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Damages and s18 cap

This page includes information on the following topics:
  • Works not carried out.
  • Costs estimates.
  • Application of s18 in various contexts.
  • Costs estimates - different work carried out.
  • Covenants to paint.
  • Covenants to re-instate.
  • Old and obsolete buildings.
  • Property ripe for redevelopment.
  • Sub-tenants remaining in occupation.
  • Old premises and lengthy expired lease - supercession.
  • Costs consequences of exaggerated claims by landlords.

Introduction

The general rule at common law is that the measure of damages is the cost of putting the premises into the state of repair required by the covenant. However, this is subject to the cap imposed by s18(1) of the Landlord and Tenant Act 1927 that limits the amount of damages to the diminution in the value of the reversion at the end of the term by reason of the breaches:
    "Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid…"
In a well prepared case there will usually be evidence of the cost of repairs that were carried out (if that is the case) and expert evidence (either joint or from each party) as to the diminution in the value of the reversion. In some cases there will be no such expert evidence and the court will often use the cost of repairs to help it assess the diminution in value (Jones v Herxheimer [1950] 2QB 106).


Works not carried out

Only some works carried out

Car Giant Ltd v The Mayor & Burgesses of the London Borough of Hammersmith
[2017] EWHC 197 (TCC)

Summary

The cost of the (limited) actual works carried out by the landlord was the best evidence of diminution of the value of the reversion. The landlord had not put forward evidence to show that it intended to undertake the remaining works, nor that its reversion had diminished by an amount equivalent to the cost of remedying the remaining defects.

Facts

T held commercial premises under a 25 year lease which had expired. The premises consisted of an estate of 39 units used as light industrial or warehouses. The premises where built in the 1980s and it was accepted that the premises were "secondary or tertiary property, probably attracting tenants who are or might be unable to fulfil their covenants under their leases in full."

The units were all let to T under full repairing leases, but as at the end of the lease (the valuation date) 10 units were occupied by tenants who were holding over, 8 by tenants under new leases with limited repairing obligations, 17 or 18 (the judgment is unclear) were vacant and four were not part of the claim. It had been agreed between the surveyors for L and T that at the valuation date the cost of necessary works to remedy the breach of repairing covenants was a total of almost £403,000.

On the question of diminution, the surveyors took different starting points. L’s surveyor started from the position of a hypothetical purchaser who would look to the cost of the works, discounting for recovery from sub-tenants holding over (to some extent) and adding in financing costs. This gave a figure of £500,000.

T’s surveyor started from the agreed cost of the works actually carried out to the vacant units of and added the agreed costs to the occupied units, which was then discounted to some extent. He then added a sum for drainage works actually carried out. This gave a figure of £110,000.

Issue

Whether the statutory cap set out in s18 of the Act limited recovery to £500,000 or £110,000.

Decision

The Court held that the work actually carried out represented the damage to the claimants’ reversion.

The court reminded itself that the correct approach was that the starting point was that a failure by the tenant to comply with its repairing obligations at the end of the lease resounds in damages, based on the cost of the remedial work required to remedy the tenant’s breach. That figure is then capped by s18 of the Landlord and Tenant Act 1927. Traditionally, diminution is the difference between the value of the property in repair, and the value of the property in its current state of disrepair: Ravensgate Estates v Horizon Housing Group and others [2007] EWCA Civ 1368 - see below.

However, where some work has been done, then that work can be considered. Referring to both Dilapidations: The Modern Law and Practice 2013-14 by Dowding and Reynolds, and Latimer v Carney [2006] 3 EGLR 13 (see below) the judge considered that in ascertaining the diminution in value, he needed to consider both the works that had been done (suitably discounted to reflect sub-tenant recoverability) and the reason why works had not been done.

The diminution, the judge held, was £166,000. This was made up of the cost of works done to the vacant units plus works done to the occupied units. To this could be added drainage work done. In addition there were the costs of finance. From this figure could be deducted a sum representing probable sum recovered from the sub-tenants holding over. This figure could then be rounded up.

