High Court clarifies limits of dilapidations claims where landlords plan sustainability upgrades

The case between Craigard and Westbury Homes centres on a dispute over the replacement of heating, ventilation and air-conditioning (HVAC) system in a two-storey office building in Dartford, Kent, following the expiry of a commercial lease.

Craigard, the landlord, acquired the freehold for premises in 2021, but the lease expired in July 2023. In early 2024, a schedule of dilapidations was served on one of the tenants, Westbury Homes, which had taken out their original lease in 2003 but had subsequently sub-let the office accommodation to multiple sub-tenants since 2007.

The landlord brought a dilapidations claim against this tenant in 2024, alleging that they had failed to comply with their obligations to repair the building’s HVAC system.

The landlord argued that the tenants had not properly maintained the HVAC system meaning that, when the lease expired in 2023, it was already out of repair. The landlord argued that the tenants, as leaseholders, were obliged to replace the HVAC system. In total, the landlord sought to claim around £1.6 million in damages to compensate for the alleged cost of remedial works required to repair the system, as well as to cover rental-related losses and professional fees.

However, the tenants maintained that their responsibility to replace the system fell outside the scope of their lease, and that any potential remedial works were superseded by the landlord’s plans to undertake a broader programme of refurbishment works. 

On 29 September, the High Court issued its judgment, holding that although the HVAC system was out of repair at the time of the lease expiry in 2023, that the landlord had failed to prove that wholesale replacement was necessary to achieve compliance with the repairing covenant.

The court said that where repair or replacement could both reasonably achieve compliance, damages fell to be assessed by reference to the less onerous repair option. The judge ordered the tenants to pay the landlord around 60% less than the amount originally sought.

Ian Morgan, a property dispute resolution expert with Pinsent Masons, said the High Court’s decision would provide useful guidance for future terminal dilapidations claims and, notably, on how to distinguish between works required to remedy a tenant’s breach and works undertaken by a landlord as part of a wider refurbishment or upgrade. “A landlord may have entirely sound commercial reasons for replacing an ageing system or carrying out wider refurbishment works, but that does not necessarily mean that the outgoing tenant must fund the upgrade,” he said. “The tenant is entitled to comply with its covenants in the least onerous way.

In particular, Morgan said the decision offered a novel interpretation of the issue of supersession. causation and the section 18(1) Landlord and Tenant Act 1927 cap. “The court accepted that the landlord would probably have replaced the HVAC system even if the tenant had repaired it but held that this did not extinguish the primary common law claim for the reasonable cost of repair,” he added. “By contrast, consequential losses such as lost rent failed where they would have been incurred anyway as part of the landlord’s refurbishment. The message for landlords is to obtain clear contemporaneous evidence of what minimum remedial works would have been required at lease expiry, rather than relying solely on the specification for a wider refurbishment project.”

The case provides broader lessons for commercial landlords, tenants, investors, asset managers, and advisers dealing with terminal dilapidations claims. Morgan said any landlords of commercial properties contemplating substantial post-lease works should ensure that expert evidence separately addresses the minimum works necessary to remedy the tenant’s breach, even where a more extensive refurbishment may be commercially preferable.

Morgan said the judgment could have potentially significant implications for other similar claims, particularly in light of the growing regulatory shift to improve the energy performance of commercial buildings.

The decision is timely given the current direction of travel on Minimum Energy Efficiency Standards (MEES) in England and Wales. In June, the government published plans to introduce enhanced minimum energy efficiency standards aimed at helping businesses to save energy, reduce costs and reduce overall grid demand. Under the proposals, all private rented non-domestic buildings of more than 1,000 square metres (sq m) would be required to attain the higher standard of energy efficiency of an Energy Performance Certificate (EPC) B by 2031, where possible.

Commenting on the implications of the case for energy performance and energy efficiency obligations associated with commercial properties, Morgan added: “As landlords increasingly undertake capital works to improve EPC ratings and future-proof buildings against tighter energy-efficiency requirements, the judgment underlines the need to distinguish between expenditure necessary to remedy an outgoing tenant’s breach and expenditure driven by regulatory, investment or wider sustainability objectives.”