The recent decision in Craigard (Dartford) Ltd & Anor v Westbury Homes (Holdings) Ltd & Anor provides important guidance on terminal dilapidations claims where a landlord intends to undertake significant refurbishment works following lease expiry, particularly where ESG issues drive the proposed works.
The judgment examines the distinction between repair, improvement and the extent to which a landlord can recover the costs of modernising a building through a dilapidations claim.
Background
The dispute arose following the expiry of a lease of a multi-let office building in Dartford. The landlord brought a dilapidations claim, seeking damages for alleged breaches of the tenant's repairing obligations together with claims for loss of rent and professional fees totalling £1.2m.
The principal issue concerned the building's heating, ventilation and air-conditioning (HVAC) system. The landlord argued that the condition of the system justified complete replacement, whereas the tenant contended that repair was sufficient to satisfy its obligations under the lease.
The court's approach: Repair versus replacement
The court accepted that the HVAC system was in disrepair and had not been properly maintained throughout the term. However, establishing disrepair did not automatically entitle the landlord to recover the cost of installing a new system.
The court reaffirmed the established principle that a tenant is generally entitled to comply with its repairing obligations in the least onerous manner available. Drawing on authorities including Ultraworth and Sunlife, the court emphasised that a repairing covenant does not require a tenant to provide a modern replacement simply because that represents the landlord's preferred commercial solution.
Although the existing system was ageing, inefficient and increasingly unreliable, the court was not satisfied that the landlord had proved that complete replacement was necessary to comply with the repairing covenant. As a result, the landlord could not recover the full replacement costs.
Why the landlord's plans became central
The evidence showed that, well before lease expiry, the landlord intended to undertake a broader refurbishment programme. This included replacing the HVAC system, improving the building's environmental credentials and repositioning the property as a higher-quality office asset. Communications with both occupiers and investors consistently referred to replacing the system rather than repairing it.
The court concluded that the landlord had effectively decided to replace the existing system regardless of whether the tenant complied with its repairing obligations. That finding became significant when considering both causation and the extent of recoverable losses.
Supersession and consequential losses
Against that background, the tenant argued that much of the claimed work had been superseded by the landlord's planned refurbishment.
The court rejected the suggestion that the landlord's intention to replace the HVAC system automatically defeated its dilapidations claim. Although the judge accepted that the system would probably have been replaced even if the tenant had complied with its repairing obligations, the landlord was not left without a remedy.
The court concluded that the landlord could recover the cost of the repairs required to satisfy the covenant by repairing the HVAC unit, but not the greater cost of installing a new replacement system.
However, the landlord's refurbishment plans were highly relevant when considering consequential losses. The claim for loss of rent failed because the evidence showed that those losses would have been incurred in any event whilst carrying out the planned refurbishment works. The losses were therefore not caused by the tenant's breaches and were not recoverable.
A timely reminder in the ESG era
The decision is particularly relevant at a time when landlords are investing heavily in retrofit and energy-efficiency projects and in an age of increasingly hot summers HVAC systems are increasingly strained.
As Laura Ludlow has noted in her article on key changes to EPC and energy efficient standards, increasing focus on EPC ratings, energy performance and future regulatory requirements is encouraging landlords to review older assets and undertake significant upgrade works.
The landlord's approach in Craigard reflected those wider market trends. The proposed works were intended not only to address disrepair but also to improve sustainability credentials and enhance the building's long-term appeal to occupiers and investors.
The judgment demonstrates that, whilst those objectives may be commercially sensible, they do not define the scope of a tenant's liability. Dilapidations claims remain focused on the tenant's contractual obligations and the loss actually caused by any breach.
Key takeaways
The decision highlights three practical points:
Landlords seeking replacement costs must be able to demonstrate why repair would not satisfy the relevant covenant
Planned refurbishment and redevelopment works may significantly affect claims for consequential losses
It is critical to distinguish between works required to remedy disrepair and works intended to improve, modernise or future-proof a building
Conclusion
Craigard is a significant reminder that dilapidations claims remain focused on the condition required by the lease, not the condition a landlord ultimately wishes to achieve through refurbishment or what might be required in the modern market. As landlords increasingly pursue retrofit, ESG and energy-efficiency projects, the distinction between repair and improvement is likely to become an increasingly important battleground. The decision confirms that the cost of transformation cannot automatically be passed on to an outgoing tenant simply because it represents the most commercially attractive solution.
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