Coldunell v Hotel Management International [2022].
This recently concluded case in the Royal Courts of Justice, regarding a claim for damages of a Listed hotel in Hampton Court, reaffirms a number of standard tests in relation to the ability for a landlord to recover losses. In particular, the tried and tested means of establishing repairing liability and loss are upheld, even when the landlord had undertaken certain works and subsequently sold the property.
Introduction
Coldunell Limited v Hotel Management International Limited (2022) centred around the leasehold obligations for dilapidations, for a prestigious hotel, originally built in 1665 and subsequently extended over the years. The defendant, a hotel operator, had a 20 year lease, handing back the property in 2016.
Substantial defects and lack of maintenance rendered the hotel un-lettable; subsequent repairs and a claim for dilapidations, for almost £1.1m, was served in 2017 after £465,000 worth of essential repairs and partial refurbishment were undertaken by the landlord. The property was subsequently sold in 2020 for £6.95m. Part of the landlord’s claim centred around the loss in sale value because of the extent of disrepair.
Lease covenants
The lease covenants in respect of dilapidations were fairly similar in nature to the standard institutional type; the repair clause required the tenant to well and substantially repair renew cleanse and keep the property in good and substantial repair and condition and to maintain the demised premises. The obligation to maintain the hotel also extended to furniture, furnishings and equipment.
Standard of repair
The first test of the court was to establish repairing liability. It was common ground that the standard of repair was to have regard to the age, character and locality of the premises, to make the property reasonable fit for the occupation of a reasonably minded tenant of the class likely to take them [Proudfoot v Hart]. It was also agreed:
- The covenant to repair did not require the property to be kept in perfect or pristine condition [Riverside v Blackhawk Automotive]
- The defendant was not required to return the premises in the same condition as they were let [Mason v Total Final Elf].
- The covenant did not require the tenant to deliver up the property with new equipment or equipment that had any particular life expectancy, but with equipment kept to a standard to be judged by reference to the condition of the equipment and fittings at the time of letting [Sunlife Europe Properties v Tiger Aspect Holdings].
- The age of the building was of particular importance in ascertaining the required standard of repair, for two particular reasons: A) The standard of repair is that appropriate to the age of the building; time must be taken into account and an old article is not to be made new but making good or protection must be undertaken [Anstruther-Gough-Calthorpe v Mc Oscar]. B) A tenant is not required to bring dated premises up to latter day standards [Pgf II SA v Sun Alliance Insurance].
- Where equipment, fixtures and fittings do need to be replaced by the tenant, they need to be replaced to the same standard as was there at the time the lease was entered into, subject to replacement items meeting modern standards
The standard of repair test was determined mostly by what a reasonably minded hotel operator would require for the premises as would make it reasonably fit for use as a High Class hotel.
Measure of Damages
As a general rule, the measure of damages for breach of a repairing covenant is the reasonable cost of the works required to put the property in the condition it ought to have been in when delivered up, whether those works were undertaken by the landlord or not. This total sum is however subject to the statutory cap under section 18 of the Landlord and Tenant Act 1927 (“the 1927 Act”) which limits the damages to the diminution in value of the landlord’s reversion caused by the breaches [Sunlife Europe Properties Ltd v Tiger Aspect Holdings].
The defendant submitted that the cost of undertaking any of the works is only recoverable if it was proportionate to undertake those works in accordance with the principle in Ruxley Electronics Ltd v Forsyth. In Ruxley, the House of Lords held that the general rule that the cost of reinstatement is the appropriate measure of damages does not apply if the expenditure would be out of all proportion to the benefit to be obtained.
The court determined that it did not matter in the present case, because:
a. None of the costs (be they incurred or not incurred) can be said to be out of all proportion to the benefit to be obtained by undertaking the works
b. The valuation experts agreed that the majority, if not all, the works for which costs had been incurred diminished the value of the reversion by at least as much as the reasonable cost of those works
c. Insofar as the claim is for costs not incurred, it is already limited to the diminution in value of the Property as a result of the breach of covenant
The evidence
During questioning, the claimant’s valuer made clear that not all breaches of the covenants would impact the price a hypothetical purchaser would be willing to pay. His views included a belief that a hypothetical purchaser would replace all the bathrooms in any event. Accordingly, the Claimant was subsequently unable to pursue any claim in relation to the condition of the ensuite and other bathroom facilities, which facilitated a reduction to the claim of £298,000 plus associated costs and fees.
The Parties put the key aspects in respect of which it was alleged that the Property failed to meet the requirements of the Lease covenants into two distinct groups:
(i) Items in relation to which the Claimant had undertaken repair and remedial works and incurred costs totalling almost £430,000 (referred to as “Incurred costs”). These items included new boilers, external redecoration, window repairs, brick and stone repairs and scaffolding.
(ii) Items which the Claimant had not remedied prior to selling the Hotel in 2020 (referred to as “Costs not incurred”) totalling almost £271,000. These costs included the provision of new carpets, replacement furniture and internal redecorations.
It was reconfirmed in this case that the measure of damages falls to be assessed by reference to the date when the Lease expired which has nothing to do with a sale that was not contemplated at the time and did not take place until some 3½ years later.
After debate about the extent of carpet that was out of repair, it was agreed that the majority of the carpet was in need of replacement. It was determined that not all the furniture items claimed were valid.
Deductions were made with regard to internal redecorations on the basis that a little over a third of the decorations would have an impact on value. In total, the non-incurred costs were subsequently calculated at £168,267, representing a 38% reduction to the claim for non-incurred costs.
The statutory cap
Incurred costs, reflective of reasonable works required to put the property into repair, are not subject to the statutory cap. Part of the overall valuation process is to make an allowance, or deduction, for works which are required as a result of any breach of the terms of the Lease and which in the opinion of the valuer impact the price that would be paid for the property on a sale. It was agreed that certain elements of the remedial works undertaken by the landlord would impact the value of the reversion in the amount of the reasonable costs required to remedy those issues. Those cost elements were the costs for the new boilers, window repairs, external decorations, scaffolding and contactor’s preliminaries and administration.
The issue between the valuers for either side was therefore limited to (i) whether the general repairs; and (ii) the Non-Incurred Cost Items (i.e. the carpets, furniture and internal decoration) would have an effect on value. The claimant’s valuer prepared two valuations, a valuation of the Property out of repair and one in repair considering in each case what effect the condition of the Property would have on the hypothetical purchaser, including an assumption that the hypothetical purchaser would spend £290,000 renovating the bathrooms. This method of valuation was accepted by the Court. The difference between both valuations was £1,302,000, a sum that was much greater than the repair and remedial costs claimed by the Claimant to put the Property into the condition it ought to have been in, assuming the Defendant had complied with the terms of the Lease. The statutory cap therefore did not reduce the claimed sum.
Accordingly, the court determined that the Claimant was entitled to the following by way of loss and damage for the Claimant’s breaches of covenant:
(i) Incurred costs in the sum of £428,850 (92% of the landlord’s actual expenditure)
(ii) Non-incurred costs in the sum of £168,267; and
(iii) Scott Schedule and Quantity Surveyor costs in the sum of £7,000.
A total of £597,117 was deemed to represent the level of damages due, excluding costs.
Signature Surveyors Limited
18 November 2022