A Guide to Dilapidations for Landlords and TenantsBy: Neil Gilbert

All landlords and leaseholders of commercial properties will have to deal with the issue of dilapidations at some point in their lease contract, but due a general lack of understanding, the practice often gets brushed under the table. 

The basis of Dilapidations is simple: a landlord must be compensated if the tenant has breached the agreed obligations set out in a lease.

Dilapidations issues primarily occur when a tenant is found to be in contravention of its leasehold obligations, and generally relate to breaches of reinstatement, repair, redecoration and statutory covenants.

A Schedule of Dilapidations records the alleged breaches of covenant and identifies appropriate remedies, which ultimately could form the basis of legal proceedings if neither party is able reach an amicable settlement.

There are principally two types of Schedule: those served any time during the lease (Interim Schedules and Repairs Notices) and those served at or after lease expiry (Terminal schedules).

Process
A landlord will appoint a dilapidations surveyor to prepare a detailed schedule of dilapidations. The schedule of dilapidations is then served on the tenant by the landlord or their solicitor, at which point the tenant will normally instruct a surveyor to act on their behalf to validate the claim. The tenant must then decide whether to undertake the works, during the lease, or agree a financial settlement with the landlord, after lease end. It can often be financially advantageous for the tenant to undertake some or all of the works, but once the lease has expired, the tenant loses the right to do so and negotiating a claim for damages becomes the only solution.

If a financial settlement is required, both parties must seek to negotiate a fair and reasonable level based on the landlord’s actual monetary loss and taking into account the landlords intentions for the property. These negotiations should commence within a reasonable time (usually 56 days after service) and must be based on lease liability as well as evidence of the landlord’s loss such as contractor’s quotations or invoices.

Advice for Landlords
A common misconception is that landlords can profit from a dilapidations claim. Agreement of a financial settlement must only relate to actual loss incurred as a result of the tenant’s failure to comply with their lease. It is also important to note that landlords cannot expect a building to be returned to as new condition, only the condition dictated by the lease covenants.

Section 18(1) of the Landlord and Tenant Act 1927 caps the level of damages that can be claimed. It states that the claim for damages cannot exceed the amount by which the value of the premises is diminished owing to the breach. It further limits the claim if you are to plan to redevelop or make substantial alterations to the premises after lease expiry.

A Jervis v Harris clause in most modern leases, gives the landlord the right to enforce covenants during the lease term by serving a Repairs Notice on a tenant, and then (if the tenant fails to comply) re-entering the property to carry out important works and reclaiming costs from the tenant as a debt. The tenant has little defence to such a Repairs Notice, but extreme caution must be exercised by a landlord, to ensure this process is properly executed.

Advice for Tenants
As a tenant, it is vital that all lease covenants are evaluated before entering into a lease. For example, ‘to keep in repair’ requires the tenant to first put the property into repair and this could be at a great cost. The condition of the property before lease commencement becomes largely irrelevant during dilapidations negotiations, unless this is specially agreed and formally documented, perhaps by way of Schedule of Condition, within the lease.

It is crucial for tenants to obtain dilapidations advice at pre-lease stage if the financial implications of term end disputes are to be minimised. A Building Survey is an ideal tool for understanding the condition of the property and the risks from the outset. The advice in a Building Survey report can substantially assist in new lease negotiations.

During a lease, it is advisable to commission a Dilapidations Liability Assessment (DLA) to budget ahead of lease end, implement any works while still in occupation, and to ensure compliance with Financial Reporting Standard 12 (FRS12). In addition, regular planned maintenance during the term should help minimise lease end expenditure.

Costs
When acting for Landlords to prepare Notices or Schedules, during or at the end of a lease term, fees are generally recoverable from Tenant’s under express lease covenants. Any additional fees incurred to negotiate settlements or monitor tenant’s works can sometimes be recoverable under the lease, depending on its wording. Fees are normally on a fixed fee basis for the preparation of schedules and notices, and either time charge or percentage fees for negotiation or monitoring.

About the author

Neil Gilbert is a partner of Tuffin Ferraby Taylor (TFT) and chairs the dilapidations working group within TFT. He is a member of the RICS Dilapidations Forum, and lectures nationally on dilapidations for a variety of organisations, including RICS. He jointly manages the professional services team in Bristol.

www.tftconsultants.com