News & Insights

Dilapidations of commercial leasehold properties – a reminder and update

Alanis Ingham-Cotterell explains how the “Coldunell” case sheds light on the way the courts look at lease dilapidations liability, in a world of increasing energy efficiency sensitivity.

The recent case of Coldunell Ltd -v- Hotel Management International Ltd [2022] EWHC 1290 (TCC) has set out in one place the fundamental principles of law relating to leasehold dilapidations. The case concerned The Mitre Hotel, a hotel that is located opposite Hampton Court Palace. The hotel was leased to the Defendant tenant, Hotel Management International Limited, for a term of 20 years. The term of the lease expired in 2014 and possession was ultimately handed back in 2016. The lease itself contained standard repairing obligations for the tenant to comply with. In 2020, the Claimant landlord issued legal proceedings against the Defendant in relation to dilapidations and damages relating to the same.

The basic principles of the law surrounding dilapidations of leasehold properties were agreed. By way of summary these principles are as follows:

  1. Where a lease contains a covenant “to repair”, the standard of such repair should have regard to the age, character and locality of the property. In particular, having regard to these characteristics that would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take the property.
  2. Again, where a lease contains a covenant “to repair”, this does not require the tenant to keep the property in perfect repair and/or in pristine condition. The tenant is not required to remedy every defect with the property.
  3. Where a lease contains an obligation, on the tenant’s part, “to keep the property in good and substantial repair and condition”, that did not require the tenant to return the property in the same condition as it was originally let. Keeping the property in good and substantial repair and condition, did not require the property to be kept in the same condition.
  4. Damages relating to dilapidations are assessed from the date when the lease comes to an end. The standard of repair, however, is assessed with reference to the time when the lease was granted. For example, if the property was let in 1924 that is the date from which the standard of repair will be assessed.
  5. The tenant is not required to return the property with new equipment or equipment that had a particular life expectancy. The tenant is, however, required to return the property with the equipment that has been kept to a standard that is in line with the condition of the equipment and fittings when the lease was granted.
  6. The age of the property (or the building in general) should be taken into account when determining what standard of repair was required. The standard of repair would need to be appropriate to the age of the property and/or the wider building. A repairing covenant also does not require the tenant to bring an older property up to the present day standards of construction and/or specification. A property that was built in 1924, does not need to be brought up to the standard of properties that would be built today in 2023.
  7. The tenant only needs to replace equipment, fixtures and fittings to the same standard as they were at the time of the grant of the lease. This is subject to any new equipment, fixtures or fittings that are required to meet current legal, regulatory and safety standards.

It is the last point that we want to focus on for the remainder of this article. It is common for a lease to include a covenant requiring the tenant to comply with statutory requirements. Ordinarily, a covenant to repair, requires the tenant to comply with all statutory requirements as to the way that the requisite remedial works have to be carried out. However, even where this covenant is not explicitly included within the lease, it is implied that the tenant must comply with these requirements.

In the recent case of Coldunell the requirement to comply with statute was a point of dispute. It was agreed that the water heaters in the hotel were operational at the end of the term of the lease and they were not in disrepair. The boilers were, however, in disrepair and needed to be replaced. It was held by the Judge that in order to comply with the relevant building regulations, the boilers now had to be replaced with a certain type of ‘condensing boiler’. The equipment required to be installed as part of the replacement of the boilers was ultimately incompatible with the current water heaters. It was held by the Judge that in order to comply with the relevant building regulations, the water heaters were required to be replaced and the cost of replacing these would be recoverable from the tenant. The tenant was, therefore, found liable for the cost of replacing equipment even where it was not in a state of disrepair.

Another notable case is Craighead -v- Homes for Islington Ltd [2010] UKUT 47 (LC). It was held that the single-glazed Crittall windows of the leased property would need to be replaced with double-glazed Crittall windows, as that was the only lawful way to carry out the remedial works in accordance with the relevant building regulations. Again, this was found to be the tenant’s responsibility.

The above decisions may seem (and is) onerous to tenants. There is, however, some potentially good news for tenants in the form of the Minimum Energy Efficiency Standards (“MEES”). Very broadly, MEES restricts the new or continued lettings of commercial properties after 1 April 2023 for new and existing leases, where the property has an EPC rating of F or G. It is worth noting that the Government has indicated that their aim is to raise to minimum EPC rating expected of commercial properties to B by the year 2030 (and the softening government stance on EPC ratings mentioned in the King’s Speech applies to private residential landlords only).

The MEES regulations do not specify whether it is the landlord or the tenant who should carry out works to bring a commercial property up to the required EPC of E or above. The regulations simply make it unlawful for a landlord to continue to let a commercial property where the EPC rating is substandard (at a F or a G). This would, therefore, suggest that the onus is on the landlord to bring the EPC rating up to at least an E rating, otherwise they will not be able to let, or continue to let, their commercial property.

There has been commentary about the effect this will have in relation to terminal dilapidations claims. Where the landlord would need to carry out additional and/or alternative works in order to continue letting or relet the property, then it is likely that the tenant will argue that they are not required to carry out certain works under the terminal schedule of dilapidations. In particular, tenants would contest the works that the landlord would be required to carry out to bring the property up to EPC standard in order to relet it. For example, if the windows of the property were in a state of disrepair, but they were required to be replaced in order to improve the energy efficiency of the property in any event so as to meet the required standard, the tenant may argue that they are not required to carry out those works as part of the dilapidations works.

Landlords may, therefore, wish to agree for provisions to be inserted in new leases to ensure that any dilapidations works are carried out (or paid for) by the tenant and to make the tenant liable to comply with the MEES regulations. There has been a recent County Court case, Clipper Logistics Plc -v- Scottish Equitable Plc, that has looked at terms such as these. The Judge rejected most of the requested additional terms, but commented:

“I am, though, persuaded that the first part of the proposed clause 3.14.6, which reads “The Tenant shall return the premises to the Landlord with the same EPC rating as it has at the date of this Lease as evidenced by the EPC dated 1 June 2021” ought to be permitted on the basis that its inclusion can be justified on grounds of essential fairness and that it is a fair and reasonable change. Without this clause, the Defendant would, in my judgement, lack any meaningful protection against omissions/inaction by the Claimant which could, during the course of a potential 10-year lease duration, reduce the EPC rating such that the property became sub-standard and in consequence, bring about for the Defendant the significant adverse consequences referenced above”.

Although the Clipper case provides some guidance in relation to terms on a 1954 LTA protected renewal, it is not applicable to terms that can be agreed as a matter of negotiation in relation to a brand new lease. It may, therefore, be possible to insert terms that go above and beyond that which was approved in the above case. It is also important to note that this was a County Court decision and is not binding. It is currently a grey area of law, but it is thought that there will be caselaw that will provide some judicial thinking on the topic.

Should you wish to have further information in relation to this topic, please do contact FSP’s Property Litigation team.