Case note: Diminution in value defence to terminal dilaps still in the court’s mind

Matthew Farrell summarises a case reaffirming that diminution in value is an available defence to a tenant to a terminal dilapidations claim.

DWF LLP was the sub-tenant of four floors in Dalmore House, Glasgow. Its landlord was Moor Row Limited. Moor Row let Dalmore House from Tarn Crag Limited, the owner of the building.

DWF’s repairing obligations under the sub-lease were materially the same as the repairing obligations owed by Moor Row to Tarn Crag under the head lease.

DWF gave notice to terminate the sub-lease.

Prior to sub-lease expiry, Moor Row served a terminal schedule of dilapidations on DWF. It was, more or less, the same schedule that had been served on Moor Row by the head landlord.

DWF did not carry out any of the works listed in the terminal schedule and Moor Row sued them for £906,294.35. This was the total cost of the works listed in the schedule, plus interest and surveyor’s fees.

The legal basis

The legal basis of Moor Row’s claim was two-fold: (1) £906,294.35 was its loss as that was the amount it would have to pay the head landlord in damages for breach of the repairing obligations under the head lease; and (2) the indemnity clause in the sub-lease applied, which required DWF to indemnify Moor Row against any claim by the head landlord for breaches caused by DWF.

DWF admitted that it was in breach of its repairing obligations in the sub-lease. DWF also accepted that its breaches of those obligations in the sub-lease meant that Moor Row was in breach of its repairing obligations under the head lease.

DWF claimed, however, (1) that the dilapidations had not been carried out and the lease required them to have been completed before the cost of them could be claimed; (2) the head landlord had not prepared a tender, appointed a contractor or agreed a price for the works, let alone carry out the works. As a result, the action was premature. It was also suggested that the head landlord did not intend to do the works at all; and (3) there was no proper claim by the head landlord for the terminal dilaps that triggered the indemnity because the works had not been carried out and the head landlord has no intention of carrying them out.

It should be said that at this point, it was reasonably well known in the market that the building was likely to be redeveloped.

Court decision

In the end, the Court decided against DWF. Properly construed, the lease didn’t require the works to be completed first. The action wasn’t premature as a party can claim for losses before works have been carried out. And the indemnity applied even if the works hadn’t been carried out by the head landlord.

DWF lost the legal debate on all grounds. But curiously, and correctly in our view, the judge, Lady Wolffe, refused to award it £906,294.35 in damages. This is the most important and interesting part of the whole decision.

In Lady Wolffe’s Opinion, it was not clear that the cost of works was the correct measure of the loss suffered by the head landlord, Turn Crag, and therefore the loss suffered by Moor Row. It was entirely possible that the loss would be better measured by some other means, such as diminution in value. Her Ladyship took the parties through the law of measuring losses and diminution in value, and concluded by saying:-

“These issues stray into the territory of the measure of damages, and in respect of which Scots law has remained attractively pragmatic and flexible. this is clear from Duke of Portland…and…Kvaerner Construction v Kirkpatrick & Partners Ltd 1999 SC 291 at pp 300b to 301c. The measure of damages the pursuer adopts in this case is the cost of remedial works. (as is clear from cases like Duke Of Portland, the diminution in capital value might have been another measure of loss.)”

It was clear that Lady Wolffe was affected by the assertion that the head landlord did not intend to carry out the works.

With that in mind, Her Ladyship sent a timely reminder that diminution in value is an available defence to a tenant to a terminal dilapidations claim.