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Landlord and Tenant – dilapidations

Section 18 of the Landlord and Tenant Act 1927 limits the amount of damages a landlord may recover for breach of a tenant's repairing covenant to the amount by which the reversion is diminished as a result of the breach.

In Ravengate Estates Ltd v Horizon Housing Group Ltd, the landlord sought damages for dilapidations following the expiry of the leases of several flats to a housing association. Subsequently, the landlord applied for planning permission to significantly extend and subdivide a number of the flats which would mean carrying out major building works.

Planning permission was obtained. However, the cost of the development turned out to be much higher than anticipated, and so the landlord did not proceed with it at that time.

The landlord claimed the cost of the repairs from the tenant. The tenant argued that a purchaser of the reversion would look at the property and see the potential for development in accordance with the planning permission. The development would render the repair work unnecessary.

The application of the cap in section 18 normally involves two calculations: one of a sale of the property in proper repair, and one of the property not in repair. The difference between those two values is the diminution in the value of the reversion. In order to ascertain the two sale prices it will usually be necessary to identify the nature of the market and therefore the nature of the purchaser.

The tenant's surveyor put forward persuasive evidence as to why it would make financial sense for a purchaser to implement the planning permission. The Court of Appeal agreed with the lower court that any purchaser would buy with an eye to development. Such a purchaser would not require any reduction in price because of the disrepair.

Things to consider

Tenants who wish to defend dilapidations claims where landlords are intending to redevelop usually avail themselves of the second limb of section 18. This provides that no damages can be recovered if the premises would, at or shortly after the end of the lease, be pulled down, or structural alterations made which would render the repairs valueless.

In this case the planning permission was obtained some time after the leases had terminated and so it may have been difficult for the tenant to rely on this part of the section. Instead, the tenant successfully argued its case on the diminution in value point.

It seems that the landlord may have been waiting for its dilapidations payout before implementing the planning permission. Landlords who have redevelopment plans should not count on being able to finance these partly through enforcing the repairing obligations of their tenants.

Landlord and Tenant - nuisance

The principle of 'caveat emptor' (buyer beware) applies where a defect in the common parts of the building causes damage to a unit let to a tenant.

In the case Jackson v J H Watson Property Investment Ltd, Mr Jackson was the tenant of a flat under a new 125 year lease. Shortly after the lease was granted water started to leak into the flat, as a result of a defect in the concrete in the light wells which adjoined the flat. The light wells did not form part of the demise but were common parts.

There was no liability of the landlord under the repairing covenants in the lease. This was because the problem arose as a result of an inherent defect. As the state of the premises was no worse than when they had been constructed, there was no disrepair, and the repairing obligation did not apply.

Mr Jackson therefore tried to argue that the landlord was liable in nuisance. However, because the defect in the concrete was present prior to the granting of the lease, the principle of 'caveat emptor' or 'caveat lessee' applied.

Things to consider

The law does not imply a term into a tenancy that the property is fit for occupation. It is up to the tenant to satisfy itself, via a survey, searches and enquiries, that the premises are suitable for the purpose for which it is taking them. The tenant cannot rely on the law of nuisance to impose an obligation to rectify faulty construction work.

Tenants of new commercial buildings are well advised to obtain the benefit of collateral warranties from the construction and design team, to ensure that they are not left without a remedy in this situation.

Landlord and tenant – agreements to surrender

If a landlord and tenant wish to enter into an enforceable agreement to surrender in relation to a lease which is protected by the Landlord and Tenant Act 1954, they must first follow the contracting-out procedure authorised by that Act.

The procedure is similar to that followed prior to the grant of a new, excluded, lease. The landlord must serve a notice on the tenant warning it that by entering into the agreement it will be giving up its right to a new lease under the Act. The tenant must then make a declaration (or statutory declaration) to confirm that it understands and accepts this.

In Ultimate Leisure Ltd v Tindle, a seller tried to use to its advantage the fact that it had not followed this procedure, to avoid a contract for the sale of the reversion.

The seller owned the freehold of premises which were let on a 99 year lease to its wholly owned subsidiary. The seller granted an option to the buyer to purchase the freehold. That option was subsequently exercised.

The option agreement was tripartite, between the seller, the tenant and the buyer. That was because it was part of the deal that, immediately prior to completion, the tenant would surrender its lease to the seller. This constituted an agreement to surrender, which was void for non-compliance with the statutory procedure.

The seller claimed that, as a consequence, the agreement for sale arising out of the option agreement was also void.

The court found that the seller was contractually obliged to sell the property free from the lease and to deliver a deed of surrender to the buyer on completion. The Act only rendered void the agreement to surrender and not the sale contract itself.

