With ever-increasing costs of running a business, tenants must be fully aware of the impact dilapidations claims can make to their accounts, not just their workplace. Laurence Barton, Director explains.
What are dilapidations?
In simple terms, dilapidations claims arise from a breach of contract. As a tenant, if your Landlord believes that you have breached the terms of your lease, causing damage to the property, you could be liable for the costs to rectify any issues they identify.
Costs of this can range from a simple repair right up to fixing structural issues caused by improper or non-existent maintenance of your premises. With this in mind, it is crucial that you read and understand the obligations in your lease that are placed upon you for maintaining the property you occupy. The Lease will set all the ground rules of the particular circumstances. It is also advisable to regularly review and update your dilapidations provision.
Breaches of contract (your lease) are actionable at law. Although few cases actually get to court, you have to act in the knowledge that it might, and it is important from the outset to follow the Protocol set by the Courts.
Dilapidations are often thought of as compensation for the landlord for wear and tear. However, it is in fact a claim for damages. Damages are awarded by Courts to restore the plaintiff (landlord) to the position they would have been in had the breach by the tenant not occurred.
Making dilapidations claims
As a landlord, it is your responsibility, should you feel that your property has been damaged by the tenant, to initiate and progress a claim for terminal dilapidations. The tenant can challenge any potential claim brought to them, so in this instance it is important to seek specialist advice from your Building Surveyor.
The claim can’t be punitive and must be due to an express breach of the lease and calculated in a reasonable and proportionate manner. If the matter can’t be settled by normal negotiation the Courts may take into account, the behaviour of the parties and the reasonableness of the claim when they award costs.
There is an obligation, both by law and by RICS (Royal Institution of Chartered Surveyors) guidance, on the surveyors to avoid exaggeration and inaccuracy. Indeed, the landlord’s surveyor is supposed to sign an endorsement of his claim, part of which confirms he has taken account of the landlord’s future intentions for the property.
Value of claims
The value of the claim is also capped. The authority for this comes from Section 18.1 of the Landlord and Tenant Act 1927 which says:
“Damages for a breach of a covenant or agreement to keep or put the premises in repair during the currency of a lease, or to leave, or put the premises in repair at the termination of a lease , whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount ( if any) by which the value of the reversion ( whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid; and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put the premises in repair at the termination of the lease, if it is shown that the premises, in whatever state of repair they might be , would at or shortly after the termination of the tenancy have been or would be pulled down, or such structural alterations made therein as would render the valueless the repairs covered by the covenant or agreement.”
There are two limbs to this clause:
- The first limits the claim to the amount that the value of the landlord’s reversion is diminished by breaches of the covenant to repair. The landlord cannot recover more than it has cost (ie the repairs), compared to the loss the repairs cause to the value of the property. This is the diminution in the property’s reversionary value, caused by the disrepair.
- The second part states that no damages are recoverable if it can be shown that on expiration of the lease, the premises would be demolished or altered to the extent that would render valueless the repairs in question.
What applies in a claim?
A common misunderstanding is that these limbs only apply to ‘repair’. Most leases have specific obligations on the tenant to address redecoration and reinstatement of the property. These items are not capped but can be reduced by dilution or Supersession. Dilution is to make void or weaken the need for something to be done, and Supersession is a slightly stronger expression to cover the case where the proposed action is made useless by following events.
For all these reasons the landlord should carefully set out a schedule itemising and costing the alleged breaches with a summary known as a Quantified Demand and which includes consequential costs such as loss of rent, rates, fees, VAT, insurance, service costs charges, etc.
In order to be reasonable and to allow the tenant the opportunity to avoid some of these consequential costs it is best practice to issue the Terminal Schedule at least 6 months before lease expiry. Under law, the landlord actually has until 56 days after expiry to present a Quantified Demand but a delay of this length is frowned upon.
So, what options are available to the tenant?
Do you carry out the repairs? Prepare for a post lease expiration challenge? Consider a cash settlement?
There is no guaranteed right way to deal with or avoid dilapidation issues (other than to wrap up your building in cotton wool for the duration of the lease!). Hardly an answer, but regular maintenance and well-informed professional advisers can ensure that a tenant is well prepared for the worst and best case scenarios.
Get the right advice
As this demonstrates it is important to know your rights and obligations and it is sensible to take specialist advice ideally 12 months ahead of lease expiry.
Be in safe hands. For further guidance on dilapidations and end of lease issues, please contact our Building Consultancy team via surveying@argroup.co.uk.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or Aitchison Raffety.