Dilapidations

Our dilapidations service helps our clients work their way through the increasingly growing area of dispute when it comes to tenants “exit costs”.

It all seems so simple. The tenant has left after occupying the building for some time and the premises are shabby and unloved, even to the most untutored eye.

The first step would be to appoint a building surveyor who will need to give consideration to the drafting of the lease and the interpretation of the repairing covenants, including repair and yielding up provisions, although the impact of undertaking both reinstatement works and redecoration will also need to be factored into the equation.

A claim made by a Landlord at the end of the lease is likely to comprise the following elements:

  • Breaches of covenant to repair
  • Breaches of covenant for internal/external redecoration
  • Costs of removal of any tenant works and reinstatement, either under the terms of the lease or associated licences to alter
  • Loss of rent during any period which may be required to actually undertake any required works (if this is deemed reasonable given market conditions)
  • Professional fees associated with the above costs

At this stage it looks like two questions only need to be addressed:

  1. To what standard does the repair clause require the building to be repaired and yielded up at the end of the term?
  2. To what extent has the building actually been left in repair/disrepair by the tenant at the end of the term?

Even allowing for questions of degree and differences of opinion between surveyors for landlord and tenant, this does not sound too troublesome to resolve.

However, following a long history of cases where the landlord collected damages from the tenant for repairs which it never intended to effect or for buildings that were to be demolished, protection for tenants came in the form of section 18 of the Landlord & Tenant Act 1927, which remains in force today.

Increasingly, many dilapidations claims are being settled with recourse to Section 18 valuations and Landlords need to understand the impact this may have on their ability to claim for breach of repair at the end of the tenancy term.

Section 18 sets out two areas (or “limbs”) which may provide the tenant a defence under any dilapidations claim:

Limb 1 states that damages for a breach of shall not exceed the amount by which the value of the reversion in the premises is diminished owing to the suggested breach. Additionally, the Landlord is required to demonstrate it is taking all reasonable steps to mitigate any loss. Effectively, this Limb places a cap on any claim relevant to repair, and sometimes decoration, but it is not relevant to any reinstatement works.

In simple terms, this means that if a property in existing state is valued at £500,000 and, after requiring repair at a cost of £100,000 would only be worth £550,000, then the measure of damages in accordance with Section 18 (1) would be restricted to £50,000.

Limb 2 states that no damages shall be recovered for a breach of any covenant at the termination of the lease, if the premises are intended to be demolished or be the subject of structural alterations. This may include proposals to redevelop the property, to undertake substantive refurbishment works or changes of use which would therefore render the value to be less than the cost of repairs covered by the repairing covenants

As an example, it would be pointless re-plastering and painting a wall which is in disrepair, if the Landlord intends to remove the wall as part of planned refurbishment or improvement works or leave the floors in good repair if the Landlord intends to strip out and replace in order to upgrade the IT infrastructure beneath them. This is referred to as supersession and, in the examples above, the Landlord’s intention to remove either the wall or undertake structural alterations to the floor has superseded the requirement to carry out the repair

A surveyor carrying out a Section 18 valuation is going to need a detailed grasp of case law (and there is plenty of it) and an in-depth knowledge of local markets.

Who is the hypothetical purchaser and what would be their intent? To what extent does the lack of repair impact on value? Leaking windows may seem an open and shut case, but not if any purchaser would intend to replace with modern double glazed units, whether left in repair or not. More often, in the case of office premises, dated internal fit-out, whether in repair or not, would be stripped out and replaced by an incoming purchaser who would need to upgrade lighting, ceilings, IT arrangements, etc. to compete with other available stock.

Market condition, supply/demand and the motivations of the various parties that make up the market are essential to understand values both in and out of repair.

These are two very different surveying disciplines, but the Section 18 valuer and the building surveyor need to interact seamlessly if the client’s position is to be properly addressed and protected.

The Landlord’s Claim & Section 18 Valuation

It should be highlighted that it is not the actual intentions of the Landlord which are considered when undertaking the valuation, but those of the reasonable hypothetical landlord. In other words, what would the market deem to be a reasonable course of action for the property given its fundamental characteristics and the state of the local market and the potential to let the property in the current market in good repair. Therefore, a Section 18 valuation can highlight any potential cap on a dilapidation claim which is gauged by the diminution in the Landlord’s reversionary interest.

A claim for dilapidations can be submitted by the Landlord at various stages during the lease term, dependant on its drafting, relating to breaches of covenant to repair which may have occurred by the Tenant during the term. The general measure of damages for such a claim is the cost of undertaking these works.

The Landlord is not required to provide a diminution valuation alongside their Schedule of Dilapidations but may decide to use one to substantiate a terminal dilapidation claim by demonstrating that the value of the property has been being adversely impacted by the level of disrepair.

In summary, the Landlord’s Section 18 valuation will consider the difference in value between the property being in repair and in its existing condition, with reference to the assessment of the cost of putting the property into the appropriate state of repair as required by the lease covenants but subject to an assessment as to the extent that disrepair actually diminishes the value of their interest.

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We are delighted to confirm that as of June 1st, 2018 Hughes Ellard have merged with fellow Property Specialists Vail Williams.

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