September 13, 2016

Dilapidations

What are dilapidations?

Dilapidations are breaches of covenant to repair a building contained in a lease. Such breaches can take many forms, but a leaking roof or a broken window are two obvious examples. Dilapidations are often wrongly considered by tenants as insignificant in comparison with rent, rates and service charges when they are seeking new premises. However, the liability to repair can have serious financial implications and therefore the tenant must seek advice of a Chartered Surveyor on opportunities to avoid, limit or mitigate dilapidations before entering into a lease, or when a schedule of dilapidations has been served upon him.

Types of schedules and tactics

Where disrepair occurs, the landlord may serve a Schedule of Dilapidations upon the tenant. The form of schedule is partly dictated by the time at which it is served. A schedule served during the currency of a lease is an interim schedule, unless served within the last three years of the term when it is a terminal schedule. A schedule served at or after the end of a lease is a final schedule of dilapidations. The first two forms of schedule differ significantly from the third. An interim or terminal schedule specifies both the disrepair alleged by the landlord and the remedial works which the landlord requires the tenant to undertake. However, while a final schedule will also contain the alleged breaches of covenant and details of remedial work required, the tenant will have no option to actually carry the works out since its right of occupation will have ended with the lease. Therefore, the landlord’s remedy in respect of a final schedule is a claim for damages which will include not only the cost of remedial works, but also loss of rent, service charges, rates, professional fees and VAT for the period during which the property cannot be occupied as a result of the disrepair.

Statutory relief for the tenant

Two principal forms of statutory relief from dilapidations may be available to the tenant. In the case of an interim schedule, the tenant might obtain relief from forfeiture proceedings (eviction) under the Leasehold Property Repairs Act 1938, providing the original term of the lease exceeds 7 years, of which 3 or more years remain unexpired. In the case of a final schedule and corresponding claim for damages, the tenant may be protected by Section 18(1) of the Landlord and Tenant Act 1927. This particular statute falls into two limbs. The first limb states that the landlord cannot recover damages which exceed the sum by which the value of his investment has been reduced by the tenant’s breach of covenant. Interestingly, this may mean that the damages which a landlord recovers in certain circumstances may be less than the costs of the works required to repair a building, even where the fact of the disrepair is not disputed. The second limb is potentially an absolute defence against a final schedule of dilapidations. It arises when a tenant alleges that a landlord will, at the end of the lease or shortly thereafter, either demolish the premises or carry out such structural alterations in it that the tenant’s breaches of covenant to repair become irrelevant. If the tenant can prove its case absolutely, no damages will be recoverable by the landlord.

Points for action: repair, redecoration and reinstatement

The good news for tenants is that there are many practical opportunities available to limit dilapidations liability. For example, in negotiations for a new lease, for a short term, the tenant may insist that the repairing liability be restricted to leaving the building in no worse condition that at the commencement of the lease, as opposed to accepting a full liability. This is an important consideration because the word ‘repair’ includes a liability to renew in certain circumstances. If the repairing liability is to be limited, the tenant should instruct a Chartered Surveyor to produce a Schedule of Condition, recording decorative condition, any existing items of disrepair and any alterations carried out by a previous tenant, if relevant. Historic alterations and disrepair must also be considered carefully by the tenant considering the purchase (assignment) of another tenant’s lease. The tenant should instruct his Chartered Surveyor to identify any breaches of covenant which have occurred prior to the date of assignment because it is probable that the new tenant will become liable for their remedy, with potentially serious financial consequences. Once the breaches and alterations are identified, prior to the purchase of the lease, the tenant may be in a position to negotiate for a reverse premium from the tenant selling the lease.

Recent developments in dilapidations law

On April 26 1999, the law under which dilapidations claims are enforced was altered radically by the new Civil Procedure Rules. The legislation was designed to ensure that litigation is pursued more swiftly and more fairly than hitherto. The intention is to reduce the costs of litigation. While no formal protocol has yet been issued for dilapidations claims, the effect of the legislation is such that parties to such claims must now place particular emphasis on the following points:-

  • Genuine attempts to avoid the need for litigation through construction negotiation.
  • Ready provision of relevant information either in substantiation or rebuttal of a claim.
  • The consideration of a Part 36 offer to settle a claim prior to judgement.
  • A reasonable approach to negotiations at all times, as an unreasonable party, even if it wins its case on the substantive issues, may be penalised by the Court on costs.

The role of the Chartered Surveyor

A Chartered Surveyor may advise in the following principal areas:-

For the Landlord, preparation of accurate schedules that will stand legal scrutiny and can be negotiated and enforced.

For the Lessee.

1. Whether the scope of the schedule of dilapidations is accurate.

2. Whether the standard of repair required by the schedule is justified.

3. Whether any statutory reliefs may be available to the tenant.

4. How and when any repairs should be conducted or whether negotiation of a financial settlement in lieu of damages would be preferable.

 

Conclusion

Dilapidations are a complex and contentious aspect of the landlord and tenant relationship. No two dilapidations claims can be identical because no two buildings are exactly the same, nor will the lease covenants or other circumstances necessarily be similar either. It therefore follows that a tenant is always prudent to seek the advice of a Chartered Surveyor before contracting a new lease, or when served with a schedule of dilapidations in respect of an existing or historic lease. The tenant should also check whether the surveyor or firm to be appointed has the expertise to advise on both the question of repair and the valuation of the claim for damages, if appropriate, under section 18(1) of the Landlord and Tenant Act 1927, to avoid the need to instruct two separate surveyors or two separate firms.