Over the last year or so as the economy has taken a dive, the number of disputes involving dilapidations has soared. With many tenants reviewing costs and operations as the recession continues to bite, the number of premises being closed has, of course, increased, bringing up the thorny and potentially costly issue of the condition of the premises and whether dilapidations are due.
It is first important to understand what is meant by the term. ‘Dilapidations' are breaches of repairing obligations, usually by the tenant, under a commercial lease. The relevant lease clauses usually include repair, decoration, alterations (including reinstatement) and yield up. These clauses will vary from lease to lease and set the bench mark by which the tenant is expected to maintain and repair the premises.
Although usually an issue at term end, they can also be relevant during the term in relation to break clauses, statutory lease renewal, requests to sublet/assign and where a landlord is concerned that disrepair is prejudicing the value of its reversionary interest.
In some cases, tenants are simply extending their lease in order to delay the issue of dilapidations until the economy improves. They may use the opportunity to re-negotiate for better terms and, as the landlord has the benefit of keeping the tenant for longer, the deal is mutually advantageous.
Surveyors play an important role in the dilapidations process and should be involved at an early stage. They can prepare Schedules of Dilapidations, deal with negotiations and frequently act as expert witnesses and independent adjudicators.
A landlord can only claim for disrepair (items which fall below the requisite standard of repair). The wording of the repairing covenants is highly relevant, but cannot be read in isolation. The case of Proudfoot v Hart brings in to play the importance of age, character and location. Whilst each case must be judged on its own merits, the following principle will often apply:
a) Good repair does not require perfect repair , the standard will vary from building to building and location to location
b) The tenant is not expected to reverse the natural ageing process
c) The tenant may not have to return the premises in exactly the same condition as it was in at the beginning
Leases will sometimes incorporate a Schedule of Condition in order to limit the tenant's repair responsibilities, particularly where the property is dilapidated at the outset. However, this may offer little protection where items are likely to require renewal during the term.
Under common law the normal measure of damages is the cost of repair, however Section 18(1) of the Landlord and Tenant Act 1927 limits damages to the reduction in value of the landlord's reversionary interest, which could be a much smaller sum.
The two major risks in any dispute are cost and uncertainty. In the current climate, it is more important than ever to manage these risks effectively. Dilapidations litigation can be notoriously expensive. However, if parties involve their professional advisers and take an early ‘reality check', they can usually reach a sensible resolution early in the dispute.
It is essential to follow the Pre- Action Protocol: it exists to help parties reach agreement without having to resort to court proceedings and there are costs sanctions if you ignore it. A key theme is ADR which offers a relatively quick and inexpensive way of resolving disputes including mediation and both non-binding and binding forms of expert determination by an independent surveyor with expertise in dilapidations. While dilapidations litigation can be expensive, few cases reach trial as there are a number of strategies available to avoid this.
With those green shoots still hard to spot, it is likely that dilapidations will continue to be an issue next year. As tenants are facing increased financial pressure and properties become harder to let in the current market, both parties are likely to adopt a more entrenched position than in more buoyant times. Be aware that disrepair in a lease can result in significant liabilities. It is essential to be pro-active, seek professional advice early and ensure you have an informed understanding about the extent of disrepair and the potential sums involved. You also need to adopt a clear strategy. Once you understand the extent of liability, decide what level of risk is involved and dedicate appropriate resources towards addressing that risk including mitigating liabilities, positioning yourself to negotiate the best deal and if necessary by using ADR.
This blog also appears as an article in the November issue of Leeds & Yorshire Lawyer and was co-written with building surveyor Brian Larter of Watts International Property and Construction Consultants.
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