An Attractive Run Down Flat?

Picture the scenario - you find a flat in need of a face lift. It is one of a number of flats within a building, which itself requires a face lift too. The flat is a leasehold property. You are satisfied that the asking price is suppressed beyond the already discounted prices reflected in today’s economic climate. A bargain?

You plan to buy the flat, refurbish it and either sell it straight on making a quick profit or rent it out. In either instance you need the building refurbished to maximise your return.

You decide to proceed with the purchase. You have the funds required to purchase the flat and further cash reserves to refurbish it. In the conveyancing process your conveyancer informs you of what the physical definition of ‘the flat’ is. You therefore know what you are responsible to look after and what your landlord is responsible for. Your conveyancer informs you of what percentage share of the landlord’s service charge (which will include costs of repairing) you would be liable for. You know who your landlord is. Unless you specifically asked your conveyancer to find out, you would not know who the other owners of the other leasehold flats are. You complete the purchase. You commence and control the refurbishment of the flat. Your attentions turn to making the landlord refurbish the building.

This is when you may hit the problem. You find out that your landlord is not complying with the responsibilities of repairing and maintaining the building. This may be because he has not got the money to outlay, or your landlord is also the occupational owner of a number of other flats in the building such that it would have to meet the lions share of service charge demands to pay for the refurbishment. What can you do to maximise the return of your investment?

It is standard form for a landlords repairing covenant in a residential lease to contain a clause using wording similar to:

‘The Landlord covenants with the Tenant that subject to the Tenant paying the maintenance contribution ... the Landlord will maintain repair keep the Building in repair’

On a literal reading of a clause as this, if the tenants do not pay the landlord service charges the landlord is not under an obligation to repair. But in the case of Yorkbrook Investments v Batten the Court of Appeal held that the landlord’s obligation to repair was not conditional on the tenants paying the service charges, ie the landlord’s covenant did not create a condition precedent.

There is the possibility that a clause containing the landlord’s covenant is sufficiently different such that the authority of Yorkbrook can be distinguished and therefore not applied in other cases. However Yorkbrook has stood for over 25 years and remains binding on the County Court.

Whilst it is common, as set out above, that landlords repairing covenants are expressed to be dependant upon the tenants paying the service charges, it is also common for tenants to stop paying service charges where landlords do not adhere to their obligations. It is therefore important that the principle is clear.

So what can a tenant do to enforce its landlord to meet it obligations? The simple answer is to threaten litigation. Of course should the threat not work alone then the tenant may have to see that threat through.

A claim for housing disrepair is a claim in contract by a tenant for damages due following the landlord’s failure to comply with its contractual repairing obligations. There may be other claims that flow from the same circumstances and facts, such as a claim in nuisance (loosely, the unlawful interference with your use and enjoyment of property). Damages in nuisance claims would need to be assessed separately and in addition to the contractual damages.

Damages in contract are to restore the wronged party to the position that they would have been but for the breach of contract. The measure of damage for such a breach is the difference in value between the property being in the condition of disrepair and the property being in the condition in which it should be in if the landlord being on notice had fulfilled his obligation to repair. This difference in value will be applied for the period of disrepair. What does this mean financially?

The writer submits that the Court of Appeal case of Earle v Charalambous is the leading case of the measure of damages for "disrepair".

In the case a tenant, of a top floor flat, sued their landlord for serious disrepair, which related mostly to the roof. The tenant argued that damages of difference in value, referred to above, should be calculated by a "rental reduction". However the rent pursuant to the lease was only a small ground rent. The tenant argued that when considering the rental reduction method the court should apply the open market rental value of the property. The landlord argued that the court should restrict damages by reference to a "tariff", based from cases earlier than Earle. The court accepted the tenant’s argument.

The landlord did appeal against the judgment but was only successful in part. The award of damages was reduced, however the rental value on the open market remains the means of calculating damages.

It is submitted that this principle is sensible as it will also account for the upmarket property as well as the more humble dwelling. In either instance, one simply applies the open market rent as the starting point.

Most disrepair cases are settled without the need for a trial. There can be many reasons why a matter does not reach trial, but perhaps the key consideration for the majority of parties within litigation is the risk of costs. A litigant is best protected by making sensible offers of settlement at the outset, which in turn affords protection against costs at a later stage.

So, returning to our scenario, the investor will have a fairly large stick to beat the landlord with to ensure it meets its repairing obligation. With momentum initiated by the investor, the landlord may also face a number of similar claims from other tenants within the building which can only add pressure of the landlord.

The process is not likely to be quick though and the investor must consider this when calculating whether the purchase is ‘the bargain’ it first appeared to be. Firstly, today litigation takes many months to run its course. Will public sector cut backs and numerous courts closing effect the timescales? Secondly, even if the landlord accepts its responsibilities (whether that is before or after litigation) most building works are likely to follow the consultation procedure prescribed by the Landlord and Tenant Act 1985, which in itself can take many months to run its course. Watch this space…

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.