What are dilapidations?
Dilapidations are items of disrepair or defects which tenants are required to rectify or pay to have remedied under repairing covenants contained in the lease.
The following types of covenants are relevant to the tenant’s liability for dilapidations:
- Repairing covenants
- Decorating covenants
- Covenants to comply with statute
Covenants to yield up and which require reinstatement of the premises to a specified standard at the end of the term.
What is the extent of the tenant’s obligations?
The exact scope of repairing covenants have been the subject of much Court scrutiny. Points to note are:
- The use of the phrase “In repair” includes an obligation to put the property into repair if it is in disrepair at the start of the lease. To limit potential problems a tenant may try to limit their liability by reference to a Schedule of Condition. Alternatively, the tenant may insist on a lower rent to reflect the costs of putting the premises into repair.
- The standard of repairs required will depend on the length of term, age and location of the property.
- An obligation to keep in good condition can require works to be carried out even if there is no disrepair.
- A covenant to keep the property in good repair and condition is more onerous than good repair alone.
- An obligation to repair will not usually require the tenant to make improvements – whether something is an improvement will involve a consideration of whether the works create something recognisably different from what would have resulted if the disrepair had merely been remedied.
What can a landlord do if premises are left in ‘disrepair’ at the end of the lease?
During the term of the lease, the landlord’s remedies include a claim for damages, forfeiture, re-entry for the landlord to repair and then re-charge costs to the tenant (pursuant to a “Jervis v Harris” clause) and specific performance of the terms of the lease. Not every one of these remedies will be appropriate on every occasion.
A claim for damages is the landlord’s only remedy once the lease has expired and it is subject to a number of limitations.
What damages can the landlord recover?
The landlord can recover the reasonable cost of undertaking the works plus loss of rent including service charge and rates for the period until the works have been completed. However, the amount claimed will be subject to a cap on the level of compensation claimed in accordance with Section 18 of the Landlord & Tenant Act 1927 which provides that damages are limited to the diminution in the value of the landlord’s reversion caused by the breach. Damages will also be limited or possibly not recoverable at all where it can be shown that the property is to be either demolished or where significant structural alterations are to be carried out which render the repairs pointless at the end of, or shortly after, the end of the term.
Any breach of other covenants (including decoration, reinstatement of alterations etc) are not limited by section 18 (unless the breach also constitutes a breach of the covenant to repair) and the damages will be assessed according to common law principles.
Practical issues for the landlord
1. Inspection of the premises for breach
After the end of the lease, it is advisable for the landlord to inspect the premises as soon as possible as the relevant date for the assessment of damages in any dilapidations claim is the lease expiry date. It is also advisable to take photographs of the state of the premises as evidence of the disrepair.
It is usual for the landlord to instruct a surveyor to inspect the premises so that the landlord can establish the exact extent of the breach(es) and to produce a ‘Terminal Schedule of Dilapidations’ compliant with the dilapidations pre-action protocol (http://www.pla.org.uk/about_the_pla/news/latest/dilapidations_protocol._oct_2011)
2. Section 18 Valuation
It will often be appropriate to take advice from a surveyor in a falling market in order to obtain a valuation of the premises both in and out of repair in order to establish the extent to which the landlord’s interest has been affected by any lack of repair.
The amount by which the property might have devalued as a consequence of the disrepair may be significantly less than the costs of the work claimed by the landlord.
3. Preparation and service of the Schedule of Dilapidations in accordance with the Pre-Action Protocol
The aim of the Protocol is to encourage the early exchange of full information about the claim to try to avoid the need for litigation. The Protocol was formally incorporated into the Civil Procedure Rules as of January 2012. This means that the Court may impose sanctions against parties that ignore it.
A Schedule for dilapidations should be prepared by the landlord within a reasonable time not more than 56 days from the end of the lease. The Schedule must be endorsed either by the landlord or the landlord’s surveyor to confirm that in their opinion the works set out are reasonably required to remedy the breaches, that full account has been taken of the landlord’s intentions for the property and the costings are reasonable.
At around the same time, the landlord should send a Quantified Demand which sets out a calculation of the damages claimed with copy invoices.
The tenant should be given a reasonable time to respond (which is usually 56 days).
The landlord and tenant (and surveyors) are then encouraged to meet before the tenant is required to respond to the Quantified Demand.
Only if matters aren’t resolved in accordance with the Protocol, the parties then consider legal action.
4. Market conditions
The market conditions and buoyancy of the letting market may affect a landlord’s strategy. If the market is good, the landlord may be more inclined to settle a claim for terminal dilapidations early because they can re-let the premises. If the market is poor, then the landlord may be more determined to maximise this particularly if they may not be able to easily re-let the premises.
Practical issues for the tenant
1. If the landlord serves the schedule of dilapidations prior to the expiry of the lease, then the tenant may wish to carry out the works itself to keep control of the repair costs and to avoid additional costs (such as landlord’s fees). However, the tenant carrying out the works may not necessarily entirely eliminate the possibility of a claim for dilapidations by the landlord since it is likely that the landlord may not agree with either the nature of or extent of works required.
2. The tenant should investigate the landlord’s likely intentions for the property. If renovation or demolition is likely, then Section 18 will operate to reduce or eliminate the sums claimed by the landlord.
3. The tenant should also consider the issue of betterment. Has the landlord included in the Schedule, repairs which may amount to an improvement? If so, these items can be challenged by the tenant.
4. The landlord is not obliged to serve a Schedule of Dilapidations before the lease expires and therefore the tenant should take both legal advice and a building surveyor’s advice on its potential liabilities in good time in order to carry out works which are considered necessary.
For more information please contact Angela Hardman at firstname.lastname@example.org