Terminal Dilapidations

The Dilapidations Protocol

Landlords and tenants need to have regard to the Pre-Action Protocol for Claims for Damages in relation to the Physical State of Commercial Property at the Termination of a Tenancy (“the Dilapidations Protocol”). The Dilapidations Protocol sets out the conduct the court expects and which the parties should follow before issuing a claim in relation to terminal dilapidations.

The Dilapidations Protocol provides a process and timetable for the exchange of information relevant to a dispute, sets standards for the content and quality of schedules and Quantified Demands and also sets outs requirements for pre-action negotiations. A failure to adhere to the Dilapidations Protocol can be taken into account by a court when making an order for costs.

In essence, the Dilapidations Protocol can be broken down into the following stages:

1. The landlord serves a Schedule of Dilapidations within a reasonable time after the lease ends (generally within 56 days of the lease expiring);
    
2. The landlord serves a Quantified Demand (again, generally within 56 days of the lease expiring) setting out all aspects of the claim and the monetary sums sought;
    
3. The tenant sends its Tenant’s Response, setting out its position regarding each item claimed by the landlord (usually within 56 days of receiving the Quantified Demand);
    
4. Negotiations – parties should meet on a without prejudice basis prior to and 28 days after the Tenant’s Response (and both parties should aim to provide full disclosure at this stage); 
    
5. Prior to issuing proceedings, a landlord will need to quantify its loss by providing the tenant with a detailed breakdown of the issues and any consequential losses (usually based on a diminution valuation report and/or details of the landlord’s actual expenditure). A tenant seeking to rely on a defence of diminution (see below) should also serve its own diminution valuation (again, within a reasonable time after receiving the landlord’s quantified breakdown i.e. within 56 days);
    
6. Stocktake - the parties should consider the state of the papers and the evidence in order to see if proceedings can be avoided and, at the least, narrow the issues between them.

When instructing a surveyor to prepare a Schedule of Dilapidations, landlords should take care to ensure that the surveyor is suitably qualified and sufficiently experienced to provide expert evidence if the claim does proceed to trial.

A Tenant’s Section 18 Defence

There are certain limitations on a landlord’s ability to recover damages for breach of a repairing covenant.

Section 18 (1) of the Landlord and Tenant Act 1927 states: “Damages for breach of covenant....to leave or put premises in repair at the termination of a Lease...shall in no case exceed the amount (if any) by which the value of the reversion...in the premises is diminished owing to the breach of such covenants or agreement to leave or put the premises in repair at the termination of the Lease”.

Section 18(1) only concerns a breach of an obligation to repair. Damages for breaches of other covenants, for instance those concerning decoration and the reinstatement of alterations are not limited by Section 18(1) and will be assessed under the usual common law principles.

Section 18(1) comprises of two limbs; the first concerns the diminution in the value of the landlord’s reversion caused by the breach and the second limb operates to limit the recovery of damages based on the landlord’s intentions for the premises.

The First Limb:

Pursuant to the first limb of Section 18(1), the damages recoverable at common law can be limited or capped in accordance with the calculated ‘diminution in value’ to the premises caused by the breach.

Calculating the diminution in value for the purposes of section 18(1) involves comparing the value of the premises in the state of repair specified in the lease with the value of the premises in its actual condition. The burden is generally on landlords to show that damages should not be reduced by applying Section 18(1).

The case of Van Dal Footwear Limited v Ryman [2009] EWCA CIV 1478 confirmed that the value of the reversion to be valued is the property as it reverts to the landlord i.e. the freehold reversion at the moment when it vests in the landlord unencumbered by the lease or any new lease. The case also confirmed that the valuation is taken as at the term date.

Case law has also confirmed that damages will be calculated by reference to the method the tenant would have chosen to effect any repairs. In all likelihood, the less expensive method of effecting repairs.

It is important that landlords take care to obtain suitable evidence of diminution as a lack of evidence is likely to reduce the amount of damages awarded.

The Second Limb:

The second limb of section 18(1) is based on the landlord’s intentions for the premises. In essence, damages are not recoverable where it can be shown that the landlord actually intends to pull down or make structural alterations at the end of the lease so as to render any repairs valueless,

In Sunlife Europe Properties v Tiger Aspect Holdings [2014]1 EGLR 30 the court provided the following rationale for this aspect of Section 18(1):- “The additional work may make worthless some of the works that would have been necessary to put the building into repair with the result that, if the work had been done, the Landlord has suffered no loss and accordingly cannot recover any damages in respect of that breach.   This is known as Supersession.”

However, superseding works do not operate as a complete defence. “Where there is need to carry out remedial works as a result of the Tenant’s breach of his repairing covenant the fact that the Landlord carried out more extensive works than was caused by the breach does not of itself prevent him from recovering the cost of such works as would have been necessary to remedy the breach.”

It is for a tenant to establish that the landlord had:

• A clearly formed intention and had reached a firm decision to undertake structural alterations or demolish the premises; and
• A reasonable prospect of the landlord implementing its intentions.

When advising in connection with dilapidations, it is important for both landlords and tenants to bear in mind the obligations pursuant to the lease, those set out by common law and also whether any cap can be imposed on the landlord’s ability to recover damages pursuant to Section 18 of the Landlord and Tenant Act 1927.

If you are dealing with dilapidations, get in touch with the team at JCP Solicitors for practical advice and assistance. Whatever the circumstances, our Property Disputes Solicitors will be able to guide you through the process and take the necessary action to protect your position.

Speak to our dilapidations solicitors in South Wales

To speak to our expert dilapidations solicitors in South Wales, please contact your local JCP Solicitors office:

• Swansea
• Caerphilly
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• Cowbridge
• Fishguard
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• St Davids

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