BACKGROUND
Tenants may not be fully aware of the fact that in most leases, they will be under an obligation to return the property to the landlord in a good state of repair, condition and decoration, regardless of the condition the property was actually in at the beginning of the lease. In many cases this means that the tenant actually has to leave the property in a better condition than it was originally when the tenant first moved in.
Tenants can therefore find themselves with what is known as a Dilapidations Claim at the end of their lease term at which point they are likely to have left the premises in question and taken on further responsibilities and costs of new premises.
Dilapidations claims relate to commercial property only. The actual term “dilapidations” refers to the condition of a commercial property during the term of a commercial tenancy or when the lease is determined and effectively dilapidations claims are for breaches of covenants or obligations under the lease relating to the physical condition of the property, in particular for repair, redecoration and reinstatement. These obligations may extend to renewal, replacement and maintenance.
Dilapidations claims can be substantial for which, more often than not, tenants do not budget. In particular, the use of expert evidence in particular from surveyors, is vital.
THE BASIC PROCEDURE
Landlords are obliged to serve tenants with a Schedule of Dilapidations which must indicate:
1. which terms of the lease have been breached;
2. what must, in the opinion of the landlord or its surveyor, be done to put the property into the physical condition required by the lease; and
3. how much the necessary work will cost (or invoices if the work has already been done).
Guidance is available as to how the schedule should be set out. The Schedule should be served within 56 days of the lease termination date in accordance with the Pre-Action Protocol relating to this type of claim or alternatively a landlord can, however, serve the Schedule before the end of the tenancy.
Thereafter, the tenant should provide a substantive response within a reasonable period of time and the Protocol suggests 56 days. The tenant will need to make clear its view on each item of the landlord’s claim. The tenant will also need to instruct a surveyor to take a view on the claim as to the cost of each item claimed.
WHAT TO CLAIM?
Under a Schedule of Dilapidations, landlords are entitled to claim for damages in respect of breaches of the terms of the lease, which may include the cost of the necessary remedial works, consequential costs and fees, VAT, loss of rent, service charge or insurance rent, surveyor’s fees for preparing the Schedule and professional fees incurred in connection with carrying out the necessary work including legal fees.
Following service of the Schedule, tenants do have the right to respond usually in the form of a counter-schedule, which is advisable in order that the parties can try to negotiate an agreement without the need to resort to litigation.
RESOLUTION
Landlords and tenants should bear in mind that in some circumstances settling out of court might not always be in their best interests, in particular when the real argument is a question of principle. Parties should be aware that resolving disputes out of court using Alternative Dispute Resolution (ADR) is not necessarily a better solution than pursing the claim in the court. For example, mediation is completely confidential and if an agreement is reached at mediation and one party fails to comply with it, there can be difficulty in enforcing the terms.
Under the Civil Procedure Rules, a particular court procedure exists, which can be used to bring a claim in circumstances where parties require a decision on a question which is unlikely to involve a substantial dispute of fact, and is likely to be more cost-effective than taking the ADR route. In addition parties would have the right to appeal any decision made by the court.