As to the work not carried out, the judge found that he was unable to conclude that these further costs should be taken into account in arriving at the diminution in value. This was because L had not put forward evidence to show that it intended to undertake the remaining works; or that its reversion had diminished by an amount equivalent to the cost of remedying the remaining defects. The judge accepted that L’s "actions and inactions" after the valuation date threw light on the damage to the reversion.


Estimated costs

Different work carried out - covenant to decorate

Latimer v Carney
[2006] EWCA Civ 1417

Introduction

In this case the CA has held that an estimated cost of repairs in a schedule of dilapidations could be used to establish diminution in value, even though different work was carried out.

It also held that a covenant to decorate is a covenant to repair and so subject to the s18 cap.

The facts

In this case there was no expert evidence at trial of the diminution in value of the reversion. The landlord had obtained a schedule of dilapidations from a surveyor, which set out an estimate of what it would cost to put the premises in repair by reason of the defects. However, the landlord did not actually carry out the works specified in the report. Rather, the landlord refurbished the property to meet the needs of an incoming tenant. There were therefore no invoices that related to the cost of works required by the disrepair, which in ordinary circumstances might have been used as providing evidence of the diminution in value. In these circumstances the trial judge dismissed the claim. He held that L had failed to establish the diminution in value of the reversion. L appealed contending that the estimate in the surveyor's report should have been used to establish diminution in value.

The appeal

The CA agreed and allowed the appeal. Even though he did not have expert evidence, the judge could have drawn the inference that the cap was not exceeded from the fact that the landlords had to repair the roof of the premises before they could be relet, and had to execute the other repairs before the new tenant would take his lease. The damage to the reversion should have been inferred from the estimated cost of repairing the roof (para 12) and in addition from the estimated costs of remedying the other breaches found by the judge .. subject in the latter case to a discount of 60% to take account of the uncertainty as to the extent that the disrepair affected the value of the reversion (para 9).

Citation

Arden LJ at paras 46, 51 - 53:
    "46. It is clear from the Jones case that expert evidence is not required and that in an appropriate case the court can infer that there has been a diminution in the value of the reversion, and the amount of such diminution, from the fact that the landlords have had to carry out certain repairs. But this is not the only circumstance in which diminution will be found. It may be found where for instance the landlord has not carried out the repairs through lack of funds. In my judgment the judge was in error in thinking that if the repairs had actually been carried out he could not infer that damage to the reversion had occurred from the fact of those repairs unless he had the actual cost of those repairs. In my judgment he could make that inference from an estimate of those costs if he was satisfied the estimated costs were reasonable. In an ideal world every landlord will come to court with the appropriate valuations but where this does not happen the landlord should not fail to make any recovery if it is clear that breaches occurred, that the repair work had to be done and that damage to the reversion as a result of the breaches is proved in other ways.

    51. The position therefore, is this. The landlords were obliged to do the repairs. But they went further than simply doing the repairs. They carried out improvements at the same time. In fairness to the outgoing tenants, there is the possibility that the landlords' work rendered some of the work required to remedy the breaches of covenant by the outgoing tenants futile and that some of the improvements rendered some of the work of repair unnecessary.

    52. In all the circumstances, the right course in my judgment was for the judge to have inferred diminution in value to the reversion from the estimated costs of any repairs required to be done by the outgoing tenant which the landlord could actually show they had done. This would include damage to the roof. In the case of other repairs, the judge should have applied a discount to take account of the possibilities referred to above. The amount of such a discount was for the judge doing the best he could on the material available to him. The parties have not invited us to refer the matter back to the judge for the purpose of making this discount. In my judgment, it would be disproportionate to take that step. This court should formulate its best judgment on the material available to it, and in all the circumstances of this case it should be generous to the outgoing tenants. In my judgment, the discount should be 60%. This is not of course a case where it is suggested that the estimates were excessive and that when the work was actually done it was found that the costs of doing the work were less than what had been estimated. The discount should be applied to the specific estimated costs of repair as defined above.