The seller was therefore in breach of its obligations under the sale contract. If it were not within the seller's power to deliver the deed of surrender, the buyer would either have to take the title that was offered (i.e. subject to the lease) and sue for damages, or treat the agreement as terminated by the breach.

If it was within the seller's power to procure execution of a deed of surrender, the buyer could ask for specific performance of the sale contract. As the tenant was a wholly owned subsidiary of the seller, it was within the seller's power to procure the deed of surrender.

Things to consider

The contracting out procedure must be followed in relation to an agreement to surrender a lease which is protected by the Act, as well as on the grant of new excluded leases. Buyers should require evidence that the procedure has been followed prior to exchange.

Development – what can go wrong when one party takes on a dual role?

Development projects can be complex affairs. A number of different parties may be involved, some of whom may be undertaking different roles in different documents.

The case of Meretz Investments A.V. & anr v ACP Ltd & others illustrates the problems that can arise when a party's rights and obligations conflict.

The facts of the case were not straightforward. A landowner granted a development lease under which the developer was to construct some penthouses on the top of an existing block of flats. In return, the landowner was to share in the proceeds of sale of the flats. The developer was obliged to use its reasonable endeavours to build the penthouses within a certain time frame.

In the event that the developer failed to build the penthouses on time, the landowner had the option to require the developer to grant it a sub-lease of the undeveloped part of the property. The landowner obtained a guarantee of the developer's obligations from the developer's parent company.

The preliminary agreement which the parties had entered into anticipated that the developer would need to charge the development lease to a commercial lender. In the event, the finance was provided by the developer's parent company, which therefore took a charge over the lease. The landowner had a second charge to secure its share in the proceeds of sale. All the parties signed a deed of priority to regulate the priorities between the first and second charges.

Eventually the development ran into construction problems and it became clear to the developer and its parent that the project would no longer be profitable. The directors came to the view that they should use the parent company charge to avoid a loss, by exercising the power of sale under the charge.

The landowner exercised its right to call for a sub-lease of the undeveloped part of the property and served notice on the developer. The developer could not grant the sub-lease, since contracts had already been exchanged on the sale between the developer's parent company and a purchaser.

The landowner accepted that the parent company was entitled to exercise its power of sale. However, the landowner claimed damages against the developer, for its failure to comply with the obligation to grant the leaseback, and against the parent company in its capacity as guarantor.

The developer and its parent contended that the leaseback option was conditional on the developer having title to the development lease, so as to be able to perform the obligation to grant the sublease. In addition, they pointed out that the landowner had agreed to the creation of the parent company's charge. They argued that this meant that the landowner must also have agreed that there should be no claim under the parent's guarantee if the developer was unable to grant the sublease as a result of the exercise of the power of sale.

The Court of Appeal held that the fact that the enforcement of the parent company's charge prevented the developer from granting the leaseback did not preclude liability on the part of the developer in damages for failure to comply with this obligation. The obligation to deliver the sublease was unqualified. The parent company was also liable in damages, as guarantor for the developer.

Things to consider

At the time of the preliminary agreement there was nothing circular in the secondary liability for damages vesting in the parent company, as the parties had envisaged the involvement of a third party funder.

When circumstances changed and the parent became the first mortgagee, it should have obtained a qualification to its guarantee liability. Where a party is "wearing more than one hat", it is important that its obligations are consistent.

Late completion – the risks of being even £1 short on the day

Time is not normally of the essence in a contract for the sale and purchase of land. This means that if one party is late completing, the other party will not be entitled to rescind the contract. However, most contracts will allow a party who is ready, able and willing to complete to serve a "notice to complete" on the defaulting party.

The effect of such a notice is usually that completion must occur within ten working days. For this purpose, time is of the essence and so if the defaulting party still does not complete, the innocent party may then rescind the contract (and, if the innocent party is the seller, forfeit the deposit).

In Chinnock v Hocaoglu, the buyer failed to complete on the contractual completion date. The seller therefore served a notice to complete.

The buyer tendered the completion monies on the last day for completion under the notice. However, the monies did not include an amount in respect of the seller's legal costs, which the buyer was obliged to pay under the contract.

The court held that the buyer had not tendered the correct amount and that the seller was not obliged to complete. Since the deadline for completion had expired without the buyer re-tendering the right amount, the seller was entitled to rescind the contract and forfeit the deposit.

Given that the contract did not in fact provide when the additional costs were to be paid, the buyer tried to argue that it could, in effect, "settle up later". The court disagreed and found that it was implicit that the monies were to be paid on completion.

