Empty dilapidated room

Lease termination – The devil in the dilapidations detail

Dilapidations disputes are no new creation.  Yet so often we find that creative arguments advanced by either party cause these disputes to run their course and end up before our Courts – incurring significant cost for both parties which often outweighs the value of the claim.

Careful drafting at the outset and detailed planning at lease exit can help to minimise these disputes.  This was illustrated in the recent case of South Essex Partnership University NHS Foundation Trust -v- Laindon Holdings Limited [2016] EWCA Civ 377 (“the Laindon Holdings case”) which was heard by the Court of Appeal on appeal from the Technology and Construction Court.

Whilst the dilapidations claim on the whole was relatively run of the mill, two issues relating to the carpets and the treatment of ‘on-costs’ (which is not dealt with any further in this note) were the subject of the appeal.

The argument in relation to the carpets arose following fit out works that the Tenant carried out at its expense at the commencement of the lease.  Those works included the replacement of the existing system of tiled carpeting through the property.

Shortly before the expiry of the term, the tenant wrote to the landlord to state that it intended to replace this tiled carpeting with a broadloom carpet of the same colour and specification.  The broadloom carpet was arranged in strips rather than tiles.  The landlord did not respond to this letter and the tenant carried out the re-carpeting at a cost of £38,234 in a bid to comply with its yield up obligations.  So far, so good.

However, after the expiry of the term, the landlord sought to argue that the tenant was in breach of its repairing and yield up obligations in relation to the re-carpeting.  The landlord argued that the original carpet tiles were landlord’s fixtures or fittings and that the tenant therefore had an obligation under the lease to repair or replace these.  It argued that the installation of an alternative carpeting system was neither a repair nor a replacement and as such the tenant was in breach of its repairing obligation.

The tenant argued, to the contrary, that the original carpet tiles were not landlord’s fixtures or fittings at all as they were installed at the tenant’s costs and therefore no repairing obligation arose.  Alternatively, the installation of the broadloom carpeting system was a permitted non-structural alteration and the landlord’s failure to require reinstatement prior to the expiry of the lease meant the tenant was not obliged to reinstate the former carpet system.

The Court found that the carpet tiles were landlord’s fixtures or fittings as they formed part of the property, regardless of who paid for them.  The Court did not have to decide whether they fell to be categorised as fixtures or fittings but obiter suggested they were likely to be fixtures as opposed to fittings as they were glued to the floor.

However, the Court found that the installation of the new carpet system by the tenant was a permitted non-structural alteration.  Therefore, in the absence of a notice to reinstate, the tenant was not obliged to reinstate the pre-existing carpet system and was only to put the alteration into repair.  As the new carpet system was clearly not out of repair the tenant was not in breach.

Hindsight is always 20:20 but the appeal stems largely from the landlord’s failure to serve a reinstatement notice prior to the end of the lease.

Key Considerations

As either landlord or tenant, ensuring you have your ducks in a row prior to lease expiry can greatly increase the chances of a quick dilapidations settlement and avoid costly and time-consuming litigation.  The following checklist can assist:

  • Check what alterations have been carried out at the demised premises and when they were carried out – are they historic or carried out during the current term?
  • If they are historic alterations, check whether they have been expressly carved out of the demised premises or referred to in the tenant’s yielding up and reinstatement obligations. If not, the tenant may not be liable to reinstate those alterations and only obliged to put them into repair.
  • Are there licences for all of the alterations? If not, is the tenant permitted to carry out certain alterations without landlord’s consent?
  • Is the tenant obliged to reinstate any alterations? The tenant may not be liable to reinstate historic alterations (as above).  Carefully check the reinstatement obligations in any Licences to Alter and how they fit with the lease provisions and, in particular, the yielding up obligations.
  • Is reinstatement automatic or only if the landlord gives written notice? If notice has to be given – has it been correctly served and adequate notice given?  In light of the Laindon Holdings case, and where reinstatement is not automatic, landlords should be looking to serve reinstatement notices prior to the expiry of the term even if it is unaware of any tenant alterations.
  • Which items are landlord’s fixtures and fittings or tenant’s fixtures or fittings? This may not be an easy distinction and, as demonstrated by the Laindon Holdings case, can be a source of contention between parties.  However, it is important to get right.  The wrongful removal of property belonging to a landlord can be an expensive mistake for a tenant as highlighted in the case of The Creative Foundation v Dreamland Leisure Ltd and others [2015] EWHC 2556 (Ch), where an external mural attributed to Banksy, which had been removed by the tenant, was held to be a chattel which belonged to the landlord.

For more information, please contact Amy Rudrum or Aaron Macauley in our Property Litigation team.