Damages in Disrepair Claims - Time for a Rethink?

Timothy Waitt, Solicitor
Journal of Housing Law - July 2008
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Introduction

In July 1998 the Court of Appeal handed down judgment in the important disrepair case of Wallace v Manchester.¹

The judgment was seen as a watershed, laying to rest longstanding arguments over heads of damages in disrepair cases and limiting tenants to a ‘‘tariff’’ of damages between £1,000 and £2,750.²

Principles

A claim for housing disrepair, for the context of this article, represents a claim in contract by a tenant for damages due to the failure of a landlord to comply with its contractual repairing obligations. This article does not consider claims based on other non-contractual causes of action, such as a claim for pest infestation in nuisance. Damages in such claims need to be assessed separately and in addition to the contractual damages.

It is trite law that damages in contract are to restore the wronged party to the position that they would have been but for the breach of contract.³ Specifically in a housing context Bankes L.J. stated in Hewitt v Rowlands4:

“Prima facie the measure of damage for breach of the obligation to repair is the difference in value to the tenant during that period between the house in the condition in which it now is and the house in the condition in which it would be if the landlord on receipt of the notice had fulfilled his obligation to repair.” (Emphasis added.)

Niazi Services Ltd, Shine and Charalambous—the rental reduction method

The above three recent cases have reminded us that the Wallace ”tariff” is not the only or even prime method of assessing damages. They also show that the courts are prepared to award substantial damages for relatively limited disrepair.

In Niazi Services Ltd v Van Der Loo5 the court considered whether there was any difference in the damages due to a tenant of a humble flat and that of an upmarket dwelling:

“Mr Cowen accepted that the tenant of an upmarket flat might be entitled to somewhat more than a tenant in a humbler dwelling, but submitted that there cannot be that much difference between the two cases. We do not agree. This was a high class flat in very high-class neighbourhood. The sub-tenant was paying for and entitled to expect high class standards. The landlords were taking rent on that basis.”

The judge then went on to award £5,000 damages for relatively moderate disrepair which had subsisted for a short period, even though the tenant was there little of the time. The award was justified because the rent paid for the flat was relatively high.

In English Churches Housing Group v Shine,6 the court considered the Wallace "tariff" and went on to say7:

‘‘It is, accordingly in our judgment logical that the calculation of the award of damages should be related to the fact that the tenant is not getting proper value for the rent . . .

. . .

Accordingly . . . the basic rule of thumb that - all other things being equal - the maximum award for damages. . . should be the rental value of the premises."

The court made clear that any global Wallace award had to be cross-checked with a ‘‘rental reduction’’ method award (that is, calculating damages by reference to a reduction in the rental value of the property). The reasoning for this cross-check is to ensure that the award of damages does not generally exceed the rental value of the premises.

In the most important of the three cases, Earle v Charalambous, 8 the Court of Appeal confirmed, without reference to the case of Shine, that the Wallace tariff was not the measure of damages for "disrepair". In that case, a long leaseholder sued their freeholder for serious disrepair. The leaseholder argued that damages should be calculated by a rental reduction method calculation. But the only rent was a tiny ground rent. They argued that the rental reduction should be applied to the open market rental value of the property, if let without the disrepair. The court agreed and accepted the figures proposed by the leaseholder.

The freeholder appealed, submitting that reference to a nominal rental value was not applicable in claims by leaseholders and the court was forced to utilise the Wallace "tariff". The tenant had never intended to rent out the flat. Therefore, according to Calabar Properties v Stitcher9 (see further below), the tenant could not recover this loss. The court in the most important housing disrepair damages decision of the decade comprehensively rejected these arguments. The court confirmed that the rental reduction method should be applied to long leaseholders as well as to ordinary tenants as an application of the confirmed principles given in Wallace. The rent to be nominally reduced was the rental value of the property, if it were let without the disrepair, on the open market. It was right that they were compensated in this manner because the leaseholder suffered the agony of watching their home and property investment fall.

The unofficial ‘‘tariff’’ of damages for disrepair

It should be remembered that the ‘‘tariff’’ in Wallace was never approved by the court. The tenant appealed her damages award primarily seeking an award for diminution in value of the tenancy in addition to an award for discomfort and inconvenience.10 Her back-up argument was that there was an unofficial ‘‘tariff’’ of damages in disrepair cases. Those awarded in her case fell outside of it and therefore the award was too low. The latter argument failed because it became clear that the judge had found the disrepair proven for less time than originally thought. As a result, the global award was well within the tariff. This meant that the court did not have to consider whether the tariff range of damages was correct and Morrit L.J. concluded11:

“Assuming, but without deciding, there is an unofficial tariff . . . it has not been show that the award fell outside it.”

