When you see the word “dilapidations” you may think about the potentially fractious period at the end of a commercial lease when tenant and landlord negotiate over a settlement for remediation to the recently vacated property. In this three-part series, we’ve been looking at the main stages of the life cycle of a lease and finally, we look at the end stage.
Dilapidations
The landlord may choose to serve a schedule of dilapidations on the tenant either before or after the end of the lease. A schedule of dilapidations is a list of breaches of covenant by the tenant and the remedial work required. It can be priced or unpriced depending on when it is issued. The schedule should be produced by the landlord’s building surveyor and served by their solicitor to ensure proper service in accordance with the lease. It takes into account the landlord’s intentions for the property (for example, to repair and relet, split the property into multiple tenancies, or redevelop it). Once served, the tenant should respond with their comments on the breaches, work and costs; they may wish to instruct their own surveyor to respond on their behalf. The two parties’ surveyors then negotiate the scope of work to be done or settlement figure to be agreed by the landlord and tenant.
Schedule of Conditions
There are three types of schedule:
- Interim schedule: often served on the tenant mid-lease with a repair notice and is typically unpriced, as it is assumed that the tenant will undertake the work themselves.
- Final schedule: served within 6-12 months of lease expiry, it can be priced or unpriced, and allows the tenant to do the remedial work during the lease term.
- Terminal schedule: served after lease expiry, always priced, and used for negotiating a settlement figure for damages to the landlord due to breaches of covenant by the tenant.
Saving money by spending
It is usually cheaper for the tenant to undertake maintenance and remedial work during the lease term as they can manage the work themselves, have time to shop around, can undertake work over months or years to spread the cost. Costs claimed are those reasonably foreseen to be borne by the landlord due to the breaches of covenant. They typically include:
- Cost of works; split into repairs, reinstatement (where items have been added or removed by the tenant), redecoration and statutory compliance (asbestos register, electric, fire alarm test, and gas safety certificates etc.).
- The landlord’s cost of producing and serving the schedule, usually recoverable from the tenant within the lease. This can include surveyor and solicitor costs and specialist surveys.
- The cost of specification and management of works on behalf of the landlord.
- Loss of rent, void costs, business rates etc. There is a significant burden of proof on the landlord for this claim; they need to have a new tenant ready to move in, which is only prevented by the condition of the property.
Regarding a terminal schedule, the landlord can “crystalise their loss” by doing the works as per the schedule, which makes claiming for damages easier. However, the landlord must be careful of improvement and supersession, which cannot be claimed from the tenant.
Section 18 valuations
Supersession is covered in Section 18 of the Landlord and Tenant Act 1927. This has the practical effect of limiting or defining the amount of damages that a landlord can recover for breach of the tenant’s repairing covenants. A “section 18 valuation” considers the diminution in value of the property by comparing the theoretical value of the property if in compliance with lease with its current value out of condition. It is generally accepted that the section contains two distinct limbs.
- The “objective” limb. The diminution in value, driven by the market. The landlord’s actual intentions regarding the property are not considered.
- The “subjective” limb looks at the landlord’s actual intentions at the point that the lease expires. It prevents the landlord from recovering damages for any disrepair which is superseded by the demolition or structural alterations that the landlord intends at the term date.
The above processes are set out in more detail in the Dilapidations Protocol, which aims to prevent the need for expensive litigation to settle the claim.
If the tenant chooses to renew their lease, the dilapidations liability typically transfers to the new lease.
In summary, there are many stages in the lifecycle of a lease during which the tenant and landlord must ensure they are compliant with their covenants. Regular maintenance and decoration during the term, and communication between parties, will help to reduce the tenant’s liability for costly damages at the end of the lease. This approach also helps the landlord to ensure their property remains sound.
Seek professional advice from Vickery Holman. We have a team of surveyors around the South West and can help you make the most of your lease.
