Dilapidations vs Improvements

An influx of lease expiries is on the horizon as 25 year leases granted in the late 1980s followed by short term extensions (to delay relocations during the financial crisis) come to an end. There will consequently be a spike in terminal dilapidations claims. Landlords may attempt to use terminal dilapidations claims to recover the cost of improving their properties to current standards but will they succeed?

The recent High Court decision in Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited and Tiger Television Limited [2013] EWHC 463 (TCC) summarised the legal principles surrounding dilapidations claims involving improvements. These principles, set out below, appear to make it difficult for landlords to recover the cost of improvements as part of a dilapidations claim:

A tenant is entitled to perform its covenants in the manner that is least onerous. A tenant is obliged to return the premises in good and tenantable condition with any M&E systems in satisfactory working order. It is not required to deliver up the premises with new equipment or with equipment that has any particular remaining life expectancy. The standard of repair is to be judged by reference to the condition of the equipment and fittings at the start of the lease not the condition which would be expected of an equivalent building at the expiry of the lease. However, if more extensive work is carried out than would have been necessary to simply remedy the tenant's breach, the landlord should be able to recover the element of the costs required to remedy the breach. Where there are covenants against alterations, the tenant is not entitled, let alone obliged, to deliver up the premises in a condition that involved material alteration. Where market conditions at the expiry of a lease dictate that a property requires upgrading or refurbishment in order to attract appropriate tenants, an outgoing tenant in breach of a repairing covenant cannot be held liable for the costs of remedying the breach if that work would be rendered unnecessary in view of the upgrading or refurbishment of the premises i.e. supersession. Nevertheless, Sunlife did provide landlords with some hope of recovering the cost of improvements. Tenants are only required to replace items in disrepair on a like for like or...