During and at the end of a commercial lease, it’s often the case that a dispute arises between the landlord and the tenant about the state and condition of the property and the associated rights and duties that each are meant to fulfil throughout the duration of the lease. In this article, our commercial property dispute solicitors will provide you with an overview of the dilapidations claims process so that you’re equipped with the knowledge of how to deal with a problem of this nature if it arises.
Contents:
- What is a dilapidations claim?
- Types of dilapidations claims
- Who can bring a dilapidations claim?
- What evidence do you need to bring a dilapidations claim?
- How to make a dilapidations claim
- Legal restrictions on damages for dilapidations claims
- How long does a landlord have to make a dilapidations claim?
- How can a tenant challenge a dilapidations claim?
- Who has to pay the costs of a dilapidations claim?
- How you can prevent commercial property disputes in the future
- How we can help
- Summary
What is a dilapidations claim?
A dilapidations claim is a type of claim that arises when a commercial landlord and its’ tenant disagree about the extent to which repair, reinstatement and redecoration obligations have been complied with during the lifetime of the lease. They can spiral quickly and therefore need to be handled with care to minimise financial outlay and/or a potential court action.
Types of dilapidations claims
There are two different categories of dilapidations claim: interim and terminal. Both types are described below:
- Interim claims: These types of claims are made by the landlord during the lifetime of the lease with a view to keeping tenants on track with their obligations and ensuring that any non-compliance is dealt with swiftly and at an early stage.
- Terminal claims: When the lease has ended, this is the time at which it would be appropriate to make a final dilapidations claim. The landlord is then certain what breaches need to be rectified, the costs of remedial work and also any financial losses they might have to bear. This could include, for example, professional fees, loss of rent for the period within which work is being undertaken and payment of service charges and utilities rates.
Who can bring a dilapidations claim?
A dilapidations claim must always be started by the landlord.
What evidence do you need to bring a dilapidations claim?
The Civil Procedure Rules dictate that the Dilapidations Protocol (which we’ll discuss in more detail in the next section) must be followed in disputes of this nature. Landlords should instruct a surveyor to inspect the property and prepare a document called a ‘schedule of dilapidations,’ a document prescribed by the protocol.
The schedule of dilapidations
The schedule essentially sets out the landlord’s grounds for bringing the claim because it consists of a list of any alleged breaches of covenant (obligations) by the tenant in relation to the condition of the property, along with details of the repair, redecoration and reinstatement work that needs to be undertaken to remedy the breach or breaches. The schedule should also include the landlord’s estimated costs involved in carrying out these works. A ‘Quantified Demand’ should also be included, which further details and substantiates the landlord’s claim for compensation. The landlord should serve a dilapidations claim within 56 days of the end of the lease.
How to make a dilapidations claim
The Dilapidations Protocol sets out a roadmap for how the court expects the process for a dilapidations claim to run. The process is summarised below and it’s worth highlighting here that the protocol says that it covers terminal dilapidations claims rather than interim. There’s no set procedure for dealing with interim claims unless the lease itself outlines a particular procedure, but it would be prudent for the landlord to consider the protocol when pursuing an interim claim.
The process for making a dilapidations claim
- Once the landlord has sent a schedule of dilapidations and Quantified Demand to the tenant, the tenant must reply within the following 56 days, confirming whether the alleged breaches and specified remedial works are agreed or disputed.
- The landlord and tenant (along with any professional advisors they may have instructed in the form of their surveyor and/or solicitor) are then encouraged to meet on a ‘without prejudice’ basis to try and resolve the dilapidations claim or failing that, at the very least, try to narrow the issues in dispute. This meeting should ordinarily take place within 28 days following the response being received – although, where the parties agree, it can also take place before the response is provided.
- The parties are also encouraged by the protocol to consider whether it might be appropriate for the claim to be referred to some sort of alternative dispute resolution process. This could take the form of mediation, early neutral evaluation or expert determination.
- In cases where settlement can’t be reached, the landlord must then provide a more detailed quantification of losses. This would be through the production of a formal diminution valuation or an account of actual or expected expenditure and financial costs.
- If the tenant wishes to raise a section 18 defence (or any other defence related to diminution in value), then this must now be confirmed – usually within 56 days of the more detailed quantification of losses being provided. (Section 18 is the statutory mechanism which enables valuations to be prepared to assess the loss in value to the landlord’s interest in the property due to the tenant not undertaking the repairs.)
- The parties must then create some time to take stock (referred to in the protocol as ‘stocktake’) before the landlord proceeds to take the last resort step of submitting their claim for determination by the court.
Legal restrictions on damages for dilapidations claims
Section 18 (1) of the Landlord & Tenant Act 1927 is the statutory cap whereby the damages a landlord is entitled to receive for disrepair will be the lower of the cost of the remedial works or the effect on the property’s value. It’s crucial to highlight here that if the property is set to be demolished, or substantially reconfigured, the damages awarded may be nil.
How long does a landlord have to make a dilapidations claim?
As mentioned above, the landlord should serve the schedule of dilapidations upon the tenant within 56 days of the end of the lease but this is not a legally enforceable restriction. Technically, with it being a claim for breach of contract, a claim could be made within 6 years (or potentially 12 (if the lease is also a deed)).
How can a tenant challenge a dilapidations claim?
A tenant on the receiving end of a dilapidations claim is well within their rights to challenge it if they’re unable to settle the matter with their landlord. If so, upon receipt of the schedule of dilapidations, a tenant should take the following steps:
- Provide a formal response within 56 days of receipt of the claim, covering everything listed in the schedule and setting out why items are not agreed, along with the tenant’s detailed position. One of our commercial property dispute solicitors can help you challenge a dilapidations claim.
- Object to the schedule of costs of repairs in early course if it appears to be too high compared to the loss in value caused to the property – instructing their own surveyor to inspect the property and produce a valuation if necessary.
Who has to pay the costs of a dilapidations claim?
If the tenant has failed to keep the property in good repair or has failed to reinstate alterations, the landlord should be able to recover the costs of remediation and potentially claim damages for loss of rent while the works are undertaken. If the matter ends up in court, significant costs and professional fees will be borne by the losing party and furthermore, the protocol warns parties that the court will take into account the extent of their compliance with the steps in the protocol when making orders about who should pay costs.
How you can prevent commercial property disputes in the future
Ensuring that the lease is properly drafted by a commercial property solicitor right from the outset is the best way for a landlord to minimise or prevent disputes of this nature in the future. Non-ambiguous clauses are very helpful in this regard, as is making it clear what constitutes wear and tear as opposed to damage. Maintaining a regular schedule of physical inspections of the property is also wise, as well as ensuring that proper notice is given to the tenants of these and that any potential problems that are spotted are raised early in an appropriate manner.
How we can help
Our experienced commercial property dispute lawyers have a proven track record of resolving dilapidations claims and also work closely with the commercial property team, who, as mentioned, can assist with drafting leases. We can help with all categories of dilapidations claims, and our approach is always to consider whether alternative dispute resolution can be utilised effectively to keep these types of claims away from court where possible and costs kept to a minimum.
Summary
Due to the fact that dilapidations claims can escalate quickly and can become technically complex and time consuming, seeking professional advice at an early stage, whether you are a landlord or a tenant, is strongly recommended.
