Now that we are all adapting to the “new normal” of working practices, many businesses are assessing their own business requirements, including their usage of premises. With this in mind, many tenants may be looking to vacate or downsize from their current premises, leading to an increase of dilapidations claims.
At the end of a tenancy, the landlord’s priority is to ensure that their property is returned in a satisfactory condition, and if not, make sure that they are compensated for any breaches to the lease covenants relating to the condition of their property.
The procedure for ensuring that dilapidations are remedied usually takes place at the end of a lease – known as “terminal dilapidations”. This area can be complex, and so it is important for landlords to pay careful attention to the Dilapidations Protocol (“the Protocol”).
1. Schedule of dilapidations
Well in advance of the expiry of the term, the landlord should review the tenant’s obligations to repair, decorate, reinstate and yield up, as set out in the lease. The landlord should consider the requirements of any licences to alter, deeds of variation and schedules of condition to establish the extent of the tenant’s obligations.
Market conditions will also factor into a landlord’s decision on how to enforce breaches. Until landlords are confident that their properties can be re-let, they may be reluctant to incur expenses in carrying out remedial works.
A surveyor will need to inspect the property and prepare a ‘Schedule of Dilapidations’ (“the Schedule”) – a list of alleged breaches of covenant by the tenant in relation to the condition of the property. It also sets out the proposed remedies to those breaches (including an estimate of costs).
Once the Schedule is completed, the landlord should make sure that it:
- Reflects its intentions for the property – this may impact what the tenant can repair / pay for.
- Refers to the correct provisions of the lease and any other collateral documents.
2. Service of the Schedule and Quantified Demand
Once the Schedule is prepared, it can be served on the tenant.
Service:
The lease may provide for specific methods of service, which should be obliged with. Special attention should also be given to other parties to the lease, for example a guarantor.
Timing:
Sometimes it is appropriate to serve a Schedule on the tenant before the end of the lease which gives the tenant time to carry out the works themselves. If this is done, then on expiry of the lease the landlord should confirm to the tenant whether the position remains as stated in the previous schedule, or it should serve a further schedule.
Under the Protocol, the landlord should serve the Schedule on the tenant within a reasonable time which will generally be within 56 days after the expiry of the lease. The tenant then has 56 days to respond, either agreeing with the dilapidations or disputing them.
Quantified demand:
If the lease has ended, a Quantified Demand should also be served on the tenant, providing a breakdown of the loss claimed, which will form the basis for any dilapidations claim.
3. Reinstatement considerations
A reinstatement notice may also be required to be served on the tenant depending on what the lease or other documents state. A landlord will need to look at whether any provision is automatic or requires a positive action. If the provision is automatic, generally the landlord will only be required to serve notice if it does not wish the tenant to reinstate the property. However, if the provision requests the tenant to reinstate the property “to the extent required by the landlord” or something to that effect, then a notice of reinstatement will need to be served on the tenant. Landlords will need to ensure that the tenant is notified within a reasonable timeframe, otherwise a claim for reinstatement costs may fail.
4. Next steps
Once the tenant has received the Schedule, they will likely instruct their own surveyor who will carry out an inspection of the property and prepare a response to the landlord’s Schedule. This response will identify areas where the tenant agrees with their liability for dilapidations and areas where they disagree.
At this point, if the lease has not ended, the tenant may choose to carry out necessary works themselves to limit their liability.
Otherwise, the tenant may attempt to negotiate a settlement with their landlord for any dilapidations liability.
5. The Protocol
It is not always possible to settle all of the issues. If the parties have not been able to settle the matter, issuing proceedings at court should be a last resort. The Protocol encourages parties to consider other methods of dispute resolution such as mediation. The lease may also require that ADR is considered in the first instance.
Throughout the dilapidations process, parties should be encouraged to make offers to settle dilapidations claims. Offers to settle can be made in various ways, at any stage in proceedings, but will commonly come in the form of a Part 36 Offer or a Calderbank/without prejudice offer.
If a claim reaches trial, the Judge will be keen to see that offers have been made and that each party has attempted to avoid the additional costs of litigation. Failure to comply with the Protocol could lead to the court ordering costs sanctions. It is therefore important to follow the Protocol from the outset.
Key points
- Any contractual provisions in relation to the timing of the Schedule must be observed. If the landlord does not comply with these it may lose its right to claim dilapidations.
- Look out for reinstatement provisions as a tenant will need to be informed within a reasonable timeframe. Otherwise, the landlord could risk a failed claim for reinstatement costs.
- It is best to consider these issues well in advance to avoid any surprises.