Thus, although never approved by the Court of Appeal, the so called ‘‘unofficial tariff of damages for disrepair cases’’ arose. Given that the judge had specifically referred to the use of a rental reduction in rental value as an assessment of damages and recommended a cross-check, it is strange that disrepair lawyers fell upon the tariff basis alone.

The cases of Charalambous and Shine effectively move the focus for assessing damages away from the unapproved Wallace "tariff" to the rental reduction method as the prime means of assessing damages in disrepair cases.

Is loss of capital or rental value a sub-head of general damages?

Some lawyers take the view that Charalambous allows a tenant to recover loss of rental value as an additional head of damages. They base this argument on comments such as the following:

‘‘A long lease of a property is not only a home, but it is also a valuable property asset. Distress and inconvenience caused by disrepair are not free-standing heads of claim but are symptomatic of interference with the lessee’s enjoyment of that asset." 12

The point is a doomed attempt to reopen arguments wholly dismissed in the cases of Calabar Properties and Wallace.

As described above historically the courts have used two methods of assessing damages, a simple assessment of damages as a whole, without reference to the rent (the ‘‘global’’ award) and the rental reduction method. Some judges used both. An argument developed that a tenant was entitled to both a global award for pain, suffering and inconvenience and a rental reduction award since the tenant had not received good value for their property under the contract. This argument was effectively attempting to introduce a tortious element to disrepair claims, as well as the contractual element. The contractual argument focuses on the words ‘‘difference in value to the tenant’’ in Hewitt, the tortious on the fact that the tenant was suffering because of the disrepair. The Court of Appeal in two different contexts considered these issues, almost 10 years apart.

In Calabar Properties v Stitcher13 a long leaseholder was awarded general damages and special damages, the latter representing the:

". . . [M]easure of the difference in value comparable to such cases where the cost of remedying dilapidation can properly be said to represent the diminution in value of the reversion.”


The leaseholder did not appeal either award. Instead they sought damages for ‘‘loss of use of the flat based on either the capital or rental value of the flat’’. The appeal failed and the court found that the reference to ‘‘difference in value to the tenant’’ in Hewitt was held not to refer to the marketable value of the asset. Damages for housing disrepair in the normal context should not be assessed ordinarily by simply assessing the market value of the property with the disrepair and without and awarding the difference.

Saying ‘‘difference in value to the tenant’’ was simply a way of stating the contractual damages principles of restitution. The ‘‘value’’ was the loss to the tenant occasioned by the disrepair.

These issues returned to the Court of Appeal 20 years later in Wallace. The tenant argued that she was entitled to two heads of general damages; diminution in value and discomfort and inconvenience. The court again comprehensively rejected the heads of damages propositions; damages in disrepair cases were awarded under contract, not tort and were therefore awarded to provide restitution. The court confirmed that in assessing damages for disrepair for a tenant a judge could legitimately make a global award or assess using the rental reduction method or a combination of both. Each was a different way of assessing the same thing.

Advisers should not view the comments in Charalambous referred to above as reopening arguments for both a global and a rental reduction award as separate heads of damages. Instead, the case should be seen in its context: namely that the leaseholder pays a substantial premium for their lease, instead of rent. Using a hypothetical open market rent as a starting point is simply a way of calculating the leaseholder’s loss.14 It does not support the proposition that a tenant is entitled to a global award reflecting tortious loss and a rental reduction award representing contractual damages.

Increased damages?

Many tenant lawyers view Shine and rental reduction awards unduly pessimistically; global awards based on the Wallace tariff no longer held sway. Damages would now go down. Landlord lawyers seemed to initially view Shine as a positive development as halting pushes to increase damages; any rental reduction award would be low.

Yet, in one sense the recent cases of Niazi Services, Shine and Charalambous do not lay down any new principle, since they merely confirm the conclusions made in Wallace. For tenant lawyers there is little in these cases to be pessimistic about. It should be noted that in Wallace the global award represented a 50 per cent nominal reduction in rental value for relatively limited disrepair. In Shine, the judges were willing to grant 75 per cent and 100 per cent where clearly the tenant was not deprived of the whole of the premises. In Charalambous the judge noted that the 10 per cent and 50 per cent awards proposed by the leaseholder were too low.

Opportunities and threats

In Wallace the disrepair was:

• rotten windows, leaving the living room cold even though heated;
• defective damp proof course causing mould behind an item of furniture;
• plaster and skirtings falling off and loose in bedrooms;