England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL CROYDON COUNTY COURT
(HIS HONOUR DEPUTY DISTRICT CIRCUIT JUDGE LAURIE)

		Royal Courts of Justice Strand, London, WC2A 2LL
		July 6th 2007

Lord Justice Lawrence Collins:

1. In this case Lyndendown Limited ("Lyndendown"), the freeholder of two industrial units in Northampton, sued its former tenant, Vitamol Limited ("Vitamol") for failure to deliver up the premises at the end of the term of the lease in accordance with repairing covenants. At the time the headlease expired a sub-lessee from Vitamol, Pacific Industrial Limited ("Pacific"), was in occupation of the premises and Pacific held over under Part II of the Landlord and Tenant Act 1954 on the terms of the sub-lease with the head lessor, Lyndendown.
2. By section 18(1) of the Landlord and Tenant Act 1927:

"Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid…"

3. The fact that the premises are occupied by sub-tenants under tenancies to which Part II of the Landlord and Tenant Act 1954 applies must be taken into account in assessing the damage to the reversion. The sub-tenant will become the direct tenant of the landlord on expiry of the head tenancy (1954 Act, section 65). The landlord will therefore become entitled to the benefit of any obligations to repair in the sub-tenancy. The sub-tenant will become entitled to a new tenancy under the 1954 Act and the new lease will prima facie be on the same terms (including repairing covenants) as the existing tenancy and the rent will be fixed by the court without taking account of any disrepair which is attributable to the sub-tenant's breaches of the repairing covenants in the current tenancy -- see Dowding & Reynolds, Dilapidations 3^rd Edition [2004] page 666.
4. In Family Management v Gray [1980] 1 EGLR 46, the premises were let to sub-tenants under full repairing leases and the disrepair which was the subject of the landlord's action against the head tenant was due to breaches by the sub-tenants of their repairing obligations, who had by the term date of the head lease applied for new tenancies under the 1954 Act. It was held that there was no difference between the rental value of the properties in repair and their value out of repair, because the reversion had to be valued subject to the rights of the sub-tenants to renew, and they could not, when renewing, pray in aid their own breaches of covenant in order to reduce the rent (see also Crown Estate Commissioners v Town Investments Limited QB (Official Referees Business) Barry Green QC [1992] 1 EGLR 61). According to Dowding and Reynolds, page 668, whether there is damage to the reversion is a question of evidence and the position may be different: for example, where the new tenants may not be good for the cost of repairs. The relevant date for assessing damages is the term date of the lease (see Jacquin v Holland [1960] 1 WLR 528 at 563 per Ormerod LJ) but subsequent events which were operative or potential at the term date may throw light on the value of the reversion at the term date (see Smiley v Townshend [1950] 2 KB 320; Family Management v Gray at page 48).
5. This is an appeal with the permission of Arden LJ from the decision of HHJ Laurie sitting at Bromley County Court on a preliminary issue, in which he decided that there had been no substantial damage to the reversion.
6. The background is that Lyndendown is the freehold reversioner of the two industrial units, 10 and 11 Tyne Road, Weedon Industrial Estate, Northampton.
7. By leases dated 23 April 1991, it let the units to Vitamol, which is a subsidiary of British Vita Plc ("BVP"). Each lease was for a term commencing 23 April 1991 and expiring on 31 January 2002. Vitamol occupied the units for the purpose of its business and, accordingly, Part II of the 1954 Act applied. The leases contained standard covenants which included delivery up covenants and covenants to pay the landlord's costs in relation to schedules of dilapidations and so on. They also contained alienation provisions which permitted with the landlord's prior written consent (not to be unreasonably withheld) assignment or subletting of the whole. It is claimed that Vitamol failed to carry out the repairs.
8. By a Licence to Underlet dated 22 December 1999 between Lyndendown, Vitamol and Pacific, Lyndendown granted Vitamol a licence to sublet the premises to Pacific on terms of a sub-lease which was annexed to the Licence. It was a sub-lease of both units expiring on 30 January 2002. Under the Licence Pacific covenanted with Lyndendown that it would observe and perform all the covenants contained in the head leases. It provided also that if the subletting were not implemented within six months of the date of the Licence, the Licence would become void. In fact, the subletting permitted by the Licence was not in fact granted within the six months but Pacific remained in occupation. Lyndendown threatened forfeiture proceedings and on 26 April 2001 Pacific executed the sub-lease. It was for a term from 1 May 1999 to 30 January 2002.
9. On 30 April 1999, that is before the date of the Licence, Vitamol's parent company, BVP, had written to Pacific in the following terms (in a document to which I shall subsequently refer as "the Letter"):

