Don Peel

Partner

Commercial Dispute Resolution


Dilapidations Claims - A Brief Overview

Don Peel

The starting point for any dilapidations claim is to calculate the cost of the works required to remedy the breaches.  Here we are mainly considering breaches of repair covenants, decoration and reinstatement provisions but also on occasions the tenant’s obligation to remove or repair fixtures and fittings at the end of the term. 

The process starts when the lease is nearly at an end, typically 3-6 months before the term date. The landlord ought to get a building surveyor to prepare a schedule of terminal dilapidations and to send this to the tenant with the proviso that it is subject to change if further dilapidations are discovered. The schedule should notify the tenant of the breaches by reference to the lease terms and provide a costing for doing the works of repair and decoration etc.

Any holding over period under statute will lengthen the term and a reviewed or up-dated schedule should be considered so that the state of the premises at the end of the lease is evidenced in the schedule. It is usual to give the tenant sufficient information about the breaches to give them an opportunity to undertake the works before the lease expires. An alternative would be to agree a schedule of works or a payment in lieu of the work actually being undertaken by the tenant.

If the lease expires, the tenant’s right to do the works ends and the landlord should serve an up-date schedule in respect of all outstanding dilapidations. It is usual for the landlord to instruct a property litigation solicitor to serve the schedule at this point and to make a monetary claim by reference to the cost of the works, the cost of preparing and serving the schedule and professional and legal fees. The landlord is under no obligation to actually do the works but if he does, this is a good indication of the true value of his claim. In addition, an intention to do the works will give the landlord additional claims associated with the loss of rent for the period during the works as well as contract and administration fees associated with the conduct of the works.

The landlord may also have a professional fee connected with negotiations and legal fees, which will be recoverable from the tenant as a cost of the litigation.

The true value of the landlord’s claim is governed by section 18 of the landlord and Tenant Act 1927. This section provides that any claim is capped by the diminution in value of the landlord’s reversion if the diminution is less that the cost of works. Calculation of diminution requires two valuations, the first of the property in repair with the covenants satisfied and the second of the property out of repair as left by the tenant at the end of the lease. The difference between the two valuations equals the diminution.

Often the diminution will be less than the cost of the works but this is not always the case. From a landlord’s point of view it is better to argue that the cost of works is equal to or greater than the diminution and for the tenant the opposite applies. This is why it is important for both parties to find a good surveyor who specialises in section 18 valuations. A case can succeed or fail on the strength of a party’s valuation evidence. It is best to find a valuer who also has expert witness experience and is comfortable under cross-examination in court. The appointment of an expert is often best left to a property litigation solicitor. 

If settlement cannot be achieved early or within the pre-action protocol period of 56 days then sufficient consideration should be given by the landlord to issuing a claim. Provided the landlord has done all he can to try to settle the claim then he ought not to be scared of litigation. The tenant, likewise, should not delay trying to negotiate a proper settlement otherwise litigation is justified and the landlord had a very good chance of recovering his costs of the litigation, particularly when the tenant has made no reasonable offer of settlement. 

Once proceedings are issued, the court will give directions for the management of the case so that the trial judge can fully assess the claim. The trial judge’s task is to listen to the evidence and ascertain the value of the claim and to award damages and probably costs to the winning party. In most, if not all cases there will be a genuine dilapidations claim by the landlord and the landlord will be awarded damages. The landlord will also get a costs order unless the tenant has made an offer which is better than the Judge’s decision.

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