    53. It may seem unjust that the landlords should recover so little to reimburse them for the costs of repairing the premises when the respondents had caused the damage and had undertaken to make good items of disrepair. But the landlords also on the judge's findings took the opportunity to upgrade the premises and thus would be able to charge more for the premises. In so far as the repairs were not works of modernisation the appellants have themselves to blame for failing to foresee that the court would not have the raw material from which more precisely to draw inferences"
Covenant to paint

There was a further point discussed in the case. It was held that a covenant to decorate premises during or at the end of the term is in substance a species of repairing obligation even if the covenant also constitutes a breach of covenant for periodic decoration of the lease. Such a covenant is therefore also subject to the s18(1) cap (para 61).

Other covenants

Other covenants, such as the covenant to re-instate or the covenant to comply with statutory obligations, are not covenants to repair and so are not subject to the s18 cap. However, there are some interesting references in the case to the possibility that even at common law the courts might now adopt similar principles to those in s18 where they are considering these other covenants. This arises in particular from the decision in Ruxley v Forsyth [1996] AC 344 - the swimming pool case where the HL held that where the expenditure required to be done to an asset to remedy a breach of contract is out of all proportion to the benefit to be obtained, the appropriate measure of damages will be the diminution in value of the asset rather than the expenditure. (See Arden LJ at paras 24 and 60).


Old and obsolete buildings

Still a loss

Hammersmatch Properties (Welwyn) Limited v Saint-Gobain Ceramics and Plastics Ltd
[2013] EWHC 1161 (TCC)

Summary

Even where an outdated property stands little or no chance of being re-let following a tenant's departure, a claim for the loss in reversionary value caused by the breach of the tenant's repairing covenants is still possible.

Facts

The case concerned a large 1930s industrial and office building let under a 1984 lease for a term of 25 years that had expired by effluxion of time. L claimed £6.8m in respect of dilapidations. T considered that the property was obsolete, that its likely destiny was to be sold for redevelopment and that the maximum an investor would pay would be £100,000. Other than a few tenancies at will and two telecommunications masts on the roof, the property had been empty for the previous 5 years.

Issues

The principal issues related to the following:
  • The extent of T’s breaches of covenant; and
  • The correct measure of damages for diminution in the value of the reversion under section18(1) of the Landlord and Tenant Act 1927
Decision

The court held that the damages payable by T were limited to the diminution in value of the reversion being the difference in the vacant site value and the value of property in repair.

Extent of T’s breaches

In order to establish the appropriate standard of repair there must be disrepair and this must be below the standard contemplated by the lease. It is assessed by the standard of repair that a “reasonably minded tenant of the relevant user class” would reasonably have required at the start of the lease to render the premises fit for occupation for the purposes contemplated by the lease, bearing in mind the age, character and locality premises.

Here, a purpose-built manufacturing building which was 50 years old at the date of the lease had to be taken into account. The age and use of the building must be considered – there is no obligation to make an old building brand new. Replacement of items was only required where repair was not possible (the fact that an item is near the end of its life does not automatically lead to replacement, even if that is what a prudent building owner would do).

The court held that two boilers needed to be replaced and three could be repaired. In addition, repairs were required to be carried out to switch panels; and the passenger and goods lifts were in need of repair, but not replacement in spite of their age. T should therefore have carried out works of repair under the lease in the sum of approximately £3m (including fees).

Measure of damages

However, in considering the appropriate measure of damages, s18 of the Landlord and Tenant Act 1927 provides that damages for breach of the tenant’s repairing obligation may not exceed the diminution in the landlord’s reversionary interest owing to the breach. This is the maximum level of damages L can recover, regardless of the cost of the repair works.