"In consideration of your having today entered into a sale and purchase agreement ("the Agreement") with this company's subsidiary, Vitamol Limited, relating to its PEC Plastics business, we hereby undertake to you that your obligation to repair the Property is only to keep it wind and water tight regardless of any conflicting or contrary provision contained in the under lease of the Property or in the landlord's licence to underlet and if the landlord requires repairs in excess of an obligation to keep the Property wind and water tight such repairs will be at our expense. [Signed by BVP]"

10. It is common ground that the letter was not disclosed to Lyndendown at any stage prior to the Licence, nor even before the commencement of these proceedings. Pacific supplied it in the course of it surrendering its continuation tenancy to Lyndendown. Nothing now turns on whether the letter should have been disclosed earlier.
11. By the time that the head lease expired on 31 January 2002, Pacific was in occupation of both units for the purposes of its business and therefore it held over under Part II of the 1954 Act on the terms of the sub-lease with Lyndendown as its effective landlord. In 2003 Pacific surrendered its continuation tenancy and Lyndendown let the unit to Slotseal Extrusions Limited.
12. I turn to these proceedings. By its Particulars of Claim dated 26 February 2002, Lyndendown asserted that when the head lease expired on 31 January 2002, Vitamol failed to deliver up possession in accordance with the relevant repairing covenants, and Lyndendown served two Schedules of Dilapidations on Vitamol. The Particulars of Claim asserted that, by reason of breach of covenant, Lyndendown had suffered loss and damage and the value of its reversion had been diminished by an amount equal to the cost of repairing the units in accordance with the covenants.
13. By its defence Vitamol denied that it had failed "to deliver up possession in the manner contended for". It also denied that the Schedules accurately recorded the defects in the premises or that they fell within the repairing obligations. Vitamol also denied that the value of the reversion had been diminished, whether by reason of any breach of covenant on its part or otherwise. It also asserted that if the value of the reversion had been diminished, it was by less than the cost of the remedial work required.
14. By letter in September 2003 Vitamol's solicitors, relying on the cases to which I have referred (Family Management v Gray and Crown Estates Commissioners v Town Investments) suggested that as Pacific was in occupation at the determination of the head lease, with a full repairing covenant, the hypothetical purchaser would have regard to that and therefore there was no diminution in the value of the reversion.
15. Following this correspondence an application was made for the determination of a preliminary issue and an order to that effect was made in February 2004. The preliminary issue was whether Lyndendown was entitled to "substantial damages" as a result of any breaches by Vitamol of the repairing and delivery up covenants contained in the leases. It was this preliminary issue which is the subject of this appeal.
16. Before the judge each side called experts. Lyndendown's expert was Mr Conn. He was asked to value the freehold reversion as at 31 January 2002 on three different bases. First, assuming that all Vitamol's repairing covenants had been complied with and that the reversion was subject to a continuation tenancy in favour of Pacific on the terms of the sub-leases to Pacific but disregarding the Letter; secondly, the same as one but on the assumption that the premises were in the condition contended for by Vitamol; and third, on the assumption that the premises were in the condition contended for by Vitamol and that the reversion was subject to a continuation tenancy in favour of Pacific, but on this occasion having regard to the existence of the Letter. On the first basis the reversion was valued at £650,000, on the second at £565,000 and on the third basis at £508,500. It is the third basis which is relevant for present purposes.
17. The starting point of his valuation was ten years' purchase applied to the rent of £65,000 per annum, and he then deducted £85,000 for the dilapidations and in addition deducted 10% for what he described as a "purchaser's contingency to reflect the uncertainty regarding repairs liability deriving from" it, then he referred to the Letter, and that was the 10%, making a total of £56,500 for this contingency. He described the 10% margin adopted as his best judgment of the market's reaction to the uncertainty inherent in these circumstances. He also said in his report that he did not believe that it was for him as a valuer to make a judgment on the basis in law as to whether the Letter relieved any party nor its relevance to Vitamol's obligations.
18. Vitamol's expert was Mr Lidgley. His report stated that in his opinion a purchaser would take the view that the obligations to repair had effectively passed to Pacific, and the landlord would then have been able to enforce the obligations against Pacific under the terms of the relevant sub-lease. He went on to say that the existence of the Letter was a private matter. The primary repairing obligation had been transferred to Pacific and did not affect the ability of a landlord to pursue a claim against Pacific on the basis of the sub-lease or the terms of the licence to sublet. A purchaser of the landlord's interests would acquire the right to pursue a claim against Pacific and the existence of the Letter could be considered a benefit to the landlord as in effect it involved BVP in underwriting Pacific's obligations to the landlord.
