A practical guide to dilapidations

30/06/2011

By Mark Steggles, Senior Associate in Dispute Resolution.

Claims by landlords for breach of a tenant’s covenant to repair typically arise upon the expiry of the lease. Landlords are looking to receive their property back in prime condition to re-let or sell and the tenant wants to walk away and move on.

This article provides an overview of the dilapidations process in the commercial market and how to reduce the possibility of a dispute.

Investigation

The most important document when considering dilapidations is the lease itself. It may be the case that either a licence for alterations and/or a deed of variation apply to the lease and these documents are equally as important.

If the property in question consists of a single building, the repairing covenant will usually relate to the whole of that building. However, if the property consists of a floor or part of a floor in an office building or a unit within a warehouse, the position is less clear.

In terms of the repairing covenant itself, in commercial lettings of whole buildings, the tenant is often liable for all repairs and the expenses involved. Where the landlord retains control of some part of a building, it is not unusual for the tenant to be responsible for works such as internal repair and decoration, with the landlord taking responsibility for the structural and external repairs. The landlord will recover the costs via a service charge.

If the covenant requires the tenant to 'put and keep' in repair, this usually means that a tenant must put the property in repair even if it was out of repair at the start of the lease. Where the property is clearly in a state of disrepair at the outset, it is now common for a landlord and tenant to agree a schedule of condition prior to the tenant taking a new lease and limiting the repairing covenant accordingly.

A tenant will usually only be responsible for repairing the property and not improving it. A landlord cannot generally pass on the costs of improvement works that are necessary to attract new tenants to a property.

Approach

Landlords need to consider their future plans for the property at an early stage. If the intention is to sell or re-let, the earlier the schedule of dilapidations is served on the tenant, the more chance that the tenant will carry out the work and the landlord will be able to re-let sooner. It may even be a factor in influencing an existing tenant to remain if he has insufficient funds to cover both relocation costs and dilapidation costs.

However, a landlord may equally prefer to wait until the end of the term and then serve a schedule with a view to negotiating a financial settlement at the end. The advantage for the landlord is that it retains control of the works and this enhances the prospects of recovering a cash settlement from the tenant.

A landlord's plans for the property will also be relevant in ascertaining the extent of a claim against a tenant. A landlord cannot look to claim damages for breach of a repairing covenant from a tenant if they intend to demolish or substantially alter the property after they obtain vacant possession.  

There is also a statutory cap on the damages that a landlord can recover for breach of a repairing covenant after a lease has come to an end. Damages cannot exceed the difference in value of the property in its condition at the end of the lease, and its value had the repairs been carried out. This cap only applies to the repairing covenant and not to, for example, a covenant to decorate at the end of the term.

To put this into context, a landlord will often produce a schedule containing the anticipated costs for carrying out the repairs. The weight that the Court will give to such costings as evidence of the reduction in value of the property depends on whether the landlord will actually carry out the works. If the landlord has no intention of carrying out the works, then the costings are of little help. If the works have been carried out or are going to be carried out, then the costings may be a real guide. Where is it questionable whether the work will be carried out at all, the estimated costs may be a starting point but they are likely to be scaled down.

As always, a proactive tenant will seek advice at an early stage.  If they are advised that the value of the property is adversely impacted by its condition, they can put in hand the repairs early which will control the costs and substantially reduce any later claim. However, if they are advised that the condition of the property has little or no impact on its value, they may seek to rely on that report rather than carrying out any repairs.

A landlord should complete the works as soon as possible following the expiry of the lease. Whilst a landlord can claim for genuine loss of rent during the time that repair works are being carried out, if the landlord has spent six months arguing with the tenant over minor matters rather than simply getting on with the work, a Court is  unlikely to be sympathetic to a claim for loss of rent during this time.

Procedure

The Property Litigation Association has published a Pre-Action Protocol for dilapidations claims arising at the end of a lease. The Protocol encourages the early exchange of information about prospective claims and promotes a framework and timetable to give the parties every opportunity to reach a settlement without recourse to Court.

The Protocol states that a landlord should serve a schedule of dilapidations within a reasonable time, (not more than 56 days after the termination of the tenancy). The schedule should state details of the sum that the landlord is seeking to claim as damages and may include legal and surveying costs, loss of rent, and professional fees.

Upon receipt of the schedule, the Protocol requires the tenant to respond within a reasonable time and again 56 days is adopted as the limit. The landlord and the tenant (and/or their professional advisers) are encouraged to meet before the tenant prepares his response on a without prejudice basis.

If the parties are unable to reach a settlement, the Protocol requires the parties to consider whether an alternative dispute resolution procedure may be appropriate such as mediation. If such alterative procedures are either not appropriate or unsuccessful, the parties are encouraged to carry out a 'stocktake' of the issues in dispute and identify what evidence the Court may need to resolve those issues.

If the parties cannot reach a settlement after complying with the Protocol, then they are free to refer the matter to the Court. However this need not be the end of negotiations and the parties should always aim to achieve an amicable resolution.

Conclusions

Dilapidations claims by their very nature can turn into complex and contentious issues, but open dialogue and realistic objectives can reduce the chances of litigation. To summarise the key points:

• obtain professional advice at an early stage
• read and understand your lease and any associated documents
• keep damages claims realistic and remember the statutory cap
• adhere to the Protocol