The starting point in assessing the diminution figure is the value of the property in repair. Here, the property would not be easy to re-let due to a number of factors, which included its age, nature, construction and space configuration. Nonetheless, the court held that with some refurbishment, the property would be capable of being relet. Taking into account a range of factors including rental voids and the cost of refurbishment works, the value of the property in repair was a few thousand pounds less than the costs of putting the property into repair.

Therefore, the court had then to look at the value of the property in its current disrepair – the difference between the "in-repair" and "out-of-repair" figures to ascertain the figure for diminution under s18 of the 1927 Act.

On the evidence that the site value amounted to £2.1m. Taking a figure for the value of the property in repair as £3m, the diminution in value amounted to £900,000.

Comment

In today’s market it is easy to assume that an old or obsolete buildings may attract a low or nil valuation in terms of diminution in the landlord’s reversionary interest. This case demonstrates how unsafe it is to make such an assumption.


Property ripe for development

Using the first limb of s18

Ravengate Estates Ltd v Horizon Housing Group Ltd
[2007] EWCA Civ 1368

Summary

Even where the tenant is unable to establish that the second limb of s18 of the 1927 Act applies there still may be no (or little) damage to the reversion (so that the first limb applies) if the evidence establishes that the property is ripe for development.

Introduction

The amount of damages awarded to the landlord by reason of disrepair at the end of the term will be limited by the provisions of s18 of the Landlord and Tenant Act 1987 ("the s18 cap"). There are two limbs to this cap. Under the first limb damages "shall in no case exceed the amount (if any) by which the value of the reversion in the premises is diminished owing to the breach". Under the second limb "no damage shall be recovered .. if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been pulled down or such structural alterations made therein as would render valueless the repairs". This second limb is awkward in its wording and is not always so easy to establish even where it seems clear that the property is ripe for development. It depends upon the intention of the landlord at the date of termination (sometimes the intention of a third party) and it can often be difficult to show an intention to pull down / carry out structural alterations "at or shortly after the termination". However, as this case shows the first limb of the s18 cap can still be highly relevant where the property is ripe for development even if it is not possible to establish a defence under the second limb.

Facts

The property consisted of six flats. The lease came to an end in March 2003. In June 2003 a schedule of dilapidations was served, the cost of repairs totalling £317,000. However, the landlord did not do the works but instead, in October 2003, applied for planning permission to develop the property. Planning permission was granted on 10 March 2004. For various reasons to do with the cost the development was not carried out at that time. By October 2004 no work had been carried out and the landlord obtained a further schedule of dilapidations that reduced the cost to £289,000 odd.

The landlord claimed the cost of repairs. The case turned upon the first limb of the s18 cap (the second limb was not even referred to). The arguments in the case are neatly set out in para 13 of Mann J's judgment on the appeal:
    "Ravengate's case was simple. It claimed the cost of repairing the works. It said there was no evidence that the damage to the value of its reversion was any less than the cost of doing the works. Horizon's case was, in essence, that a purchaser of the reversion would look at the property and see the potential for development in accordance with the planning permission. It would, Horizon maintained, be plainly advantageous to carry out the works necessary to develop the property. Those works would render otiose the bulk of the dilapidations work. A part of those works relating to the common parts would still be carried out by the purchaser, and that notional purchaser would require a reduction in the purchase price in the amount of the cost of carrying out those works. To that extent there was diminution in the value of the reversion. That was the cap which operated via s.18(1)."
Expert evidence was given to the trial judge and on that evidence he found that (i) the premises were ripe for development, (ii) any potential purchaser would give effect to development and (iii) that development would render otiose the carrying out of most of the repairs claimed by Ravengate. The only things that would make a difference to the developer would be a few "survival items" (as they were called in the case), and the developer would require a deduction for those.

