in London, in poor condition, in breach of comprehensive repairing obligations. The landlord (Sunlife) carried out extensive work in order to re let it; and then issued proceedings against the tenant to recover the cost of the works.
At first instance HHJ Edwards-Stuart [2103] EWHC 463 (TCC), http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/TCC/2013/463.html&query=title+(+tiger+)+and+title+(+aspects+)&method=boolean found that the value of the reversion in its actual condition at the end of the lease was £4,462,000 and the value in the condition in which it ought to have been as £5,870,000. Given the diminution in value exceeded the cost of the necessary works the statutory cap did not apply. Accordingly, the court awarded the landlord the cost of the necessary works, plus various incidental items in the sum of £1,353,254
The Appeal
The tenant sought to appeal the judge’s assessment of the value of the reversion in the condition in which it ought to have been i.e. £5,870,000.
Lord Justice Lewison noted that:
1. The fact that there was no challenge to the judge’s assessment of the measure of damages at common law was critical to an understanding of the issues.
2. In assessing the common law measure of damages the judge was required to find the sum that would have put the premises into the condition in which the tenant ought to have left them.
3. That issue requited a consideration First, what was the scope of the tenant’s obligations under the covenants in the lease. Second, what is the reasonable cost of putting the building back into the condition in which it should have been if there had been sufficient performance by the tenant of those obligations?
4. In addition and crucial to the appeal was the tenant having failed to make sufficient performance of its obligations under the leases, what was the difference between the value of the building in its actual condition at the expiry of the leases and the condition that it should have been in if there had been sufficient performance by the tenant of its obligations?
5. The tenant’s obligation was to put and keep the premises in such repair as, having regard to the age, character, and locality of the building, would make it reasonably fit for the occupation of a tenant of the class who would be likely to take it Proudfoot v Hart (1890) 25 QBD 42.
6. The Court of Appeal noted that the end result of HHJ Edwards-Stuart careful examination of all the items claimed was that he came to the sum of £1,353,254. This represented the cost of putting the building back into the condition in which it should have been left by the tenant, plus some additional incidental items. That would be the measure of damages unless it exceeded the statutory cap.
The Valuation Exercise
Both parties instructed valuers. Each valuer produced a report and together they produced a joint statement (see below) dealing with the points upon which they agreed and differed.
The tenant’s expert valuation was a residual valuation. This takes the finished product as its starting point and then deducts the time cost and money cost of getting there. It assumes that what a purchaser will pay is the surplus after he has met out of the proceeds of sale of the finished building his costs of construction, his costs of purchase, the time and money cost of finance, and an allowance for profit. What is left is the residual value.
The landlord’s expert provided a comparative valuation in which he had applied a cost of works of just over £1.3 million as compared to the tenant’s expert of £2.02 million.
1. The joint statement contained four valuations. The first two related to the actual condition of the building and was not relevant. Valuations (iii) and (iv) concerned the hypothetical state of the building i.e. the value of the building in the state in which the tenant ought to have left it.
2. The basis of valuation (iii) was that in November 2008 (when the lease came to an end) the works in the remedial works required/ undertaken column had already been done.
3. On that basis the Landlord’s valuation was £6,559,300; and the tenant’s was £6,465,000.
4. The difficulty with the landlord’s valuation (iv) was that no breakdown had been provided to the court. However certain points could be made about the landlord’s valuation (iv). First, he did not agree with the tenants approach to supersession as set out in the tenant’s expert report valuation (iv). Second, the landlord’s expert took the tenants figures as set out in the Schedule (as the basis of the valuation required him to do). Third, the landlord’s expert did not agree with the approach involved in valuation (iv) for the reason recorded in the experts’ joint statement.
5. As to supersession the landlord’s expert did not agree that a further £2 million (or £1.3 million) worth of works would have needed to have been carried out if the building had been left in a condition that complied with the lease.
The Decision
It will be recalled that it was the judge’s assessment of the value of the reversion in the condition in which it ought to have been against which the tenant appealed.
The Court of Appeal noted that the valuation (iv) was a residual valuation. The eventual output was heavily dependent on the inputs. Although both experts were valuation experts, they were not experts in building costs or repairing liabilities, which were dealt with by other experts and the judge respectively.
Each of them acknowledged this in the preparation of their reports. Accordingly, having made his findings the judge was fully entitled to adjust the landlord’s valuation (iv) and the tenant’s valuation (iv) in order to insert the correct inputs for the cost of works. That is what the judge did and in the Court Of Appeal judgment he was correct.
Conclusion
The issue in this case was the assessment of the diminution in value of the landlord’s reversion caused by the tenant’s breaches. To achieve that assessment the court had to compare the value of the reversion in its actual state with the value of the reversion in the state in which it should have been at the end of the lease.
At first instance the Court focused on what works were necessary to put the building into the condition in which the tenant ought to have left it.
It was the costs of the repairs that proved the real issue and indeed the correct input for the cost of works given that this was a residual valuation.
At first instance HHJ Edwards-Stuart found that valuation (iv) did not simply represent the value of the premises in repair to 1973/74 standards: it included an assumption that the state of repair can be or could have been achieved by the expenditure identified by the tenant which was not the case. The court of Appeal noted this was a finding of fact that the work identified by the tenant which formed the basis for valuation (iv) would not have amounted to compliance with the covenants.
Kind regards
