Dilapidations

Question 1

Define the term ‘dilapidations’

Answer 1

‘The term ‘dilapidations’ refers to a state of disrepair in a property where there is a legal liability for the condition of disrepair’

Those items of disrepair that arise through breach
of contract, especially by one of the parties to a lease, giving rise to a right to damages or remedial action

Question 2

What are the 3 factors for dilapidations?

Answer 2

• A lease (usually a commercial lease of 25 years or less but may be a longer term);
• A piece of property or part of an estate (e.g. offices, a
warehouse, or a unit in a shopping centre)
• A state of disrepair for which one party has accepted legal liability and for which the other party has suffered or will suffer financial loss’

Question 3

Why does a dialpidations claim benefit the owner of the property?

Answer 3

If a building is not properly maintained, it can become damaged or fail, with the effect that the value and usefulness of the building might be diminished, either to its owner or to those occupying it

Question 4

What is in both of the parties interests in terms of responsibility for the leased property?

Answer 4

• When a building is let, the landlord and tenant will be keen to ensure that one or both of them take on the responsibility to maintain the property.
• identifying what the landlord or tenant may or may not do to the premises is decided upon in the lease

Question 5

What is a dilapidations claim?

Answer 5

A dilapidations claim is an assessment of whether these provisions have been complied with and the implications of this

If a building has been damaged, and assuming that action is required, then the first task will be to seek to determine what the breaches are, generally by recording them in a Schedule of Dilapidations

Question 6

How does the length of the lease affect the remedial actions?

Answer 6

• The remedies that are available will be influenced principally by the length of the term of the lease that is remaining
• However, when these remedies are to be imposed on the other side, especially where this takes the form of financial compensation, the actual losses that these breaches cause need to be taken into account

Question 7

What two factors must be considered when covering the dilapidation task?

Answer 7

• The extent of the breaches of the lease, together with the works necessary to correct them
• The actual effect that these have on the other’s interest

Question 8

What does fitting out mean?

Answer 8

Works required by a tenant to make the premises fit

and ready for occupation and use

Question 9

What does forfeiture mean?

Answer 9

The ability of the Landlord to bring the Lease to an
end during the Term as a result of the Tenant not having paid rent, not having complied with covenants or becoming insolvent

Question 10

What is a full repairing lease?

Answer 10

A full repair and insuring lease means that a tenant is responsible for all maintenance (internal and external) as well as the buildings insurance. Also known as FRI
or full repair

Question 11

What is an internal repair only lease?

Answer 11

An internal repair only lease means that a tenant is responsible for internal maintenance only. The Landlord is likely to be responsible for external maintenance

Question 12

What is a licence?

Answer 12

A document by which the Landlord gives consent

usually to alterations to the premises or the assignments or underlettings

Question 13

What is a rent review?

Answer 13

The basis on which the rent can be increased

during the Term. Rent Reviews often take place every 3 or 5 years. The Lease will set out how the rent is to be reviewed

Question 14

What is a service charge?

Answer 14

The amount that the Tenant has to pay to
the Landlord for maintaining and repairing common parts of the property or building such as repairing structural parts with an Internal Repairing Only Lease or areas of a building or estate that are used in common with other Tenants

Question 15

What is an assignment?

Answer 15

The transfer of the Tenant’s interest in the Lease to
another person (the Assignee)

Question 16

What is a break clause?

Answer 16

A clause within a lease allowing the landlord or

tenant (or both) to terminate the lease upon serving Notice as defined in the lease

Question 17

What are covenants?

Answer 17

The obligations that the Landlord and the Tenant
must comply with. These are set out within the Lease itself. The Tenants Covenants are one of the main parts of the Lease

Question 18

What is demise?

Answer 18

The area that is let to the Tenant under the terms

of the Lease

Question 19

What is a term?

Answer 19

The length of time that the Lease is granted to the Tenant for

Question 20

What is underletting?

Answer 20

The granting of an additional Lease by a Tenant to a third party to another person (the Under tenant) of all
or part of the premises with the existing lease staying in place

Question 21

What does yielding-up mean?

Answer 21

At the end of a lease, a tenant is required to Yield Up in accordance with the repairing and redecorating covenants contained within the lease A tenant is also required to remove any alterations which they may have been carried out, including the removal of demountable partitions, for which an express licence is usually not required

Question 22

What can a landlord include in a dilapidations claim?

