DILAPIDATIONS NEWS/COMMENT

30/7/2010

PGF II SA v Royal & Sun Alliance Insurance
The law that concerns damages for disrepair at lease expiry is not straightforward..

The landlord of an office building in the City of London left in disrepair has only succeeded in recovering a small proportion of its claim for repair costs and consequential losses (PGF II SA v Royal & Sun Alliance Insurance, 13.07.10).

In 2008, PGF was the landlord of a six-storey block in Lime Street in the City. The office had been let for 35 years until 24 June 2008. Royal & Sun Alliance was the outgoing tenant and London & Edinburgh Insurance was the outgoing subtenant.

Following expiry of the lease, PGF spent £5m on refurbishment works to the building. It sought to recover a total sum of around £4m and interest from Royal & Sun Alliance and London & Edinburgh – the defendants – by way of damages for dilapidations and failure to reinstate. The sum included a substantial amount for loss of rent.

The key part of the claim centred on the works required to the cladding. The defendants claimed they had no liability, because PGF had replaced it rather than repaired it and any disrepair had therefore been superseded. They claimed PGF could have repaired the cladding for substantially less cost.

The judge reviewed the law concerning dilapidations in some detail. Section 18(1) of the Landlord and Tenant Act 1927 was introduced to put a cap on the damages a landlord could recover, so a landlord no longer had an automatic right to recover the costs of the repairs.

The judge also considered developments in the law since 1927 and, in particular, the case of Ruxley Electronics v Forsyth (1996), in which the House of Lords made clear that damages have to be reasonable and not out of proportion to the detriment suffered. The judge took note that damages for dilapidations should reasonably compensate a landlord and, applying Ruxley, held that, where a landlord had not decided what to do at lease expiry but there was only one reasonable option open, it could assess compensation on the basis that the landlord intended to pursue that option.

It was the defendants’ case that PGF intended to replace the cladding at lease expiry. The judge confirmed it is the landlord’s intention at lease expiry that matters. He rejected the defendants’ argument that any latent development value of the property at that time should be taken into account.

The judge held the landlord had not made any decision to replace by lease expiry and would not have replaced the cladding if it had been left in repair, so PGF could therefore recover the costs of reasonable repairs.

As for the costs recoverable, the judge preferred the evidence of the defendants’ expert, Mr Plough. He confirmed that the standard of repair has to take account of the prestige locality of the building and the type of tenant who would take such a letting, but it was limited to the works that a reasonable tenant would undertake to make the property reasonably fit for occupation. He thought Plough’s scheme, which would maintain the cladding for another 10 years, was sufficient, especially as any new letting was likely to be for such a period of time.

The judge made some other interesting findings. He accepted the carpets needed replacing but, if they had been replaced by the defendants, they would have had to have been taken up to allow for the refurbishment of the interior by PGF. He awarded a sum of £50,000, based on the costs of the carpets, less the costs PGF would have to have incurred in taking them up and storing them while their works proceeded. The figure itself was expressed to be “the appropriate reasonable negotiated net figure to provide compensation”, which would have been agreed in a negotiation between the parties.

The judge only awarded five weeks’ rent, because he held that PGF would have carried out works anyway, which would have taken 25 weeks to complete. The repair scheme put forward by Plough would have taken 30 weeks to carry out and the loss of rent was therefore awarded for the five-week difference. However, he made clear that the costs of preparing a schedule of dilapidations are recoverable as damages, as well as the costs of removing partitions and consequential works to the ceilings.

The damages have not yet been decided, but PGF is likely to recover substantially less than claimed and the next battle is likely to be over legal costs.

Jonathan Ross is head of property litigation at Forsters (Source www.propertyweek.com)

Full judgement availabe by clicking here.

8/06/2010

OSBOURNE:- DEPARTMENTS MUST LOOK TO PRIVATISE PROPERTY
Chancellor George Osborne has today called on government departments to examine their assets, including property, and consider contracting them out or privatising them.

In a speech to the House of Commons this afternoon, Osborne announced details of how the forthcoming Spending Review will be carried out, which will set spending limits for every government department for 2011 – 2015 after its conclusion this autumn.

Osborne said: “For capital spending, we will undertake a fundamental review of spending plans to identify the areas of spending that will achieve the greatest economic returns.

“Departments will be asked to examine their assets and consider how they can be managed more effectively, and whether they need to be held at all.”

A separate document published alongside the speech, which sets out the timeframe and plan for the review in more detail, says departments are being asked to consider “the role of privatisation and contracting out where assets do not need to be held in the public sector.”

The Treasury has now confirmed that the assets concerned include property. The report also talks about how over-spending will be tackled throughout central and local government.

Osborne said: “First, we will build on the in-year savings that we have already made in order to deliver a step change in the drive for efficiency and value for money in the public sector.

“The new Efficiency and Reform Group at the heart of government will support departments to deliver savings in specific areas, including renegotiating contracts, maximising collective buying power and using benchmarking to improve performance.

“Departments will be asked to reduce administrative spending in central Whitehall and quangos by at least a third.

“Each Secretary of State will appoint a Minister with specific responsibility for driving value for money across their department.”

To lead the review, Osborne also announced the creation of a new committee of senior ministers to scrutinise public spending, called the Public Expenditure Committee.

Its five members will be Osborne, the chief secretary to the Treasury George Osborne, foreign secretary William Hague, Cabinet Office minister Francis Maude, and minister of state for the Cabinet Office, Oliver Letwin.

28/5/2010

LEASE BAN TO LEAD TO DILAPIDATIONS
Government bodies are liable for up to £70m in dilapidation fees following a ban on signing new leases and lease extensions without Treasury approval.

Dilapidations consultants are expect to benefit from the ban on signing new leases without Treasury approval. This will last until 2011 and could affect up to 3.5m sq ft of central government and quango-occupied floorspace across the UK.

The measures will be driven by the Efficiency and Reform Group, which was jointly launched by the Cabinet Office and the Treasury on Monday with the aim of saving £47m in rent, as part of the Treasury’s £6.2bn cuts to public spending.

Of the 644 leases that fall under the rules, 450 are in buildings that are used for back-office functions.

Landlords are expected to claim up to £70m in dilapidation costs from the government. However, it says the measure will help it to achieve its long-term aim of cutting property from 13 sq m per person to 10 sq m.

There have already been property controls in place for central government, but only central London and south-east departments had to consult with the Office of Government Commerce before signing new leases.

The new group’s board will be chaired jointly by the chief secretary to the Treasury, David Laws, and Francis Maude, who is minister for the Cabinet Office and paymaster general.