Dilapidations in a commercial lease: The basics

Dilapidations arise as a result of a tenant’s failure to comply with obligations concerning the state and condition of the premises. A dilapidations claim can be made by the landlord against the tenant during or towards the end of a lease, or after the lease has ended.

What are the tenants’s repairing obligations?

The starting point for any landlord when determining the extent of the tenant’s obligations and whether to there has been a breach by the tenant is to read the lease and any other supplemental documents such as a licence for alterations and/or a deed of variation.

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. What is deemed to be to “put and keep” in repair can be a cause of dispute itself.

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.

How should a landlord deal with dilapidations?

Once a landlord is satisfied that they have a dilapidations claim, they 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 greater the chance that the tenant will carry out the work and the landlord will be able to re-let sooner. Equally, the landlord may prefer to wait until the end of the term and then serve a schedule of dilapidations with a view to negotiating a financial settlement at the end.

The advantage for the landlord in waiting until the end of the term is that they retain control of the works and this enhances the prospects of recovering a cash settlement from the tenant. That said, a well advised tenant will carry out its own survey long before the lease expires, so that it has the opportunity of carrying out any necessary repair works, regardless of what the landlord does.

Following expiry of the Lease, the measure of damages to remedy dilapidations is broadly the reasonable cost to the Landlord of doing the works plus loss of rent for the period until the works have been completed, assuming that there is a tenant waiting to take a new lease and this process has been held up by the repair works. That is often not the case, in which case the loss of rent claim would fall away (but it is still routinely claimed by landlords).

How are damages calculated?

Any claim has to be reasonable, so if a very minor remedy would cost a sum of money out of all proportion to the actual damage, a landlord is not entitled to a gratuitous benefit, but rather the Court would look at what the actual difference in value to the premises is.

In any event, there is a statutory provision in Section 18 (1) of the Landlord & Tenant Act 1927, which limits the damages available for breach of a repairing covenant to the diminution in value of the landlord’s reversion caused by the breach. This essentially means that a Court would look at what the diminution in value of the property actually is as a result of the breach of repairing covenant, and any damages would be limited to this sum. The diminution in value may well be a lot less than the actual cost of repair, particularly if the property is not going to be let out again in a similar way to that which it was before. Conversely, if the property is going to be let out again, then the court is more likely to find that the diminution in value is broadly the same as the costs of the repair, and therefore will allow the repair costs to be recovered in full.

Evidence

There is a standard procedure for assessing dilapidations at the end of a Lease, and usually a surveyor is instructed by the landlord to prepare a Schedule identifying the dilapidations claimed, and what value the landlord places upon them. The surveyor has to sign and endorsement to confirm that the landlord’s future intentions for the property have been taken into account when preparing the schedule. This means that there should be no schedule setting out proposed extensive repairs to a property if in fact it is going to be redeveloped.

In more substantial cases the tenant would then instruct their own surveyor to prepare a formal response, and the response (and indeed the landlord’s initial Schedule) would identify the parties’ positions in relation to the works required, whether they were a breach of any terms of the Lease, and what value if any the parties place upon them.

Pre-Action Protocol

The Pre-Action Protocol for Claims to Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (the ‘Dilapidations Protocol’) applies to such claims where they relate to commercial property situated in England and Wales.

The stated objectives of the Protocol are:

• to encourage the exchange of early and full information about the dispute;
• to enable the parties to avoid litigation by agreeing a settlement of the dispute before proceedings are commenced; and
• to support the efficient management of proceedings where litigation cannot be avoided.

The Protocol provides that a landlord should serve a schedule of dilapidations within a reasonable time, which the Protocol suggests should be 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.

The Schedule should contain an endorsement that in the landlord’s or the landlord’s surveyor’s opinion: 

• all the works set out in the schedule are reasonably required to remedy breaches;
• where endorsed by the landlord, full account has been taken of its intentions for the property;
• where endorsed by the landlord’s surveyor, full account has been taken of the landlord’s intentions for the property, as advised by the landlord; and
• the costings, if any, are reasonable. 

Where the landlord is claiming a sum of money, the landlord should also provide a Quantified Demand to substantiate the monetary sum sought as damages in respect of the breaches detailed in the schedule as well as any other items of loss for which damages are sought. It should also set out whether VAT applies.

Upon receipt of the Schedule and/or the Quantified Demand, the Protocol requires the tenant to respond within a reasonable time and again 56 days is adopted as the limit.

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 the parties cannot reach a settlement after complying with the Protocol, then the parties are free to refer the matter to the Court. Before issuing court proceedings the landlord should provide a detailed quantification of loss which details exactly what the landlord is claiming and how the claim has been calculated.

We are happy to advise any landlord or tenant in relation to a dilapidations claim, so should you have any questions, please do not hesitate to contact us.

Disclaimer

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss because of acts or omissions taken in respect of this article. Please contact us for the latest legal position.