Dilapidations: the law and the reality
There is little doubt that we are likely to see increasing numbers of dilapidations disputes between landlords and tenants of commercial property. The Dilapidations Protocol within the Civil Procedure Rules (formally titled the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy), together with the relevant RICS guidance note, represent best practice for parties looking to pursue or meet a dilapidations claim. However, there can be practical or commercial issues when it comes to complying with these rules. So how do terminal dilapidations claims actually tend to work and to what extent should parties adhere to the rules for such claims?
Where should parties start in assessing a dilapidations claim?
The first point for parties to consider in a dilapidations situation is the extent of the tenant’s repairing obligations. By way of example, any schedule of condition attached to the lease will usually restrict the extent of repairs required by a tenant.
Following on from assessing the extent of the tenant’s repairing obligations, a landlord will want to establish whether there has been a breach of these responsibilities. Of course, tenants need to keep in mind that there is usually nothing in the lease to require a landlord to inform the tenant of the repairs required before the expiry of the lease – which can be particularly frustrating for a tenant trying to exercise a break option conditional on compliance or “material compliance” with the lease.
Despite this, landlords need to bear in mind that a lease or licence to alter may require them to notify the tenant before a tenancy ends of the extent to which alterations to the premises need to be removed (or left in place, as the case may be). Where notification is required, landlords should check and comply with the notice provisions within the lease and/or relevant licence. Even with all of the changes which have resulted from Covid-19, relying on e-mail service alone is unlikely to be sufficient – unless there are clear arrangements for this.
The review of these issues will usually be part of an overall instruction to a building surveyor to inspect the property and prepare a schedule of dilapidations (or advise on the likely dilapidations liability, in the case of a tenant’s adviser). Before any schedule is prepared, it is usually sensible for landlords to check what the lease allows in terms of costs recovery as this may affect when the schedule is served. Under the Dilapidations Protocol, those who serve a schedule before the end of a tenancy should either confirm to the tenant at the end of the tenancy that there have been no changes or else serve a further schedule within a reasonable time after the tenancy ends.
What are the initial steps for the parties to a claim?
In addition to consulting the Dilapidations Protocol, any specialist dilapidations surveyor practising in England and Wales will be well aware of the RICS guidance note on Dilapidations in England Wales (7th edition, published in December 2016). This guidance advises surveyors on the factors they should take into consideration when producing schedules of dilapidations, quantified demands, responses, Scott schedules and diminution valuations. The guidance note is essential reading for those advising landlords and tenants in dilapidations claims.
Advisers should also review the requirements set out in the Dilapidations Protocol. It states that a schedule of dilapidations should be served within a reasonable time, suggesting this will generally be within 56 days after the expiry of the tenancy. The schedule should contain the appropriate endorsement as required by the protocol, not least to confirm that full account has been taken of the landlord’s intentions of the property (as advised by the landlord, where the landlord’s surveyor signs). Where possible, a copy of the schedule should be sent to the tenant’s surveyor electronically so that comments can be contained in the one document.
A quantified demand usually now accompanies the schedule of dilapidations, as envisaged by the Dilapidations Protocol. This sets out the sum sought by the landlord as damages for the breaches detailed in the schedule as well as any other items of loss, for example loss of rent. The protocol envisages that certain detail should be provided with the quantified demand in order to substantiate the sums claimed and the legal basis for the claims. However, it is acknowledged in the RICS guidance note that the landlord will often not have completed the works at the time when the schedule is served and so a quantified demand is more likely to provide a detailed estimate of the likely costs of those works than invoices.
The protocol expects a tenant to respond to the quantified demand within “a reasonable time” and this should also contain a suitable endorsement. Again, 56 days is suggested as reasonable and this is sufficient in most cases. It is also expected that there should be a parties’ without-prejudice meeting after the tenant sends its response to the claim – with 28 days being given as a reasonable period for this.
Can parties choose not to follow the rules?
The broad principles of the Dilapidations Protocol outlined above are sensible in order to encourage the exchange of information and reasonably timely progress in the parties’ negotiations. However, the decision as to how a pursue a dilapidations claim beyond these stages will often depend on its likely value and involve an assessment of where it is sensible to incur costs.
In high-value cases or where there is a high risk that the matter is going to end up being litigated, it makes sense to follow the protocol’s requirements more closely. However, it can be sensible not to adhere rigidly to it in some instances – to see whether the parties can reach agreement without incurring costs which could make settlement more difficult and on evidence which may not be needed. If it transpires that agreement is not possible, the parties can always review the extent to which additional steps should be taken before any court action is pursued.
For example, one of the most contentious points is whether and, if so, when to provide a “section 18 valuation” (this refers to section 18(1) of the Landlord and Tenant Act 1927). The protocol makes it clear that a landlord should quantify its loss prior to issuing proceedings by providing a detailed breakdown of the issues and consequential losses. It notes that this may be based on either: “a formal diminution valuation or an account of the actual expenditure or, where [the landlord] has carried out some but not all remedial action, a combination of both; unless, in all the circumstances, it would be unreasonable to do so”.
The protocol also notes that any tenant relying on a defence on the basis of diminution “must state its case for so doing and provide a diminution valuation to the landlord”.
In many instances, it is the landlord who comes under pressure to produce a diminution valuation – especially where it has not undertaken all works specified in the schedule of dilapidations. However, parties will always need to review the relevant circumstances and bear in mind that there may be instances where it would be “unreasonable” to incur costs on a diminution valuation.
Another point which can arise is the Dialpidations Protocol’s suggestion that parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation for resolving the claim. Of course, no party can be forced to mediate and the decision as to whether to involve such a third party will often depend on costs, as well as the nature of the issues between the parties.
Unfortunately, there can sometimes be slavish reference to the protocol by parties and this can stall negotiations. Parties should bear in mind that the protocol expressly states that the court will be concerned “about whether the parties have complied in substance with the relevant principles and requirements and is not likely to be concerned with minor or technical shortcomings”. In reality, the issue of non-compliance with the protocol is likely to go to the question of costs and, even then, a judge will probably focus only on conduct which has resulted in costs being incurred unnecessarily and/or with any false representations. If you manage your case sensibly, with an appropriate exchange of evidence, then you are unlikely to be penalised.
This was originally published in Estates Gazette on 26 July 2021. For more information on the above please contact Emma Humphreys or your usual Charles Russell Speechlys contact.