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21st February, 2018 by Bill Trow
The expression “dilapidations” refers to any breach of lease covenants which relate to the condition of a leased property. This can apply to, among other things, a tenant’s covenants to repair the premises, to decorate or to remove alterations.
The process for ensuring that dilapidations are remedied usually takes place at the end of a lease, and any such dilapidations are commonly labelled “terminal” or “lease end” dilapidations. The procedure for determining liability can be complex and can potentially end up in Court.
We set out below a step-by-step guide for landlords looking to ensure either that their properties are handed back to them at the end of their lease in the correct condition, or that they are adequately compensated for any disrepair which remains outstanding.
1. Appoint a surveyor to inspect the property and prepare a Schedule of Dilapidations
Landlords will usually seek the help of a professional surveyor when a lease is approaching the end of its term. A surveyor will inspect the leased premises and will prepare a Schedule of Dilapidations. This is a document which lists any alleged breaches of covenant by the tenant and proposes necessary remedial works. Occasionally a Schedule of Dilapidations will estimate the costs of the proposed works. This Schedule can be served on the tenant before the end of the lease to allow the tenant time to carry out works themselves.
Often a surveyor will ask a landlord what their intentions are for the premises once the lease has ended, as this can affect the extent of the tenant’s liability for dilapidations (for instance, if the landlord is intending to completely alter the premises, a tenant will not be expected to spend time and money decorating prior to the end of the lease).
2. Instruct a solicitor to serve the Schedule of Dilapidations (and Quantified Demand)
Once the Schedule of Dilapidations has been prepared, it is served on the tenant. A solicitor is normally instructed to deal with service, as the lease can provide for specific methods of service.
If a dilapidations claim does end up in Court, a Judge will want to see that the parties have complied with the (succinctly named) “Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy” (or the “Dilapidations Protocol”, for short). The Dilapidations Protocol contains guidance for serving the Schedule of Dilapidations, so it should be referred to at an early stage as non-compliance can have adverse costs consequences. A link to the Dilapidations Protocol can be found at the bottom of this article.
Once the lease has come to an end, a Quantified Demand should also be served on the tenant, which will provide a full itemisation of the loss claimed by the landlord, and will form the basis for any dilapidations claim.
While the landlord will technically have at least 6 years from the end of the lease to commence a dilapidations claim, the Dilapidations Protocol suggests that the Schedule of Dilapidations and Quantified Demand ought to be served within 56 days of the end of the lease.
3. The tenant’s response
Once they have received a Schedule of Dilapidations, the tenant will likely instruct their own surveyor (if they have not done so already) who will carry out an inspection of the premises and prepare a response to the landlord’s Schedule. This response will identify areas where the tenant agrees with their liability for dilapidations and areas where they disagree.
4. Next steps – tenant’s repair works and/or settlement
At this point, if the lease has not ended, the tenant may choose to carry out necessary works themselves to limit their lease-end liability.
Otherwise, the tenant will attempt to negotiate a settlement with their landlord for any dilapidations liability. There will inevitably be areas of liability which the tenant disputes. The parties’ surveyors and solicitors generally attempt to narrow these areas in negotiations, so that a settlement figure can be reached.
5. Alternative Dispute Resolution and/or Court proceedings
Settlement is not always possible. Sometimes parties can become entrenched in their positions, or there is a complex legal point which cannot be agreed between the parties. In these circumstances, a landlord (or sometimes a tenant) will be forced to litigate.
Litigation should be a last resort. Parties are encouraged to consider less expensive methods of Alternative Dispute Resolution (ADR) and leases often provide for ADR to be used in the first instance.
Should a dilapidations claim end up in Court, proceedings will generally be decided by a Court Order. If the landlord is successful in their claim and is awarded a sum for dilapidations, they will ask the Court to make an Order that the tenant pays their legal costs. Similarly, if the Court finds that there is no dilapidations liability or some liability but at a level below any offer made by a tenant, then the tenant will seek their costs from the landlord. This brings us onto the importance of making offers during the dilapidations process.
6. Offers to settle
Throughout the dilapidations process, parties should be encouraged to make offers to settle dilapidations claims. If a claim reaches trial, the Judge will be keen to see that offers have been made and that each party has attempted to avoid the additional costs of litigation.
Offers to settle can be made in various ways, at any stage in proceedings, but will commonly come in two formats:
Part 36 offers – this is a formal offer, which must be made in a specific way (usually by a party’s solicitor). Failure to “beat” a Part 36 Offer in Court will result in automatic adverse costs consequences for the recipient of the offer.
Calderbank/without prejudice offers – offers to settle can be made on a less formal basis, which can allow the parties more flexibility to come to an agreement. Generally any such offer would be marked “without prejudice save as to costs” which ensures that the offer remains hidden from the Court, until such time as the Judge addresses the issue of costs. Whilst the costs consequences of failing to beat a without prejudice offer are less severe than failing to beat a Part 36 offer, there is still a costs risk if such an offer is ignored (which makes this type of offer a useful tool for settling proceedings).