Answer 22

• The cost of repairing the demised premises
• Decorations
• Reinstatement
• Professional Fees

Question 23

What are repairs in the dilapidations claim?

Answer 23

• This may include putting the premises into repair that meets the standards found at the beginning of the lease
• The obligations may be ‘limited’ by a Schedule of Condition recording the standards required

Question 24

What are decorations in the dilapidations claim?

Answer 24

• As standard, most leases require that the premises be decorated internally every five years and externally every three years
• There will usually be a clause requiring that the entire premises be decorated in the last year of occupation

Question 25

What does reinstatement mean in the dilapidations claim?

Answer 25

* It is usual for the tenant to be required to reinstate the premises to the configuration/layout in which the premises were originally found * For example, this is likely to include the stripping out of any partitioning or plant, or mezzanine floors etc

Question 26

What do professional fees include in the dilapidations claim?

Answer 26

* For Contract Administration – The fees for preparing the specifications, obtaining tenders and administrating works on site * For Professional Fees for preparation of the Dilapidations Schedule. * Fees may include specialist testing

Question 27

What does a loss of rent mean in the dilapidations claim?

Answer 27

• The market rent for the period it would take to undertake the works plus possibly then period for preparing specifications and obtaining tenders

Question 28

What does loss of service charge mean in the dilapidations claim?

Answer 28

• Applicable where the building is in multiple occupancy

Question 29

What does VAT mean in the dilapidations claim?

Answer 29

• On the cost of the works where not recoverable by the landlord

Question 30

What is the strategy for the landlord in the dilapidations process?

Answer 30

The landlord wants the highest possible damages whilst the tenant wants to minimise his costs

Question 31

What is the strategy for the landlord in the tenants process?

Answer 31

* Tenants should seek the advice of a professional well in advance of the lease expiry in order that the dilapidations liability can be assessed and a strategy established * The adviser can then work on behalf of the tenant to negotiate an acceptable settlement with the landlord or to project manage any required works

Question 32

What can over-exaggeration or understatement of dialpidations schedules lead to?

Answer 32

The Civil Procedure Rules have resulted in a vast reduction in this approach as the courts can now impose damages on any party who is found to be ‘obstructing’ the process, which eventually ends up coming before the courts. This is particularly important as any subsequent litigation carries with it the danger of a heavy costs order against the party who exaggerates or understates its position ‘In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including the conduct of all the parties’

Question 33

What can the tenant do if the landlord sends an interim schedule?

Answer 33

The tenant can seek relief under the Leasehold Property (Repairs) Act 1938 (as amended by the Landlord and Tenant Act 1954), if the lease has more than three years to run (and the lease term is over seven years)

Question 34

What are conditions for the tenant not to do the interim schedule?

Answer 34

The lease has to have more than three years to run (and the lease term is over seven years) This will normally be successful provided that the repairs are not required to put the building in repair under a specific lease covenant or to avoid substantial damage to the value of the revers

Question 35

In respect of a terminal schedule, what options does the tenant have for a number of options when the end of the lease approaches?

Answer 35

* The tenant can attempt to comply with all his repairing obligations either by his own interpretation of the lease or by reference to the landlord’s schedule * The tenant can do nothing, wait until the lease expires and then seek to negotiate a financial settlement * He can carry out limited works and seek to negotiate a settlement in respect of the work he is not undertaking

Question 36

How does the The Leasehold Property (Repairs) Act 1938 affect the landlord and tenant?

Answer 36

* Where a tenant claims relief under the 1938 Act, the tenant within 28 days of service of the section 146 notice, serves a counter-notice taking the benefit of the Act * The landlord may not proceed with a damages claim (or forfeiture) without first obtaining the permission of the court

Question 37

What are five grounds under the 1938 Act which the court can make the tenant fulfil the interim schedule?

Answer 37

When the immediate remedying of the breach in question is required to prevent substantial diminution in the value of the landlord's reversion, or that the value thereof has been substantially diminished by the breach When the immediate remedying of the breach is required for the purposes of any enactment, by-law or other provision having effect under an enactment, or for any order of a court or requirement of any authority In a case in which the tenant is not in occupation of the whole of the property with regard to which the covenant or agreement is proposed to be enforced, and where the immediate remedying of the breach is required in the interests of the occupier of the property or of part thereof When the breach can be immediately remedied at an expense that is relatively small in comparison with the much greater expense that would probably be occasioned by postponement of the necessary work In special circumstances which, in the opinion of the court, render it just and equitable that permission should be given

Question 38

Why might the tenant not be required to pay the full or no reinstatement?

