It is not uncommon for commercial landlords and tenants to disagree about the extent to which repair, redecoration and reinstatement obligations have been complied with when a lease comes to an end. Disputes of this nature are known as a ‘dilapidations claim’ and need to be handled with care, both to minimise the risk of them ending up in court and to avoid either party being exposed to unfounded liability or unnecessary costs.
As Phil Moir, dispute resolution lawyer with Richard Reed Solicitors explains, ‘Dilapidations claims have the potential to get out of hand quickly if they are not managed well. If professional advice is sought at an early stage, this will help everyone to be clear about where they stand, what they want to achieve and the most appropriate way for any disagreement to be handled.’
Why dilapidations claims arise
Dilapidations claims arise for a variety of reasons, but most commonly centre on disagreements about:
- the tenant’s liability to reinstate the premises to its original condition;
- what constitutes ‘reasonable’ repairs;
- the tenant’s entitlement to offset improvement costs; and
- the landlord’s calculation of the compensation they are permitted to claim.
Types of dilapidations claims
Dilapidations claims fall into three categories: interim claims, terminal claims, and final claims.
Interim claims are made during the course of the lease, to ensure that tenants keep on top of their obligations and that incidents of non-compliance are quickly nipped in the bud.
Terminal claims are made in the run up to the lease ending, to give the tenant advance notice of what the landlord is expecting and so they have a chance to voice potential concerns.
And final claims are made once the lease has expired, when the landlord is clear about the nature of the breaches that have occurred and the costs and related financial losses. These include the cost of carrying out any work the tenant has failed to undertake, the loss of rent occasioned by these works having to be done by the landlord, service charge and rate costs for the relevant period, and reimbursement for any professional fees incurred.
How dilapidations claims should be approached
Before taking any steps in relation to a dilapidations claim, it is important that you take advice from a solicitor on the nature and effect of the repair, redecoration and reinstatement obligations that are set out in the lease, and also on the potential impact of section 18 of the Landlord and Tenant Act 1927, which provides that:
- repair costs cannot be claimed against a tenant where there is evidence to show that when the lease comes to an end, or shortly afterwards, the previously occupied property will be knocked down or altered in such a way that carrying out the stipulated repairs would be pointless; and
- the cost of any repairs that can be claimed must not exceed the amount by which the value of the landlord’s interest in the property has been reduced as a result of it being left in a state of disrepair (referred to as the ‘diminution in value cap’).
Interim dilapidations claims
Interim claims are part and parcel of good commercial property management. While there is no set procedure for dealing with them (in the absence of anything prescribed in the lease), the process detailed below in respect of terminal and final notices should be borne in mind.
Terminal and final dilapidations claims
For terminal and final claims, landlords and tenants should follow the dilapidations Pre-Action Protocol, published by the Ministry of Justice. This sets out a framework for the exchange of information relevant to the claim and encourages the use of meetings, settlement offers and alternative dispute resolution to keep disputes out of court wherever possible.
In brief, the protocol stipulates that:
- the landlord should send a schedule of dilapidations to the tenant, usually no more than 56 days after the lease ends, which clearly sets out the obligations which the tenant has failed to comply with, the works that need to be done to put this right, and the landlord’s costs. This should be accompanied by a quantified demand which details and substantiates the landlord’s claim for compensation;
- the tenant must reply to the schedule and quantified demand, usually within the next 56 days, confirming whether the alleged breaches and stipulated remedial works are accepted or disputed;
- the landlord and tenant (and/or their respective advisors) are then encouraged to meet on a without prejudice basis to see if the dilapidations claim can be resolved and, if not, whether the issues in dispute can at least be narrowed. This meeting should take place within 28 days following the response being received – although, where the parties agree, it can also take place before the response is issued;
- the landlord and tenant are also encouraged to consider whether it may be appropriate for the claim to be referred to some sort of alternative dispute resolution process, such as mediation, early neutral evaluation, or expert determination;
- where settlement cannot be achieved, the landlord must proceed to provide a firmer quantification of losses i.e. through the production of a formal diminution valuation or an account of actual or expected expenditure and financial costs;
- if the tenant intends to raise a section 18 defence, or any other defence related to diminution in value, then this must now be confirmed – usually within 56 days of the firmer quantification of losses being provided; and
- the parties must then create some time to take stock before the landlord proceeds to take the last resort step of submitting their claim for determination by the court.
How we can help
We work closely with clients to understand their rights and obligations and to develop a strategy which is geared towards achieving a resolution as quickly and economically as possible, and which is also aligned to any relevant commercial aims or practical requirements.
Working in conjunction with our commercial property transactions team, we can also deal with dilapidations claims which arise in the context of ongoing negotiations about the possible renewal of a lease and where there may be a compromise to be struck in order to get the renewal agreed and signed off.