Things to consider

Where completion occurs after the completion time stated in the contract (usually, 1 or 2pm), most contracts will provide that completion is to be treated as if it had occurred on the next working day, for the purposes of calculating the amount due. This means that, in addition to the balance of the purchase price and any other sums due under the contract, the buyer must also pay compensation for late completion. If this amount is not tendered alongside the rest of the completion monies, the seller is entitled to refuse to complete until the whole amount is paid.

Where a notice to complete has been served and time is of the essence for completion, this could have disastrous consequences for a buyer. While many sellers may adopt the more relaxed stance of completing and dealing with the outstanding payment afterwards, buyers should be aware that sellers are within their rights to insist on payment of the entire amount, including interest.

Contract – section 2 Law of Property (Miscellaneous Provisions) Act 1989

In Eyestorm Ltd v Hoptonacres Homes Ltd, the buyer missed the contractual completion date. The parties exchanged letters in which they agreed to extend the completion date. In its letter, the seller also agreed to cease remarketing the property (it had commenced remarketing once it became clear that the buyer was going to default).

The buyer did not complete on the revised date for completion, and the seller served a notice to complete. This was not complied with. Since time was now of the essence, the seller rescinded the contract and forfeited the deposit.

The buyer alleged that the seller was in breach of the agreement on the basis that it had continued to remarket the property. As a result, the buyer argued that the notice to complete served by the seller was invalid as it was not "ready, able and willing" to complete.

The court held that the exchange of letters did not create a binding contract, since it did not comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This provides that a contract for the sale or other disposition of an interest in land must be in writing, incorporate all the terms which have been agreed in one document and be signed by or on behalf of both parties.

Since the buyer could not enforce a contractual obligation to cease marketing against the seller, it then tried to argue that the seller was estopped from denying this obligation. Estoppels fall into a number of different types, but the buyer did not specify which type it was relying on.

There is case law which supports the proposition that a proprietary estoppel can in certain circumstances "save" a contract which is void for non-compliance with section 2. This is because a proprietary estoppel can give rise to a constructive trust, which is specifically excluded from the scope of that section.

However, the court in Eyestorm Ltd v Hoptonacres Homes Ltd doubted whether anything other than a proprietary estoppel would be enough to avoid the consequences of a failure to comply with section 2. In particular, a promissory estoppel would not assist, since this cannot be used to found a cause of action but only as a defence. This is sometimes expressed as that such an estoppel can be used as a shield, but not as a sword.

In any event, the court found that any remarketing that the seller may have carried out was not the cause of the buyer's failure to complete. In these circumstances it could not be said that the alleged breach meant that the seller was otherwise than "ready, able and willing" to complete when it served the notice to complete.

Things to consider

The courts will not usually adopt a favourable view towards any attempt to get around section 2. There are circumstances in which it may be possible to establish a proprietary estoppel. However, the safest course of action is to assume that any variation to a contract which falls within section 2 must itself comply with that section if it is certain to be enforced.

The effect of the "registration gap" – a warning to purchasers

For most clients, a deal is done on the day of completion, when the monies are transferred. However, there are post-completion formalities which the buyer needs to comply with; the most important of which is registration of the transaction at Land Registry.

The significance of this cannot be underestimated. In dealings with registered land, legal title to the land does not pass until registration has occurred. There is therefore a gap between completion, and the buyer becoming the legal owner.

In most situations this is not a problem, as registration occurs reasonably speedily. However, it can give rise to difficulties where there are notices to be served pending registration.

In Renshaw v Magnet Properties South East LLP, the court held that the correct person on whom any statutory notices should be served, and who was capable of serving such a notice, was the legal owner.

Until a purchase of registered land is completed by registration, this is still the seller. Renshaw v Magnet Properties South East LLP was a case concerning the collective right of tenants of long leasehold flats to enfranchise their building. However, the principle is equally applicable to other kinds of notice as well (in particular, notices under the Landlord and Tenant Act 1954).

Things to consider

Many notices are time-critical and it is crucial that they are served by or on the right person. For example, a landlord has only two months to respond to a tenant's request for a new tenancy under section 26 of the 1954 Act, if the landlord wishes to object. Where such a request is made shortly before completion, there may not be sufficient time for the buyer to complete their registration at Land Registry and serve a counter-notice.

Most sale and purchase contracts will therefore provide for the seller to manage the property in accordance with the buyer's instructions during the period between completion and registration.

This analysis was written by Sarah Allen (sarah_allen@wragge.com), associate in Wragge & Co's Real Estate group.