19. The judge's judgment can be summarised as follows: the key question was whether the Letter was a matter which adversely affected the value of the reversion on 31 January 2002. The judge preferred the evidence of Mr Lidgley and concluded that the existence of the Letter will have been unlikely to have affected the value of the reversion adversely. He accepted that the Letter gave rise to some uncertainties, in particular with regard to the scope and duration of the indemnity.
20. He agreed with Mr Lidgley that from a practical point of view it could be seen as an advantage since Pacific could pass on the expense and would be more amenable to tackling the repairs. He agreed with Mr Lidgley that the Letter was a private matter between Pacific and BVP. Because the Letter had been obtained, Pacific was prepared to commit itself to its repairing covenants in the licence and sub-lease eventually. Any businessman would understand that and the Letter could not possibly be read as reflecting adversely on the willingness or ability of Pacific to comply with its covenants. Quite the contrary, said the judge, if anything.
21. The passage in the Letter dividing the proposed obligations to repair was clear in context. Between themselves BVP and Pacific were agreeing the division of labour in anticipation that Vitamol and Pacific would both be liable. It was a private matter between BVP and Pacific and that should not be any business of the landlord, who did not reserve any rights to dictate who would carry out covenanted works. For clear commercial reasons it was evident that the meaning and intent was that the division of labour was personal to the two companies and that the landlord and other successors in title would not be affected. Lyndendown's rights under the proposed licence and sub-lease could not be prejudiced and it was not intended to prejudice its rights in any way. A purchaser would not be in any doubt about that.
22. On this appeal Lyndendown says that the true construction of the Letter is far from clear. It is unclear whether as between Pacific and BVP Pacific's only obligation to do works was limited to keeping the premises, wind and water-tight, but with the obligation that to do all other works was BVP's. It is unclear whether, insofar as works in excess of keeping the premises wind and water-tight were required, Pacific was, as between it and BVP, obliged to do the works, or whether in fact BVP was undertaking to do the works itself. Furthermore, even if Pacific was agreeing to do all the works, it is unclear whether Pacific was to pay for them in advance of the works being done or after completion of the works. There is also a substantial question as to whether the agreement was to last until the end of the sub-lease or the continuation tenancy under Part II of the 1954 Act or indeed for any new tenancy granted under Part II.
23. The judge was correct to accept that the Letter created uncertainties, but was wrong then to find that the Letter gave Lyndendown a benefit or some form of guarantee. Mr Lidgley accepted in cross-examination that had he been advising Lyndendown at the time of the licence to sublet and had he known of the Letter, he would have advised that Lyndendown should take a guarantee from BVP or that the sub-lease be contracted out of Part II of the 1954 Act. That admission demonstrated the falsity of Vitamol's suggestion that the Letter was a benefit to Lyndendown.
24. The judge rejected a submission that the Letter could not have been a benefit in the face of this evidence. He rejected it on the basis that Lyndendown's counsel did not ask Mr Lidgley why he would have given that advice. In fact, the reason why Mr Lidgley would have given that advice was put to him by Lyndendown's counsel and Mr Lidgley agreed with it. He would have given that advice precisely because if the lease had been contracted out or if there had been no guarantee at the end of the term, Vitamol could have pointed to the full repairing covenant of the sub-lease and said that Pacific, as a continuing tenant under Part II of the 1954 Act, was liable under full repairing covenants and therefore there was no diminution in the value of the reversion.
25. If a competent surveyor, knowing of the Letter would have advised a freeholder not to have permitted a subletting without more, then the existence of the Letter represented an impediment to the landlord's interest. The judge did not deal, in his judgment, with the part of Mr Lidgley's cross-examination in which the scenario was put to Mr Lidgley of two adjoining sites, exactly the same as Units 10 and 11 but with one not subject to the Letter. Lyndendown criticises his answer, which was that it would not have made any difference. It says that the evidence made no sense and did not sit comfortably with the evidence he gave earlier to the effect that any uncertainty has an effect on value.
