Tenant Dilapidations: A Guide
Many tenants are shocked at the value of the dilapidations claimed by landlords. Fortunately, legislation includes statements that can limit tenants’ liability. Chartered surveyors can support tenants with negotations, often substantially reducing a dilapidations claim, saving tenants £1000s.
What are dilapidations?
Most leases will specify that the property must be in its original condition when it is returned to the landlord at lease end.
Of course, this is almost impossible, and so the Dilapidations Protocol sets out a process that allows landlords to claim funds to compensate them for any disrepair or alterations that would otherwise result in a financial loss to the landlord.
Many tenants are shocked at the value of the dilapidations served by landlords. However, both the Dilapidations Protocol and the Landlord and Tenant Act contain statements that can protect a tenant and limit a tenant’s liability, and it is usually possible to negotiate on dilapidations claims.
Chartered surveyors can support tenants at the start of their lease, during their term and at lease-end to minimise their dilapidations liability and make considerable savings.
What is the Dilapidations Protocol?
The Dilapidations Protocol (or to give it its full title, the ‘Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy’) is a legal process that governs commercial landlords and tenants in England and Wales. It covers the steps that landlords must follow to claim for damages for dilapidations against tenants at the termination of a tenancy.
The Dilapidations Protocol covers terminal dilapidations only, and so only comes into force at the termination of a tenancy. Landlords and tenants can request and prepare interim and anticipated dilapidations before the end of a tenancy, but this is not mandatory.
If a dilapidations schedule is prepared before a tenancy ends, at termination the landlord should either confirm that the previous schedule remains as stated or issue a new schedule.
Alongside the terminal schedule of dilapidations, the landlord will also issue a Quantified Demand. The Quantified Demand sets out the amount the landlord is claiming as a result of breaches of the lease (which will have been detailed in the schedule). It can also include claims for loss of rent during works and any additional marketing periods that would be required, losses due to business rates liability, insurance and other utility bills, service charges, finance costs and professional and legal fees.
The Protocol also sets out a format for dilapidations schedules and the process to follow in the case of any disputes between the landlord and the tenant.
“Crucially, the Dilapidations Protocol, along with the Landlord and Tenant Act, limit the landlord’s claim to the landlord’s likely loss; this is not always as much as the costs of works to remedy the breaches. Furthermore, the landlord cannot claim for items that are likely to be rendered valueless because of the landlord’s intentions for the property.”
Do Tenants Have to Pay Dilapidations?
Most leases specify that tenants are liable for the cost of a landlord producing a schedule of dilapidations, the cost of compensation for disrepair, and any enforcement actions taken by the landlord.
However, tenants can of course negotiate and defend against dilapidations claims by instructing their own chartered surveyors. In addition to dilapidations defence at lease end, there are also several measures tenants can take before and during a lease to minimise their liability.
Dilapidations Timelines
The Protocol mandates that terminal dilapidations schedules and Quantified Demands are issued to a tenant within a reasonable time; this is normally agreed to be within 56 days of the termination of the tenancy.
The Quantified Demand should specify a reasonable time by which the tenant should respond. This is normally within 56 days of the issue of the quantified demand. It is important that tenants do their best to stick to these timelines – courts can penalise tenants for not setting out their defence in timely manner, as in the case of Hammersmatch v Saint-Gobain.
If there is a dispute, surveyors representing each party should arrange to meet and negotiate within 28 days of the tenant sending their response.
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Minimising Dilapidations Costs for Tenants: At Lease End
Understanding dilapidations claims and the limitations placed on landlords
Dilapidations claims can be overwhelming, running into £100,000s in many cases. However, in most cases tenants can negotiate on the claims, substantially reducing their costs.
The landlord’s building surveyor will have endorsed the landlord’s dilapidations schedule, stating that they believe it to set out works that are reasonably required to remedy breaches of the lease, that the costs are reasonable, and that they have taken into account the landlord’s intentions for the property.
It is, however, vital to note that the endorsement by the landlord’s surveyor is based on their opinion. Tenants are entitled to instruct their own chartered surveyors to respond to the claim and defend against it. The tenant’s response and initial defence will normally be based on an updated version landlord’s schedule. The tenant’s surveyor will produce a Scott Schedule by adding to the landlord’s document, putting forth alternative professional opinions on the costs involved.
Getting a Scott Schedule
A dilapidations schedule will typically list some items of repair that the tenant’s surveyor agrees are a breach, although often the cost will be disputed, particularly if savings can be made by finding a different contractor or combining several works into one contract. There are also likely to be numerous items that are contested, perhaps because a schedule of condition provides evidence that they were already in disrepair, or because the surveyor suspects that there will be no financial loss to the landlord as a result of the disrepair.
A Scott Schedule is an extended version of the dilapidations schedule that includes the tenant’s response to each item and the costs that they believe to be associated with each item. This is then used as a basis to start negotiations.
Negotiating Dilapidations Claims
Often, there is disagreement between the landlord and tenant regarding the value of the dilapidations claim. These conflicts normally occur because of differences between the landlord’s and tenant’s viewpoints in terms of the level of disrepair, the cost of remedial works, or the degree of financial loss to the landlord.
In these cases, the next step is negotiation. Fortunately, the majority of dilapidations disputes can be sorted out without going to court. The two surveyors will enter negotiations to attempt to agree as many items in the dispute as possible. These discussions generally result in a mutually agreed settlement.
If the dispute cannot be resolved through private communication between the landlord, tenant and their surveyors, alternative dispute resolution (ADR) is normally the next step. This is not mandatory, but is strongly encouraged by the courts and the institute governing chartered surveyors – the RICS. ADR normally involves an independent expert review and determination, arbitration, or mediation.
Dilapidations Defence for Tenants
A key principle of dilapidations is that landlords can only claim for losses.
