Dilapidations

WHAT ARE DILAPIDATIONS?

Dilapidations are breaches of lease covenants to repair. Such breaches take many forms, but a leaking roof or a broken window are two potential examples. Dilapidations costs are often wrongly anticipated by tenants as insignificant in comparison with rent, rates and service charges. However, repair costs can be significant and therefore tenants should consult a Chartered Surveyor before signing a new lease or when a schedule of dilapidations has been received.

TYPES OF SCHEDULE

Where disrepair occurs, the landlord may serve a Schedule of Dilapidations upon the tenant. The type of schedule is partly dictated by timing. A schedule served during the lease is an Interim Schedule, except within the last three years, when it is a Terminal Schedule. A Schedule served after expiry of a lease is a Final Schedule. The first two types differ from the third. Interim and Terminal Schedules specify both disrepair alleged by the landlord and the remedied works which the landlord requires. However, while a final schedule also specifies alleged breaches and remedial work required, the tenant has no right to perform repairs because the right of occupation ended with the lease. Therefore, the landlord’s remedy in respect of a Final Schedule is a damages claim including not only the cost of repair but also loss of rent, service charges, rates, professional fees and VAT.

LIMITING DILAPIDATIONS

Two principal forms of statutory relief may be available to the tenant. With an Interim Schedule, the tenant might obtain relief from forfeiture (eviction) under the Leasehold Property (Repairs) Act 1938 providing the lease exceeds 7 years, with 3 or more years remaining unexpired. With a Final Schedule and claim for damages, the tenant may be protected by Section 18 ( i ) of the Landlord & Tenant Act 1927. This statute has two limbs. The first states that the landlord cannot recover damages exceeding the sum by which the landlord’s investment has been devalued by the dilapidations. This devaluation is also called the "diminution to the reversion". This may mean that the damages awarded are less than the cost of repairs, even where the disrepair is not disputed. The second limb is potentially an absolute defence; where a tenant proves that a landlord would have, at the end of the lease or shortly thereafter, either demolished the premises or carried out such structural alterations that the disrepair becomes irrelevant, no damages will be recoverable by the landlord in respect of the relevant breaches.

POINTS FOR ACTION: REPAIR, REDECORATION & REINSTATEMENT

The good news for tenants is that there are practical opportunities to limit dilapidations. For example for a new short term lease the tenant might negotiate the repairing liability clause down to leaving the building in no worse condition at the end of the lease than it was at the beginning. This is a useful tactic because a covenant to repair otherwise includes a liability to renew in certain circumstances. Previous alterations and breaches must be considered carefully by the tenant considering the purchase (assignment) of another tenant’s lease. The Chartered Surveyor should identify any breaches of covenant or alterations prior to the proposed assignment because the new assignee will be generally liable for their remedy, with potentially serious financial consequences. Once the breaches and alterations are identified, prior to the purchase of the lease, the assignee may negotiate for a reverse premium from the tenant selling the lease, to compensate for the historic liabilities.

AVOIDING LITIGATION

On April 26 1999, the law was altered radically by the new Civil Procedure Rules. The Rules were designed to ensure that litigation is pursued swiftly and fairly and avoided completely wherever possible. The effect is that parties must now consider the following points carefully.

  • Whether or not the claim is limited by the "Diminution" principle.
  • Genuine attempts to avoid litigation by constructive discussion and negotiation.
  • Ready exchange of relevant information either in substantiation or rebuttal of a claim.
  • The consideration of a Part 36 offer to settle a claim prior to the litigation.
  • A reasonable approach at all times, as an unreasonable party, even if it wins its case on the substantive issues, may be penalized by the Court on costs.

CHOOSING A CHARERED SURVEYOR

The Chartered Surveyor should be able to advise on the following matters.

  1. Whether the Schedule is accurate.
  2. Whether the standard of repair required is justified.
  3. Whether any statutory reliefs are available to the tenant.
  4. How repairs should be conducted and whether negotiation of a financial settlement in lieu of works or damages is preferable.
  5. Whether the claim is limited by the "Diminution" principle.

CONCLUSION

Dilapidations is a complex and contentious aspect of the landlord and tenant relationship. No two claims are identical because buildings, lease covenants and other circumstances are never entirely similar. It therefore follows that a tenant should consult a Chartered Surveyor before contracting a new lease, or when served with a schedule of dilapidations. The tenant should check in particular whether the surveyor has the expertise to advise on both repair and the "Diminution" principle, to avoid the need to incur two separate sets of fees.

This article is produced as a general guide and must not be construed as or relied upon by any party as advice.

Charles Scouller MSc BA (Hons) FRICS MEWI IRRV,
Director
LSM Partners