The appeal

On the appeal, the CA reviewed the evidence and came to the view that "the judge was right to find that any purchaser of these premises would purchase with an eye to redevelopment. That means that any purchaser would not need, require or expect a reduction in respect of a large part of the repairs". The consequence of this was that "the judge was right to find that the amount of the diminution in the value of the reversion brought about by the want of repair was less than the cost of repairs, and therefore to apply that as the relevant measure of damage. He was also right to assess that value by reference to the amount which a developer purchaser (in effect the only likely purchaser) would require to be deducted from the purchase price, which in turn is to be assessed by reference to items of repair which the developer would have to carry out himself."The landlord was therefore only entitled to the small sum representing the few repairs that the developer would require to the common parts.


Sub-tenant remaining in occupation

Lyndendown Ltd v Vitamol Ltd
[2007] EWCA Civ 826

Summary

The fact that premises are occupied by sub-tenants under tenancies to which Part II of the Landlord and Tenant Act 1954 applies must be taken into account in assessing the damage to the reversion in a claim brought by a landlord for disrepair against the tenant at the end of a term; because the sub-tenant will become the direct tenant of the landlord with an obligation to repair.

The question in this case was whether any regard should be had to a side letter between the tenant and sub-tenant limiting the sub-tenant's obligations.

Facts

C was the freeholder of two industrial units. It brought proceedings against its former tenant (D) for failure to deliver up the premises at the end of the term in accordance with the repairing obligations under the lease.

In May 1999, D granted a sub-lease to a sub-tenant. The sub-lease was not contracted out of Part II of the Landlord and Tenant Act 1954.

The licence to sub-let included a covenant by the sub-tenant that it would observe and perform the covenants in D's head lease. However, prior to the licence being granted D's parent company wrote to the sub-tenant stating:
    "we hereby undertake to you that your obligation to repair the Property is only to keep it wind and water tight regardless of any conflicting or contrary provision contained in the under lease of the Property or in the landlord's licence to underlet and if the landlord requires repairs in excess of an obligation to keep the Property wind and water tight such repairs will be at our expense"
D's lease expired on 31 January 2002, and on that date, the sub-tenant remained in occupation under the 1954 Act.

In February 2002, C brought a claim against D for damages for failure to deliver up at the end of the term in accordance with the relevant repairing obligations.

The issue

Section 18(1) of the Landlord and Tenant Act 1927 limits damages for breach of the repairing covenant whether during or on expiry of the term to the diminution in the value of the landlord's reversionary interest. The cases of Family Management v Gray [1980] 1 EGLR and Crown Estate Commissioners v Town Investments Limited [1992] 1 EGLR 61 held that where a sub-tenant with the same or similar repairing covenants remains in occupation at the end of the tenant's term, then there is usually no damage to the landlord's reversionary interest. The reason being that the reversion would have to be valued with the sub-tenant in occupation and it could not, when renewing its lease, seek a rental reduction on the basis of its own breach of its repairing obligations; accordingly the rental value of the premises in or out of repair would, in such circumstances, be the same.

The question before the court in this case was whether or not, and if so to what extent, the letter (not disclosed to C until the proceedings) affected the level of the damage to the reversion. It was common ground between the parties that, if the letter was to be treated as of no effect, then the level of damages for breach of the repairing covenants on expiry would be nil as, on the date of expiry of the lease sub-tenant remained in occupation under the 1954 Act with obligations to repair. The judge held that there was no diminution in the value of the reversion. C appealed.

The appeal

The appeal was dismissed. The judge at first instance had been fully entitled to determine that the letter would have no adverse impact on the value of the reversion as (a) he found that the letter was simply an indemnity to the sub-tenant and (b) he preferred to evidence of D's expert that it would have no effect on the value of the landlord's reversionary interest as it was a private matter between D and the sub-tenant; and that any purchaser would have taken the view that D's obligations to repair had, in effect, been passed to the sub-tenant and that if it had had any effect on the mind of a purchaser it would have been in the nature of a reassurance as underwriting the sub-tenant's obligations.


Old lease

Old premises

Sunlife Europe Properties v Tiger Aspect Holdings
[2013] EWHC 463 (TCC)

Summary

The case is a useful reminder of the principles to be considered in assessing damages for terminal dilapidations especially where the premises, and the expired lease, are old.

