Legal Expert Highlights Why Early Advice Is So Important

Office Depot International (UK) Limited v UBS Asset Management (UK) Limited & others [2018] EWHC 1494 (TCC) will be of interest to dilapidations professionals and their clients.

On the face of it at least, the decision may close down one of the potential options available to tenants who are unsure of their lease ‘dilapidations’ obligations and want clarity before committing to a programme of remedial works.  It also highlights why obtaining early dilapidations advice could be crucial, particularly when exercising a break.

In Office Depot the tenant entered into a 20 year lease of a new building in 2005.  In advance of lease expiry therefore (and due to certain limitation issues arising from collateral warranties from the building contractor) the tenant sought from the court a declaration as to what works, if any, it needed to carry out to put the property in a compliant state.

Importantly it was common ground that the tenant was obliged to keep the property in repair – there was no dispute as to the meaning of the covenant.

The court refused to give the declaration applied for by the tenant on four grounds:

1. Despite the tenant’s arguments to the contrary, there was in fact no dispute as to the scope of remedial works required because the choice of works required to maintain the property was a matter for the tenant. It is not open to the tenant to require the landlord to identify or agree any particular scheme in satisfaction of the dilapidations covenants.
2. The tenant did not put forward a positive case as to what was required to be done and it was not, in this instance, for the court to assume responsibility for how the contract should be performed.
3. It would not be appropriate for the court to carry out an ‘inquisitorial process’ to identify the scope of works required because court did not have the benefit of the adversarial trial process and the dilapidations claim had not crystallised.  The tenant only put forward neutral expert schemes - it did not assert which position it was adopting of those schemes put forward.
4. The court confirmed that it could of course determine whether works that had been carried out in fact achieved a requisite state of repair, in the event of a dispute, but it could not supervise a tenant’s performance of its covenant.

Expert Opinion

"In a dilapidations context, it is perhaps rare that a tenant would apply to the court for clarity as to the required remedial works prior to having carried those works and before lease expiry. Certainly this case demonstrates the significant hurdles a tenant would have to overcome if it did seek clarity from the court in those circumstances.

"The more common (and far cheaper) approach a well-advised tenant would normally take would be to undertake the works it believes will discharge its obligations prior to lease expiry and/or alternatively make a well-pitched offer to the landlord to try and cover off the cost risk of a potential terminal dilapidations claim.

"However, applying for declaratory relief is often seen as a possible route for tenants in the context of break options, particularly where there are onerous pre-conditions relating to compliance with the dilapidations covenants. The commercial advantage of knowing in advance what works need to be done in those circumstances are obvious - the holding costs of a continuing lease where a break failed can be substantial. It is in this scenario where this case becomes particularly instructive.

"As a minimum, a well-advised tenant looking for that clarity would be prudent to have fixed its intention on the works which it believes are necessary to perform its obligations before coming to the court; better still, if there is any uncertainty as to precisely how those works will be undertaken (which there may well be) it could be necessary to have actually completed those works. If the landlord challenges that position then at least there is a genuine dispute which the court can interrogate through the adversarial trial process and it avoids the need for the court to supervise the tenant’s performance of its covenants.

"Given the likely need to have undertaken the works prior to coming to court (and the time needed to both bring the matter to court and undertake further works prior to the break date if ordered by the court), this case further highlights the importance for tenants to obtain early advice on dilapidations, particularly if those works are to be carried out in compliance with uncertain break conditions.

"If the break is conditional, we suggest obtaining advice at least 18-24 months before the break date. If professional advice is obtained late, a tenant risks limiting its potential options and ultimately increasing the risk of a failed break."
Tim Rayner - Partner