Hot Topic Highlight - Dilapidations
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What is this blog about?
In this week's blog, we take an in-depth look at dilapidations, a technical area of practice sitting sitting at the intersection of commercial property management, building surveying and legal & regulatory compliance.
This area of practice maps directly to several RICS APC technical competencies, including Landlord & Tenant, Inspection and Legal & Regulatory Compliance. It is also useful general knowledge for all surveyors as you are likely to come across dilapidations during your career.
What are dilapidations?
RICS defines dilapidations in their Consumer Guide as a ‘breach of lease covenant that relates to the condition of a property during the term of the tenancy or when the lease ends’. Thus, a dilapidations claim is a claim by the landlord for damages recoverable as a consequence of the tenant’s breach of lease covenant.
When can a schedule of dilapidations be served?
A landlord can serve a schedule of dilapidations at any time during the lease term (interim schedule) or at or near to expiry (terminal schedule). This should itemise the repair works based on compliance with the repairing covenant.
What due diligence and investigations should you undertake in relation to a dilapidations instruction?
Lease and any additional relevant documents (e.g., side letters, personal concessions, subleases, notices, schedules of condition or licences)
Scaled plans
Planning consents
Statutory notices
Original marketing particulars
Evidence of comparable rental values and yields
This should be followed by inspection to accurately record the property’s condition and any breaches of the relevant covenants. It’s also important to note the general standard of repair for nearby properties in relation to any diminution in the value of the landlord’s reversion (more about this later on).
What lease clauses do you need to consider?
A good understanding of repairing covenants is required to understand what works are required to comply with the covenant, e.g., terms such as ‘in repair’, ‘in good repair’, ‘to put and keep’ and ‘good and tenantable repair’. Dilapidations are also influenced by decorating, alterations and yielding up (reinstatement, which is only for terminal schedules) covenants and you will need to read any licences to alter etc alongside the lease.
A tenant’s repairing liability can be limited by a schedule of condition appended to the lease. This generally limits the repairing liability to the condition evidenced in the schedule (through photographs and text ideally).
What remedies are available to landlords?
For a dilapidations claim during the lease term, the landlord has a restricted number of remedies under the Leasehold Property (Repairs) Act 1938. This applies to any lease granted for 7 years or more and where the lease has more than 3 years still to run. The Act thus requires landlords to prove that immediate repair is required to prevent damage to the value of their reversion – protecting the interests of the tenant.
The remedies are:
Damages – capped by reference to the diminution in the value of the landlord’s reversion
Forfeiture – the lease is brought to an end, although the landlord must be very careful not to waive it’s right to forfeit. The landlord must initially serve a Section 146 (under the Law of Property Act 1925) detailing the breaches and allowing time for the tenant to remedy them (i.e., with an interim schedule of dilapidations attached).
Specific performance – a Court can order performance of a contractual obligation by the tenant, in limited circumstances.
Landlord’s right of entry to carry out the work – through an explicit ‘Jervis v Harris’ clause. This avoids the Section 18 (1) cap discussed below because it is a recovery of debt, not a damages claim.
At the end of the lease, the landlord generally only has one remedy; damages. These are generally assessed to be the ‘reasonable’ amount due to compensate the landlord for it’s loss.
Can damages be capped?
Under Section 18 (1) of the Landlord & Tenant Act 1927, the amount recoverable is limited under Limb 1 to the diminution in the value of the landlord’s reversion (i.e., how much has the value of the property been reduced by as a result of the tenant’s breaches of covenant). For example, if repairs cost £50,000 but they only increase the value of the property by £20,000, then the claim may be capped at the lower of these; £20,000.
Under Limb 2, damages are not recoverable where the landlord intends to demolish the property or undertake structural works – both of which would render the remedies (repair works) of no value. This is also known as supersession.
What RICS guidance is available?
The RICS publish guidance in the Professional Standard Dilapidations in England and Wales (7th Edition, September 2016). This provides mandatory and best practice guidance for surveyors dealing with dilapidations.
Please note that the processes and legal positions in Ireland, Northern Ireland and Scotland are all very different.
How does the dilapidations process work?
A schedule of dilapidations, prepared by the landlord’s surveyor and served prior to expiry of the lease, should include:
Relevant lease terms and documents relied upon
Breaches
Remedies required
Cost of the remedy (together with supporting cost information)
Other items to consider include professional fees, legal fees, design and administration of the required work, CDM compliance costs, statutory fees and irrecoverable VAT
Following expiry of the lease, the landlord’s surveyor should re-inspect and serve a quantified demand, which will include associated claims for lost rent and service charge, costs and interest. The quantified demand takes the schedule of dilapidations one step further by quantifying the actual, total financial loss (damage) incurred by the landlord.
The quantified demand may show a higher figure to that stated within the schedule of dilapidations, as the landlord may have incurred additional (consequential) loss by the works not being completed by the end of the lease. This, therefore, sets out the full financial ‘bottom line’ for negotiations between the parties.
The parties will generally then negotiate (on a without prejudice basis) the content of the schedule of dilapidations (using a Scott Schedule - with columns for the parties’ to record their respective positions) to reach settlement. Generally, this will be a cash settlement as the tenant will have vacated the property already.
What about if the parties can’t reach settlement?
The parties must also comply with the Dilapidations Protocol, set out in the Civil Procedure Rules. This details the following timeframes and requirements:
Landlord’s schedule served generally no longer than 56 days after lease expiry
Tenant’s response issued within a further 56 days
Parties’ respective building surveyors meeting on a without prejudice basis within 28 days of the tenant’s response to negotiate
Requirement to consider Alternative Dispute Resolution (ADR) prior to litigation in Court
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N.b. Nothing in this article constitutes legal, professional or financial advice.