Facts

The case concerns two properties let to the tenant (T) under two full repairing leases for terms of 35 years. Both leases continued beyond their expiry dates pursuant to the provisions of the Landlord and Tenant 1954, Part 2 but ultimately came to an end in 2008 when T moved out. It was not disputed that T did not comply with its repairing obligations under the leases.

Issue

What was the measure of damages due to the landlord for the tenant’s failure to yield up in accordance with the repairing obligations under the leases?

At trial the landlord (L) produced a costed schedule of dilapidations, and the total damages sought were £2.172 million (including 30 weeks loss of rent).

T, by contrast, asserted that the remedial works attributable to want of repair amounted to around £700,000. However, T contended that it was not obliged to pay more than £240,000 being the diminution in the landlord’s reversionary interest under s18(1) of the Landlord and Tenant Act 1927. T’s argument was that even if it had left the premises in a good state of repair by reference to the standards at the date of the leases the building would not have been lettable without the substantial upgrade and improvement works which the landlord had carried out.

Decision

The damages claim was assessed by the High Court at £1.4 million.

Section 18(1) of the Landlord and Tenant Act 1927 provides that:
    "Damages for breach of a covenant or agreement to keep or put in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is express or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) is diminished owing to the breach of such covenant or agreement as aforesaid . . ."
The starting point, therefore, must be to consider whether, if T had handed back the premises in accordance with its repairing obligations under the lease, L would have been able to relet or sell the building without significant discount. If this was the case then damages are the lower of either of the total cost of putting the property back into the state of repair required by the lease (to include the cost of the works and consequential fees, costs and losses) or the difference in value of the building in its current state and the state it should have been handed back in.

If, however, L would not have been able to relet or sell the building without significant discount, even if T had carried out the works necessary under the lease, then it is necessary to look at what L would have to do to be able to relet the premises at a fair market price; in other words, what “extra” work must the landlord do to make the premises lettable in today’s market? In looking at that “extra” work, the court must have in mind two points. First, that the landlord cannot recover the cost of this “extra” work from the tenant and secondly, that this “extra” work may make some of the tenant’s repair works redundant – and so the landlord has suffered no loss if the tenant fails to carry out such “redundant” repair works (an issue known as “supercession”).

Further points to be borne in mind are:
  • The tenant is entitled to choose a less costly method of complying with its covenants
  • The tenant (in the absence of wording to the contrary in the lease) is under no obligation to upgrade plant and machinery to current standards, the tenant is entitled to replace such plant and machinery with ‘like-for-like’
  • The landlord cannot recover costs which he could have avoided if he had acted reasonably, and he cannot recover costs of works where the costs are “disproportionate” to the benefit obtained (Ruxley v Forsyth [1996] 1 AC 344)
Applying these principles to the facts of this case the court made an assessment of damages. The court agreed with L that, had T yielded up in a good state of repair L would have only had to carry out “relatively modest additional works” to be able to “relet to a tenant of the appropriate type”.


Exaggerated claims

Costs consequences

Business Environment Bow Lane Ltd v Deanwater Estates Ltd
[2008] EWHC 2003 (TCC)

Summary

Making dilapidation claims which are wholly unjustified can lead to the landlord suffering indemnity costs orders even if it does recover a small sum that beats a Part 36 offer.

