Dilapidations are a large part of commercial leasehold properties. They relate to breaches of covenants under a lease agreement in relation to repair, decoration, or reinstatement obligations covering the condition of the property as compared to the beginning of the tenancy. The tenant is typically responsible for the dilapidations and they must comply with the terms of the lease during and at the end of the tenancy.
The purpose of dilapidations is to ensure the property is maintained, avoiding deterioration that could affect the property's value. If dilapidations are not resolved by the end of the lease, the landlord may issue a claim to recover the cost of repairs.
When addressing dilapidations, it is essential to understand the types of schedules involved: Interim, Terminal and Quantified Demand. Each serves a different purpose depending upon the stage of the lease and the type of claim involved. This article discusses the three types of schedules and explains when and why each should be used.
The schedule is usually prepared by a surveyor and served by a solicitor.
Interim Schedule of Dilapidations
An Interim Schedule of Dilapidations is issued during the lease term often as a reminder to the tenant of their ongoing repair obligations.
If a tenant fails to keep the property in repair during the term of the lease, an interim schedule of dilapidations can be served ensuring that the tenant carries out the repairs that are identified in the lease.
When to use an Interim Schedule
- Mid-Lease: An interim schedule is issued whilst the lease is still in effect. It serves as a tool for landlords to enforce compliance with the lease's repair clauses before the end of the tenancy.
- Preventing Further Damage: If the property is showing signs of neglect, such as structural issues, leaks, or cosmetic disrepair an interim schedule can be issued to prevent further damage.
- Long Leases: Interim schedules are particularly useful for long leases where the property is expected to be maintained over an extended period.
Benefits of using an Interim Schedule:
- Proactive Maintenance: Landlords can ensure that the property is properly maintained throughout the lease term thus avoiding large-scale dilapidations claims at the end of the tenancy.
- Mitigation of Costs: Dealing with repair issues early can prevent more significant damage and higher repair costs at a later stage.
- Clarity for Tenants: Tenants are reminded of their obligations under the lease with a view of reducing the chances of disputes at the end of the term.
Terminal Schedule of Dilapidations
Depending upon the wording of the lease, a terminal schedule of dilapidations could be served immediately prior to the end of the lease or within 56 days of the lease being terminated. The schedule should be served in accordance with the Pre-Action Protocol for claims for damages in relation to the physical state of commercial property at the termination of a tenancy (“Dilapidations Protocol”).
The schedule should set out the details of the lease, the tenant's repair obligations and the breaches complained of along with any remedial action required.
It is the most common type of dilapidations schedule and is used to calculate the cost of any necessary repairs or reinstatement works required to restore the property to the condition specified in the lease.
When to use a Terminal Schedule
- End of Lease: This is issued in the final months of the lease or upon its expiry. The landlord issues this schedule to highlight any repairs, redecoration, or reinstatement works that the tenant is obligated to complete before vacating the property.
- Negotiating Settlements: This can form the basis for negotiations between the landlord and tenant in relation to the cost of repairing or reinstating the property. Tenants may prefer to settle financially rather than undertake the repairs themselves.
- Formal Claim for Damages: If the tenant does not carry out the necessary repairs before the lease ends, the landlord may use the terminal schedule to support a claim for damages. Such a claim would be based on the estimated cost of carrying out the required work.
Benefits of using a Terminal Schedule
- Final Compliance Check: This ensures that all repair and reinstatement obligations are addressed before the tenant vacates reducing the risk of legal disputes later.
- Clear Basis for Claims: Landlords can present a clear and detailed claim for dilapidations supported by cost estimates for necessary repairs.
- Negotiation Leverage: They can help landlords negotiate financial settlements for dilapidations whilst helping to recover repair costs without lengthy legal proceedings.
Timing of a Terminal Schedule
The timing of a terminal schedule is crucial. They are usually issued within the last six months of the lease. Any time after this can leave the tenant without sufficient time to address the issues referred in the schedule. Landlords should aim to give tenants enough notice to complete the necessary works before the lease expires. However, issuing the schedule immediately after the lease ends allows for a clean break with the tenant paying towards the dilapidations as opposed to carrying out the repairs themselves.
Quantified Demand
Following the end of the lease the Landlord should serve a Quantified Demand on the tenant. It is a more detailed document than an interim or terminal schedule. It will include details of what the landlord considers to be its likely loss as a consequence of the breaches of the tenant and will usually be different to those stipulated in the schedule of dilapidations. It is usually the case that a quantified demand is served in addition to the terminal schedule of dilapidations and will include a detailed estimate of costs along with the legal basis of making such claim. It is essentially the landlord's formal claim for damages.
When to use a Quantified Demand
- Legal proceedings: The demand is typically used when the landlord is seeking to recover damages for dilapidations after the lease has ended. It is often the starting point for formal legal proceedings as it provides a detailed justification for the amount being claimed.
- Detailed breakdown of costs: If the parties cannot agree on a settlement based on a terminal schedule, a quantified demand can be issued to provide a fuller breakdown of costs.
- Final stage of dispute: The demand is often the last resort when negotiations between the landlord and tenant have broken down.
Benefits of using a Quantified Demand:
- Comprehensive claim: The demand provides a complete breakdown of the cost of repairing and reinstating the property. It gives landlords the best chance of recovering their losses in court. Sometimes a landlord prefers to carry out the works themselves after the tenant has vacated the property. The demand allows the landlord to claim damages from the tenant rather than relying on the tenant to carry out the repairs directly.
- Negotiation tool: The demand can also be used as a negotiation tool encouraging the parties to settle rather than face the uncertainty of a trial.
- Compliance: In dilapidations claims that reach the legal stage, a quantified demand ensures compliance with the Dilapidations Protocol which requires a clear and detailed explanation of the landlord’s claim.
The Dilapidations Protocol requires that landlords provide tenants with a clear, detailed and transparent breakdown of their dilapidations claim before initiating court proceedings and a quantified demand helps with such compliance.
Damages
A tenant's failure to comply with its repairing covenant entitles the landlord to claim damages. However, the landlord's right to claim damages for breach of a repairing covenant by the tenant may be restricted under Section 18 (1) of the Landlord and Tenant Act 1927 (the “Act”).
The Act contains two key limbs that aim to ensure that claims are fair and reasonable.
The First Limb: Diminution in Value
The first limb restricts the claim to the amount that the value of the landlord’s reversion is diminished by as a result of the breaches of covenant to repair. The landlord cannot claim the full cost of repairs but can only claim an amount equivalent to the reduction in the property’s value due to the disrepair.
By way of an example, if the cost of repairs is £100,000 and the property’s value has only diminished by £75,000 due to the disrepair, the landlord’s claim will be limited to £75,000.
The Second Limb: Redevelopment
The second limb states that no damages are recoverable if it can be shown that on expiration of the lease the premises would be demolished or significantly altered to the extent that would render the repairs worthless.
For example, if the landlord planned to redevelop the property by demolishing it and constructing a new building, they would not be entitled to recover the full cost of repairs for dilapidations.
Conclusion
The choice between an interim schedule, terminal schedule, or quantified demand depends on the timing and purpose of the dilapidations claim. By using the appropriate schedule and at the right time, landlords can protect the condition of their property whilst tenants can avoid costly disputes or legal proceedings.
Stacey Moore is an Associate at Wright Hassall.