Dilapidations Deep Dive – key takeaways from the Peachside case

Whilst not creating new law, the High Court case of Peachside Ltd v Lee is a helpful recap of the legal principles that come into play when diminution in value and supersession type arguments arise in dilapidations claims.  In this insight we consider the judgment and decision in Peachside and outline our key takeaways for professionals advising clients on these types of claims.     

Peachside case background 

In Peachside, the claimant landlord brought a £0.5 m+ claim for damages for terminal dilapidations relating to a commercial premises that had been let and used as a Chinese restaurant. The landlord’s case was that the premises, which had been left by the defendant tenant in a serious state of disrepair, required substantial and expensive works to put them back into repair for re-use as a restaurant. They further argued that given that that restaurant demand in the area was low, it would be more economic for them to re-develop and re-let the premises as a commercial office space. 

The landlord submitted that they would undertake works to the premises in two phases: (1) works required to put the premises back in repair in accordance with the schedule of dilapidations which they had served on the defendant and (2) works required to redevelop the premises into a ready to let office space. The works would include installation of a new passenger lift in place of the goods lift.

By trial, the landlord had completed the first phase of works. The tenant sought to challenge the landlord’s claim relying largely on the two limbed defence provided by section 18(1)of the Landlord and Tenant Act 1927 and also arguing that some elements of the works were unnecessary and/or involved betterment and that some works (i.e. the addition of the passenger lift) would never be carried out. They submitted that the landlord’s claim was an “elaborate charade” as they intended to redevelop the whole building.

The tenant’s defence: section 18(1) – a recap 

Under section 18(1), damages for breach of a repairing covenant are: 

• Limited to the diminution in value of the landlord’s reversion caused by the breach of a repairing covenant (First Limb). The starting point for this is the cost of the works. 
• Not recoverable at all when it can be shown that, whatever the condition of the property, demolition or serious structural alterations are to be carried out at the end of the term, which would render any repairs valueless, otherwise known as supersession (Second Limb).

In Peachside, the judge acknowledged that the First Limb is an objective assessment requiring a hypothetical valuation of the reversion on the term date. This equates to the difference between the value of the premises in disrepair on the open market and the value it would have had had the breach not occurred. The Second Limb is a subjective assessment, looking at the intention of the claimant not any hypothetical purchaser. 

He acknowledged that the general conclusions set out by the judge in the important case of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd, were material to the facts of this case, notably that:

• “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. 
• 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.
• Where a tenant is in breach of its covenant, the court is entitled to infer that remedial work is necessary to remedy the breach unless the tenant demonstrates the contrary.
• 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 cost of any works to remedy the breach to the extent that such works would be rendered abortive by the need to upgrade or refurbish the building (i.e. where there is supersession)."

This latter point formed a key part of the tenant’s case in Peachside. The tenant argued that ultimately the premises could not be re-let as office accommodation without installing a passenger lift from street level, which would require works that would fundamentally alter or supersede the works previously carried out. 

The tenant further argued that the landlord’s decision to split the works into two phases was therefore an “elaborate charade” to obtain a substantial sum of damages from the tenant. This was by way of the dilapidations claim, as the landlord never had any intention of concluding the second phase of the works to offer the office accommodation to the market. 

The judge found in favour of the landlord (save for the costs of installing a new lift) and awarded them damages to the tune of £408,431. He concluded that the award did not exceed the statutory cap of the First Limb of section 18 and that on the facts of the case, the Second Limb was not engaged.

Key takeaways  

From a practical point of view, our top three key takeaways form the case are as follows:

1. Where a landlord has done the repairing works already, they will generally be better placed to bring a successful dilapidations claim.
2. Even if a landlord has carried out the repair works, it is still open to a tenant to run a section 18(1) defence.
3. As was made clear in the earlier dilapidations case of Latimer v Carney [2005], the absence of expert section 18(1) evidence does not necessarily preclude the court from making a finding on diminution, inferring this from the facts of the case and the material available to it. 

For more information, please contact Warren Reid.