Key facts:
  • Claim by landlord against a tenant in respect of dilapidations at the end of the term.
  • The initial schedule of dilapidations was in the sum of £557,483.97. The landlord had not carried out any works.
  • Subsequently there were revised dilapidation schedules of £350k plus other items and then £424k odd.
  • When proceedings were issued L claimed £414,932. (The defendant raised certain preliminary issues which they subsequently lost).
  • The schedule was completely inaccurate because works actually carried out at the property bore no relation to the claim. The property had been converted into a furnished office centre. Nontheless the claimant pressed on with its claim.
  • At the hearing of a case management conference counsel told the court that the claim for the cost of remedial work would be reduced to below £200k.
  • A revised Scott Schedule prepared pursuant to an order at the CMC reduced the claim to £107,506.
  • L subsequently made a part 36 offer stating that it would accept £1,073.50.
  • At a pre-trial review the Judge made an award by consent that the landlord should pay the tenant damages of £1,073.50. The issue of the costs was to be determined at a later hearing.
Contentions
  • L claimed that it was the winner and should have its costs. T could have protected itself by a Part 36 offer.
  • T contended that the claim was wholly exaggerated and that it should have its costs on an indemnity basis. In exercising its discretion on costs the court is required to take into account conduct including exaggeration of a claim (CPR 44.3(5)(d)); and may order indemnity costs where the where the facts of the case and/or the conduct of the parties is such as to take the case out of the norm. (CPR 44.4(1) and Excelsior Commercial v Salisbury Ham [2002] EWCA Civ 879).
Costs order of the judge:

The landlord was ordered to pay the tenant's costs on an indemnity basis.

Citation

At paragraphs 104 and 105 as to why the tenant should pay the landlord's costs:
    "..I should add some general words about Part 44.3(5)(d) 'whether a party … has exaggerated his claim'. The effect of exaggerating a claim may be to prevent parties having realistic discussions at an early stage to resolve a dispute or prevent a successful mediation. In such cases the result of the exaggeration may be to prevent a settlement of the dispute at an early stage. Similarly, if a case is not merely exaggerated but is put on a wholly unsustainable basis, it may prevent an early settlement. It may also prevent a defendant from being able to assess realistically the value of the Claimant's case and make an appropriate Part 36 offer. This will be particularly the case when only the Claimant is able in the first instance to evaluate its own losses. In appropriate cases the Defendant should not be left at such a disadvantage. The situation may, of course, be different if the Defendant is in a position at an early stage fully to evaluate the Claimant's case.

    This case was put on the basis that the Defendant was liable to pay as dilapidations the cost of the very substantial internal remedial works carried out to the property under the terms of the lease. In the end, the Claimant was forced to concede that the work which was carried out was, except for a trivial sum, not referable to dilapidations but to the Claimant's wholesale refurbishment of the building as offices. Equally in relation to external works the Claimant claimed for very substantial works which were not in fact carried out. The Claimant's dilapidation schedules which were produced by their expert bore, therefore, no relation to the position which they were forced to concede shortly before the trial took place. It is clear therefore that the Claimant lost on the issue of dilapidations. I conclude that in this litigation there was a clear winner and loser and that the Claimant was the clear loser and should realistically have realised that this was the result."
And on the question of indemnity costs the judge said at para 109:
    "In my view the Claimant both before and after the institution of proceedings acted in a way which took this case out of the norm. It represented to the Defendant both before and after the start of the litigation that it had a very substantial dilapidations claim. The Claimant knew what work it intended to carry out from the time when it made its initial claim for over £500,000 for dilapidations. The scope of the work was no doubt refined in the summer of 2005 and during the tendering stage. This claim was persisted in at the time of the service of the Particulars of Claim. The Statement of Truth, made on its behalf on the claim form and in the Statement of Claim attested to the fact that this was a genuine claim for dilapidations and that the work claimed for had been carried out. Any proper investigation of this claim both before the Particulars of Claim were served and afterwards, would have revealed (a) that the external works had not been carried out, and (b) that this was indeed not a genuine claim for dilapidations. Even in the Schedule of Dilapidations served on 7 December 2007 the Claimant persisted in a substantial claim which it knew or ought to have known was unsustainable. In these circumstances the appropriate order is that the Claimant pay the Defendant's costs other than those subject of the order of the Court of Appeal on an indemnity basis.".
Comment

This is an extreme but by no means completely uncommon scenario. Landlords must be very careful in the way they pursue dilapidation claims.

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