Why obtaining early dilapidations advice could be crucial, particularly when exercising a break.

Why obtaining early dilapidations advice could be crucial, particularly when exercising a break.

Office Depot International (UK) Limited v UBS Asset Management (UK) Limited & others [2018] EWHC 1494 (TCC)

This decision may close down one of the potential options available to tenants who are unsure of their lease ‘dilapidations’ obligations and want clarity before committing to a programme of remedial works.
The tenant of a large warehouse in Manchester brought a claim against its landlord for a declaration as to whether any works were required to put the roof into repair and if so, what those works were.

The warehouse was constructed pursuant to a design and build contract between the freehold owner and Amec Developments Limited. Following practical completion of the warehouse, a lease was granted to the claimant in 2005 for a term of 20 years. From the outset, the roof leaked and it continued to do so notwithstanding patch repairs. In 2010, the landlord made a claim against Amec alleging defects in the design and construction of the warehouse and that claim was settled by payment of a sum of money to the landlord.

Although the tenant was subject to a full repairing covenant in respect of the roof, the landlord did not seek to enforce that covenant against the tenant. Were it to do so, the tenant would seek to pass on the claim under the collateral warranties given to it by Amec when the lease was granted and Amec would then seek an indemnity from the landlord under the terms of the settlement agreement in respect of the landlord’s claim against Amec. The tenant wished to claim on its collateral warranties in any event and wanted to know what it was obliged to do to put the roof into repair under the lease whilst the warranties were still enforceable (before the expiry of the relevant limitation periods). Accordingly, the tenant issued this claim seeking a declaration which would bind the landlord and the contractors, as to whether it was obliged to put the roof of the warehouse into repair and if so, by what means. The tenant also claimed damages against the contractors in respect of the cost of such works as the court found were required.

The landlord applied to strike out the claim against it on the ground that it is not open to a tenant to adopt a position of neutrality where the landlord is not seeking to enforce the repairing covenant, and to leave it to the court to decide whether there is a breach and if so what is required to remedy it. Moreover, the tenant’s claim for a declaration, in advance of works being carried out, that a particular scheme of works would satisfy its obligations under the lease with regard to the defects to the roof was misconceived because in covenanting to keep the roof in repair, the tenant takes the risk of a particular scheme of work not being satisfactory once carried out and the relief sought by the tenant would shift that risk to the landlord. O’Farrell J. accepted these arguments and concluded that the tenant’s claim did not raise any dispute as to the remedial works required to be carried out because the tenant did not advance a positive case. It would be inappropriate for the court to conduct an inquisitorial inquiry as to the most appropriate scheme of works rather than deciding between the competing positions adopted by the parties. O’Farrell J. rejected the argument that the relief sought by the tenant was akin to a declaration sought by trustees in respect of the administration of a trust (where the court, in effect, accepts responsibility for the administration of the trust).

The court refused to give the declaration applied for by the tenant on four grounds:

  1. Despite the tenant’s arguments to the contrary, there was in fact no dispute as to the scope of remedial works required because the choice of works required to maintain the property was a matter for the tenant. It is not open to the tenant to require the landlord to identify or agree any particular scheme in satisfaction of the dilapidations covenants.
  2. The tenant did not put forward a positive case as to what was required to be done and it was not, in this instance, for the court to assume responsibility for how the contract should be performed.
  3. It would not be appropriate for the court to carry out an ‘inquisitorial process’ to identify the scope of works required because court did not have the benefit of the adversarial trial process and the dilapidations claim had not crystallised. The tenant only put forward neutral expert schemes - it did not assert which position it was adopting of those schemes put forward.
  4. The court confirmed that it could of course determine whether works that had been carried out in fact achieved a requisite state of repair, in the event of a dispute, but it could not supervise a tenant’s performance of its covenant.

Expert Opinion

"In a dilapidations context, it is perhaps rare that a tenant would apply to the court for clarity as to the required remedial works prior to having carried those works and before lease expiry. Certainly this case demonstrates the significant hurdles a tenant would have to overcome if it did seek clarity from the court in those circumstances.

"The more common (and far cheaper) approach a well-advised tenant would normally take would be to undertake the works it believes will discharge its obligations prior to lease expiry and/or alternatively make a well-pitched offer to the landlord to try and cover off the cost risk of a potential terminal dilapidations claim.

"However, applying for declaratory relief is often seen as a possible route for tenants in the context of break options, particularly where there are onerous pre-conditions relating to compliance with the dilapidations covenants. The commercial advantage of knowing in advance what works need to be done in those circumstances are obvious - the holding costs of a continuing lease where a break failed can be substantial. It is in this scenario where this case becomes particularly instructive.

"As a minimum, a well-advised tenant looking for that clarity would be prudent to have fixed its intention on the works which it believes are necessary to perform its obligations before coming to the court; better still, if there is any uncertainty as to precisely how those works will be undertaken (which there may well be) it could be necessary to have actually completed those works. If the landlord challenges that position then at least there is a genuine dispute which the court can interrogate through the adversarial trial process and it avoids the need for the court to supervise the tenant’s performance of its covenants.
"Given the likely need to have undertaken the works prior to coming to court (and the time needed to both bring the matter to court and undertake further works prior to the break date if ordered by the court), this case further highlights the importance for tenants to obtain early advice on dilapidations, particularly if those works are to be carried out in compliance with uncertain break conditions.

"If the break is conditional, we suggest obtaining advice at least 18-24 months before the break date. If professional advice is obtained late, a tenant risks limiting its potential options and ultimately increasing the risk of a failed break."