Landlord and tenant solicitor, Emma Slade, looks at dilapidations at the end of a commercial lease.
A written commercial lease sets out the agreement between a landlord and the tenant, and the obligations of each party under it. Specifically, it will set out the obligations of the tenant as to repairing covenants (keeping the premises in good or reasonable repair), decorating requirements, or even reinstatement. Importantly, it will also specify how the property is to be presented once the lease has expired and is returned to the landlord. And the Landlord will be checking that the property is in the correct condition – and that all the covenants have been met. Meet ‘terminal dilapidations’.
Repairing obligations and terminal dilapidations
During a lease, if the landlord considers that the tenant is in breach of its repairing obligations, the landlord can serve what is known as a “s146 Notice” which sets out details of the breach and method of remedy. If the tenant fails to comply, then the landlord can seek to forfeit (terminate) the lease without any reimbursement of the premium the tenant paid to obtain the lease.
At the end of the lease, an inspection will be carried out to determine whether the tenant has been complying with the repair and maintenance obligations. This is usually done by instructing a surveyor who will prepare a formal report, identifying the defects and the cost to the landlord of putting it right, as well as the loss of rent for the period that the property remains vacant whilst the works are undertaken.
Section 18(1) of the Landlord and Tenant Act 1927
However, it is important to note that the cost of the works cannot exceed the diminution in value to the premises, and section 18(1) of the Landlord and Tenant Act 1927 applies.
Section 18(1) provides the principal statutory protection for commercial tenants facing claims for dilapidations arising from disrepair. In simple terms, a landlord cannot recover more in damages for disrepair than the amount by which the disrepair has reduced the value of the landlord’s reversionary interest in the property.
Section 18(1) also provides that a landlord cannot recover damages for disrepair if the premises are going to be demolished, substantially altered or redeveloped in a way that would render the repairs valueless.
In those circumstances, the landlord may recover little or nothing for the relevant items of disrepair because the failure to repair has not caused a real loss.
The surveyor’s report
The surveyor’s report itself does not need to be in a specific format, and any surveyor familiar with dealing with “dilapidations claims”, will know the relevant legislation to refer to and how to draft such a report.
Dilapidations Protocol
Specifically, the requirements are set out in the “Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy”, more simply known as the ‘Dilapidations Protocol.’
The whole purpose of the ‘Dilapidations Protocol’ is to set out a specific timetable for the dilaps claim to be dealt with, both expeditiously and fairly between the parties and, as much as possible, to avoid litigation.
The Dilapidations Protocol is intended to be user friendly so parties can understand the procedure, but in reality, it can be quite daunting, especially given there are consequences if the timetable is not kept to.
Quantified Demand
Once the report has been prepared, a formal letter or “Quantified Demand” needs to be sent to the former leaseholder, setting out specific information and setting out the recompense the landlord requires. This can be done by the landlord or their surveyor, but more usually it is done by a solicitor.
Tenant’s response
Once the Quantified Demand has been served, the former tenant has an opportunity to respond.
The tenant will often instruct their own surveyor to review the landlord’s allegations and prepare a formal response. The tenant may challenge whether there has been a breach of the lease, whether the proposed works are necessary, or whether the landlord’s cost estimates are reasonable.
Settlement negotiations
Most dilapidations claims are resolved through negotiation rather than court proceedings.
Once surveyors and solicitors for both parties have exchanged their views, discussions often take place with the aim of reaching a commercial settlement. This can save significant time and costs when compared with litigation.
Court proceedings
If an agreement cannot be reached, the landlord may issue court proceedings to recover damages.
The court will consider the terms of the lease, the alleged breaches, the evidence of the parties’ surveyors, and any statutory limitations on the landlord’s claim. The court expects parties to have complied with the Dilapidations Protocol before proceedings are issued.
Why early legal advice is important
Dilapidations claims can be technically complex and often involve substantial sums of money.
Obtaining specialist legal advice at an early stage can help landlords preserve their position and assist tenants in identifying potential defences, challenging unreasonable claims and limiting their exposure.