Answer 38

* If the tenant has discharged all his liabilities then the matter should be concluded swiftly, however this option is not always viable, as the premises are usually required by the tenant until immediately prior to the lease expiry * It is also possible that the landlord may have plans for the building which would over-ride the requirements to carry out some works (ie substantial refurbishment) * The landlord may have a new tenant wishing to retain some of the facilities for which there is a requirement for reinstatement * There is also the danger that the works carried out by the tenants may not be of a satisfactory standard resulting in a full claim from the landlord in any event

Question 39

What are the principles of the damages regarding the dilapidations claim?

Answer 39

• A landlord cannot recover more than its loss. section 18(1) of the Landlord and Tenant Act 1927, a landlord cannot recover more than the diminution in the value of its reversion • The purpose of damages is to compensate an injured party for its loss; it is not to punish. That is the position regardless of the nature of the breach(s) • As a consequence of the common law and statutory provisions described below, generally, the damages recovered by a landlord will be agreed or determined by reference to: • Or, a combination of the two

Question 40

What is the purpose of damages in the dilapidations claim?

Answer 40

The purpose of damages is to compensate an injured party for its loss; it is not to punish. That is the position regardless of the nature of the breach/s

Question 41

Define and explain the Tenant and Law Act 1927

Answer 41

• The common law position is that, where there has been a breach of the repair covenant, the normal measure of damages is the cost of repair

Question 42

What two calculations are required to calculate the diminution of the property?

Answer 42

• In order to calculate the diminution two valuations are required. Firstly to compare the property’s value in poor repair; and secondly to look at the value the property would have achieved in the open market if it had been maintained by the tenant • The second valuation is a hypothetical assessment, as the premises would not currently be in repair. It must consider all potential uses for the premises, as it may be more valuable as a redevelopment site or for an alternative purpose

Question 43

What is the first part to section 18(1)

Answer 43

• 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

Question 44

What is the second part to section 18(1)

Answer 44

• 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

Question 45

What is the role of the Building Surveyor?

Answer 45

• The role of the Building Surveyor will differ significantly depending on whether acting on behalf on a Landlord or a Tenant

Question 46

What is the difference when the building surveyor is appointed by the landlord instead of the tenant?

Answer 46

• When acting on behalf of a landlord, the Building Surveyor will prepare a schedule of dilapidations. When negotiating on behalf of a Landlord the Building Surveyor will aim to maximise that amount of damages payable • When acting on behalf of a tenant the Building Surveyor will receive and scrutinise a schedule prepared by the landlord’s professional advisor. When acting on behalf of a tenant the Building Surveyor will be trying to minimise the amount of damages payable

Question 47

What should the Building Surveyor’s role include the following to ensure that the tenant minimises financial liability:

Answer 47

Assess the repairing, decoration, alteration and yield up covenants within the lease and any other supporting documentation Advise tenant as to whether it is best to undertake certain works prior to the expiration of the lease in order to reduce/remove the dilapidation liability or to seek to negotiate a financial settlement with the landlord Prepare a report assessing the dilapidations liability, which will provide a realistic breakdown of the potential claim in relation to building works, loss of rent, service charge and insurance When project managing works, ensure that the scheduled works and costs do not exceed the specific liabilities and will not be superseded by essential works required to market the premises Be persistent in negotiating a settlement in order to minimise the client’s uncertainty over liabilities or the potential monies available to undertake repairs

Question 48

What does the CPR include regarding the conduct of all parties?

Answer 48

Conduct before, as well as during, the proceedings, and in particular the extent to which the parties followed any relevant pre-action protocol Whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue The manner in which a party has pursued or defended his case or a particular allegation or issue; and Whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.’

Question 49

What does the CPR include regarding the conduct of all parties?

Answer 49

Conduct before, as well as during, the proceedings, and in particular the extent to which the parties followed any relevant pre-action protocol Whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue The manner in which a party has pursued or defended his case or a particular allegation or issue; and Whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.’