1. Schedule of Dilapidations – What is it?
A schedule of dilapidations records the works required to be done to a property in order that it is put into the physical state the property should have been put in if the tenant had complied with its covenants or obligations contained within the lease of the property.
Landlords – need to be sure that they get the best advice and practice to avoid drawn-out expensive settlements.
Tenants – need proper planning and budgeting to ensure there are no unwelcome surprises at lease end. Both sides benefit from a considered approach which ideally starts before the lease is signed.
2. What does Dilapidations mean?
The term dilapidations refers to a state of disrepair in a property where there is a legal liability for the condition of disrepair. This legal liability usual arises from express covenants contained within a lease, but may be a consequence of the law of tort or implied contract.
Landlords and Tenants frequently enter into a lease without specific regard for condition at the commencement of the tenancy and no particular strategy to maintain the building in accordance with the repairing covenants during the period of occupation.
The landlord and tenant may renew the original tenancy without necessarily considering the condition of the property or the implication of any improvements or alterations, which might have been undertaken.
When the landlord/tenant relationship eventually ends, attention will focus on the condition of the building and the dilapidations issues.
Unless the parties to the lease have had the foresight to consider a dilapidations procedure well before the end of the tenancy, this is very often the starting point for a dilapidations dispute.
3. What is a “Yield Up” clause and does it affect dilapidations liability?
Dilapidations generally concern the Tenant’s failure to observe certain obligations within the lease, thereby breaching one or more covenants. In general terms, these breaches fall in to four main categories: Repair, Decoration, Reinstatement and Statutory Compliance.
The ‘Yield Up’ clause is key to reiterating the requirements on the Tenant elsewhere in the lease, as well as outlining further conditions to make sure the premises are handed back to the Landlord with vacant possession, and in a repaired, decorated, reinstated and cleansed state compliant with current regulations.
4. Does a landlord have to serve a schedule of dilapidations at the end of a tenancy?
There are two types of schedule of dilapidations, which are served at different times during and after the tenancy.
- An interim schedule is served during the term of the tenancy, in contemplation of remedy of any alleged breaches during the contractual term of the lease and not in anticipation of the lease end.
- A terminal schedule of dilapidations is prepared at or shortly after the end of the lease term. The tenant will not be entitled to undertake remedial works themselves once their right of occupation has come to an end.
5. Does the landlord need to follow a Procedure to serve of Schedule of Dilapidations?
The short answer is yes. The schedule must specify:-
- The terms that have been allegedly breached.
- The Landlord’s opinion of what is required to return the building to a satisfactory condition.
- A cost schedule for the necessary remedial works.
6. Is there a body which governs dilapidations procedure?
The Royal Institution of Chartered Surveyors has issued its own Guidance Note on Dilapidations giving practical advice to surveyors which explains how to prepare, serve and respond to dilapidations claims, both before and after the commencement of proceedings.
7. Why are Dilapidations so Complicated and Costly?
Dilapidations is unique to the UK and is enforceable in a court of law. Clearly, a landlord will interpret disrepair in an entirely different way to a tenant and the legal interpretation of lease clauses can vary on a case-by-case basis.
8. Should the same approach be taken with all dilapidations claims?
The property market dictates the approach to a dilapidations claim depending on whether demand for that kind of space is weak or not.
In weak market conditions:
During a market downturn an oversupply of space or a lack of demand results in tenants being able to negotiate higher incentives, lower rents and more flexible lease terms when taking a new lease. A shrewd tenant will also negotiate their end of term options early.
Landlords will look at the dilapidations issues early and take measures to avoid lengthy vacant periods.
In a strong market:
During a buoyant market, supply is often limited which means landlords are in a good position to negotiate strong terms. Tenants should look beyond the rent and initial incentives when negotiating a lease and should look at their liabilities over the duration of their tenancy.
9. What is Section 18(1) and how does if affect dilapidations?
A Section 18 (1) Valuation provides a statutory cap for damages, by calculating the difference by which the value of the landlord’s interest has been reduced on account of the breaches of lease covenant. This is otherwise known as the ‘diminution in value’ of the landlord’s interest.
The cap can have a significant impact on a landlords dilapidations claim. For example in Hammersmatch V Gobian the landlords claim was reduced from £6.8m to less than £1m. Where a building is in disrepair at the end of the term, Section 18 (1) of the Landlord and Tenant Act, 1927, limits the landlord’s claim for damages for breach of a repairing covenant. There are two parts to section 18 (1):-
The first limits the claim to the amount that the value of the landlord’s reversion is diminished by breaches of the covenant to repair. The landlord cannot recover more than it has cost, in terms of the loss caused to the value of the property. This is the diminution in the property’s reversionary value, caused by the disrepair.
The second part states that no damages are recoverable, if it can be shown that on expiration of the lease the premises would be demolished or altered to the extent that would render valueless the repairs in question.
10. What is the Dilapidations Protocol?
The Dilapidations Protocol was formally adopted by the Court Rules on 1st January 2012, and is now Law in England & Wales.
The aim of the Protocol is to ensure that a claim is reasonable and understandable, facilitating settlement before court proceedings are issued. Where litigation cannot be avoided, then the Protocol facilitates the efficient management of the process.
The Pre-action Protocol is produced by the Property Litigation Association (PLA) in consultation with the Royal Institution of Chartered Surveyors (RICS). It is quite clear and unavoidable, and should be used in all claims for damages for breaches of tenant’s repairing obligations, at the expiry of the lease term.
The courts now treat the Protocol as the normal and reasonable approach to pre-action conduct, and non-compliance might bring sanctions against the party concerned. It is therefore essential that surveyors, landlords and tenants understand fully the implications of this document.