26. I come to my conclusions. A number of matters canvassed in the judgment are no longer in issue, in particular whether the Letter should have been disclosed to Lyndendown. That issue does not arise since the case has proceeded, and in particular the expert evidence has proceeded, as if the Letter were known to relevant parties in January 2002. It is common ground that unless the Letter could be said to alter the position, any damage to the reversion was nil or nominal because, as at the date the leases fell in on 31 January 2002, Pacific was in occupation holding under a sub-lease to which Part II of the 1954 Act containing the same or similar repairing covenants which Lyndendown could enforce directly by virtue of section 65(2) of the 1954 Act. The judge determined that the Letter would have no adverse impact on the value of the reversion, firstly, because he construed it as an indemnity to Pacific and, secondly, because he preferred the expert evidence of Mr Lidgley to that of Mr Conn. It was accepted by Mr Levy in his elegant and concise submissions that he had an uphill struggle to persuade this court to overturn the judge's findings of fact and his assessment of the experts. It was not seriously suggested that this court could substitute its own findings and assessment, and consequently if the appeal was successful there would have to be a retrial in a case in which the amount in dispute is well under £100,000.
27. As I have said, the judge preferred the evidence of Mr Lidgley over that of Mr Conn. In particular, the judge said: First, Mr Conn's opinion was that purchasers would think there was or might be a problem if they saw the Letter, but that was not good enough, since businessmen did not negotiate with their heads in the sand; second, Mr Lidgley put it very well in saying that the Letter would have very little effect on the value, if any, no material difference; third, there were other aspects of Mr Conn's evidence which undermined the confidence the judge could have in his assessment. In particular he did not apparently consider, much less take into account, that insofar as the Letter contained an indemnity it was an advantage to the reversion; fourth, Mr Conn did not explain what sort of three-party litigation which might be feared would be complex or worry potential purchasers, and his scenario was unrealistic; fifth, Mr Conn had no actual experience of the unusual nature of the task he was being asked to speak to and had no historical knowledge or experience to back up his figure of 10%. It was a guess based on or informed by general experience of the market; sixth, Mr Lidgley was in the same position but he gave reasons which were more comprehensive, accurate and sensible, and the judge preferred his evidence.
28. I consider that the judge was fully entitled to accept the evidence of Mr Lidgley over Mr Conn and to conclude that the Letter did not adversely affect the value of the reversion. In particular he was plainly right to find that the existence of the arrangement between BVP and Pacific could have no effect on Pacific's obligations to repair under the sub-lease. Whether or not the Letter was of benefit to Lyndendown (because it could be seen as encouraging Pacific to carry out works at the expense of a plc), it was, as the judge said, at worst neutral. Although in evidence Mr Lidgley accepted that there was a degree of uncertainty in the Letter, and that there was a potential for fall out between Pacific and BVP, his evidence was that he did not think it was a significant risk and that a reasonable purchaser would not worry about the additional uncertainty of the Letter; in particular for a property of this kind, a purchaser would accept a much higher degree of risk. He firmly disagreed with a suggestion that a prospective purchaser would want the site without the taint of the Letter.
29. I do not consider that the judge was wrong to take little account of Mr Lidgley's evidence that had he been advising Lyndendown at the time of the licence to sublet, and had he known of the Letter, he would have advised that Lyndendown take a guarantee from BVP or that the sub-lease be contracted out of Part II of the 1954 Act. The judge was entitled to infer that it would have been because, having seen that BVP was prepared to indemnify Pacific, any surveyor would have advised Lyndendown to try and take advantage of the commercial situation and seek a direct guarantee itself. In 1999 when the hypothetical advice would have been given, Pacific would not have been bound into the sub-lease, but the position was quite different by 2001 and 2002. It was open to the judge to find: "It is one thing to advise a landlord asked to grant a licence to sublet, it is quite another to assess what a willing seller and purchaser might do and the enquiries they might make when there is a tenant in occupation with a right to renew".
30. I see no grounds for disturbing the judge's findings of fact and his assessment of the experts and I would therefore dismiss the appeal.

Lord Justice Jacob:

31. I agree.

Lady Justice Smith:

32. I also agree. I should perhaps mention just for the avoidance of doubt that ground 9 relating to costs was not pursued before us because the parties have reached agreement on it.
33. The outcome is that the appeal is dismissed.

Order: Appeal dismissed.