Section 18 (1) of the Landlord and Tenant Act 1927 relates to breaches of repair, and therefore dilapidations.
The first part of the section states:
‘Damages for breach of a covenant or agreement to keep or put premises in repair during the currency of lease, or to leave or put premises in repair at the termination of the lease, whether such covenant or agreement is express 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 aforesaid’.
This means that landlords cannot claim for an amount that is higher than the losses incurred by the leaving the property in disrepair. For example, if the property’s value is reduced by £100,000 because of the breaches, then that is the maximum that the landlord can claim, even if the cost of works is estimated at a higher value. If the property’s value is unaffected by the disrepair, then the landlord will not be able to recover any damages.
The second part of Section 18 (1) states:
‘and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premise in repair at the termination of a 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 be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement’.
This means that damages are not recoverable if the property is to be demolished. They are also not recoverable if the landlord intends to carry out alterations that would render remedial works to address the breach of the lease irrelevant or valueless.
This part of the Act is straightforward if the property is to be demolished, in which case landlords would find it almost impossible to claim for loss as a result of disrepair.
If the landlord is planning to carry out alterations, the situation is more complex. For example, if they are refurbishing the interior of the property, anything exterior or that affects the structural soundness of the property would still be likely to affect the value and could still be claimed, but damages to interior carpets, for example, could not.
If the tenant anticipates that best market value for the landlord would be achieved by refurbishment or change of use, or that the landlord does not intend to carry out all the repairs listed in the schedule, a Section 18 Diminution Valuation can be a vital tool in negotiations.
Section 18 Diminution Valuations for Tenants
Section 18 (1) of the ‘Act’ states that the approach for a valuation is to assess the value of the premises in repair, as if there were no breaches at all, and compare that with the actual value at the end of the lease (“out of repair”) to identify the extent of negation. The difference between the hypothetical “in repair” value and the “out of repair” value is the diminution in value, and this is the maximum that the landlord is allowed to recover.
A strong dilapidations defence will incorporate information from building surveyors assessing the degree of disrepair and the cost of works, and input from a general practice valuation surveyor, detailing the Section 18 diminution in value.
It is not unknown for the diminution value to be a tiny fraction of the landlord’s original claim.
Minimising Dilapidations Costs for Tenants: Before and During the Lease
Getting a Schedule of Condition
A schedule of condition is a report produced by a building surveyor before the start of a lease. It is a photographic and written record of the condition of every element of a building. These typically contain hundreds or even thousands of images, providing thorough documentation of the building at that moment in time. Everything will be captured, including roof tiles, gutters, paving, ceilings, drains, electrical fittings, specialist equipment, masonry, and flooring.
Can a schedule of condition limit repair obligations?
Yes! A comprehensive schedule of condition can be attached to a lease to provide evidence of the state of the building when the tenant too the lease on. In this way, a schedule of condition protects the tenant from the landlord claiming that they were responsible for disrepair that was already present when they took the lease on.
Getting a Pre-Acquisition Building Survey
You may also want to consider a pre-acquisition building survey. This will focus on the condition of the fabric and structure of the building, and will make sure you are fully informed of any repairs or maintenance that will be needed to keep the property functional and safe.
Estimated costs will be provided to help you budget over the coming years. Furthermore, getting a survey before signing a lease can help you negotiate terms or determine whether the responsibility for fixing defects lies with you as the incoming tenant, or the landlord.
Consider an Anticipated Schedule of Dilapidations
Your landlord may mandate that you cover the cost or preparing and serving and interim schedule of dilapidations. These will specify breaches made by you as the tenant and detail remedial works that are required. This is often done because the landlord wants to protect themselves in case the tenant defaults or goes into liquidation, but these schedules can prove helpful for tenants too. An interim schedule of dilapidations will help you understand what the landlord expects by lease-end, and opens up discussions at an early stage.
As a tenant, you can also instruct your own anticipated schedule of dilapidations, even if the landlord is not instructing one of their own. This can be really helpful as it tells you what works you will need to do to fulfil the repair requirements of your lease. You can use this information to help you understand the cost of ending your lease versus renewing it, to start work on rectifying breaches yourself, or to budget for a dilapidations claim at lease end. Getting an idea of the repairs that the landlord requires before lease end also gives the tenant chance to shop around for the best value contractors.
Carry Out Maintenance During your Tenancy
Keeping on top of repairs and maintenance during your lease can help minimise a dilapidations claim, particularly if you bear the lease conditions in mind.
Furthermore, it reduces the likelihood that the landlord will need to carry out extensive works after the end of a lease, resulting in loss of rent, which they would otherwise include in their dilapidations claim.
One common mistake is tenants making changes which improve the premises, but that result in a breach of the lease because the alterations were carried out without consent. For example, a tenant may add a mezzanine that they believe improves the use of space; however, in most cases the landlord will require such alterations to be removed and any damage made good. If you want to make alterations as a tenant, getting a licence to alter can protect you.
Allcott Commercial’s surveying services
At Allcott Commercial, our team includes surveyors from both disciplines, so we can support tenants on all aspects of their dilapidations defence, often saving our clients many thousands of pounds.
- On behalf of the landlord, we prepare interim schedules, terminal schedules and final schedules of dilapidations. We also sign off tenant works or support the agreement of financial settlement in lieu of outstanding breaches of the lease.
- On behalf of tenants, we review the landlord’s claim, the leases, and licences to alter, along with any other relevant documentation. We prepare a comprehensive defence using Scott Schedules to ensure that any claim accurately reflects any breach of the lease. We provide advice regarding progressing with works when there is time remaining within the lease term, and with negotiating a financial settlement when there is insufficient time or the lease has ended.
Find out more about our commercial building surveying and valuation services.
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