Repair or replace? Lessons from a rare dilapidations ruling on HVAC and supersession

The Technology and Construction Court had a relatively rare opportunity in the dilapidations claim of Craigard (Dartford) Limited and Anor v Westbury Homes (Holdings) Limited and Anor to rule upon regularly contentious issues including supersession, Section 18 valuation and the updating of heating, ventilation and air conditioning (HVAC) systems.  HVAC systems in particular can be a frequent battle ground between landlords seeking to ensure their property are energy efficient and attractive to new tenants, and tenants looking to minimise their financial exposure.

HVAC repair v replacement

The landlord served a schedule of dilapidations which claimed c£1.6m in damages, roughly one third of which related to the HVAC system.  The tenant successfully persuaded the Court that it could have adequately complied with its obligations by repairing rather than replacing the system (which was the least onerous method available), cutting this element of loss by c70%.  However, it is worth noting that the judge was less than impressed about the way in which the evidence had been presented and the fact that neither expert had inspected the system before it was removed, an easily overlooked point when the landlord is keen to press ahead with works.

Won’t the replacement works wipe out the landlord’s claim?

Supersession became a key issue given it was apparent from the evidence that the landlord had intended from some time before lease end to replace the HVAC system.  The tenant argued this defeated the landlord’s claim in full, asserting that the landlord’s intent to refurbish meant it had suffered no loss due to the tenant’s failure to repair.  The Court disagreed, stating that a claim would only be lost in full under the second limb of Section 18(1) (if the premises was to be pulled down or structurally altered so to make the repairs worthless) and it was common ground this limb didn’t apply.  The landlord was entitled to recover the costs of repairing the system, but the loss of rent claim for the time needed to repair the system failed as the loss would have been incurred in any event due to the time needed for the replacement works.

Takeaways

• An intent to refurbish does not necessarily reduce a landlord’s claim.
• A tenant is entitled to carry out the cheapest adequate repair, and carefully presented expert evidence will be needed to demonstrate that repair works to plant such as HVAC is not sufficient.  The fact that the system will be dated and inefficient even if repaired is not necessarily relevant to its functionality.
• The point above is also relevant to valuation under Section 18(1) – if the repaired system was adequate then it was unlikely that a hypothetical purchaser would have allowed for replacing the HVAC system.
• If a landlord is planning an ESG led upgrade prompted by concern over EPC ratings and MEES requirements for example, it should anticipate funding the difference between the cost of repairing and replacing the system.

How we can help

Our Property Disputes team advises landlords, tenants and investors on dilapidations claims, lease-end disputes and the impact of refurbishment and ESG-led building upgrades. Find out more about our property disputes expertise and how we help clients achieve practical, commercially focused outcomes.