Hypothetical Tenant Doesn’t Count

When vacating premises at the end of a lease, the maximum amount of the tenant’s liability for dilapidations under the dilapidations clause will be based on the difference in value of the leased property in its repaired and unrepaired states.

In a recent case, a ‘blue-chip’ tenant wished to remain in its premises, but its offers of new lease terms were rejected by its landlord and so it vacated the premises.

The value of the building in good repair exceeded the value in its current state by approximately £120,000. However, the tenant argued that the appropriate calculation should be based on the value of the building with the tenant remaining in the premises as, were the property for sale, it would have made the same offer to remain in the premises as it had made to its landlord. The court accepted the argument that a hypothetical purchaser would have preferred to have accepted the tenant’s offer, as this would have avoided an expensive void period. The tenant would have taken a new lease with the hypothetical purchaser when it bought the property. In this case, the diminution in value of the freehold would have been less than £50,000.

The landlord appealed to the Court of Appeal, which overturned the ruling. The correct valuation was that of the property as the landlord received it from the tenant at the end of the lease. There was no lease in existence then, so the value of such a lease could not be taken into account.

For more advice please contact Clare Magill


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