Dilapidations At The End Of A Lease – What Are They?

Dilapidations generally refer to items of disrepair that are covered by specific repairing covenants or promises contained usually in a commercial Lease.

The term is often used as shorthand for “terminal dilapidations”, which cover breaches of the Tenant’s covenants relating to the physical state of the premises when a Lease has ended.

A Tenant’s liability for dilapidations can relate to breaches of repairing covenants, decorating covenants or reinstatement requirements that relate to alterations carried out by the Tenant during the period of the Lease.

There may also be covenants to “yield up” that is to deliver the premises back to the Landlord at the end of the term in a particular state.

What Remedies does a landlord have for breach of repairing covenants?

A Lease is similar to any other legal contract, and the remedies available will depend upon the specific wording in the Lease.

There are however certain statutory restrictions on the Landlord’s remedies for breach of a repairing covenant, which mean that generally Landlords tend not to pursue damages as a remedy for breach of a repairing covenant during the term of the Lease, and quite often rather than claiming damages if the Lease is still on-going the Landlord will seek to forfeit the Lease (if the Landlord actually wants the property back).

To be able to forfeit the Lease for breach of a repairing covenant there will need to be an express right of re-entry for breach of covenant (in practical terms there almost always is) and generally the Landlord must follow a notice procedure.

Is the landlord entitled to forfeit for a breach of a repairing covenant?

The landlord in not entitled to forfeit for a breach, or indeed any Tenant covenant apart from a covenant to pay rent, by peaceable re-entry or proceedings unless and until the Landlord has served a “Section 146 Notice” identifying the particular breach complained of, requiring the Tenant to remedy the breach, and requiring the Tenant to pay monetary compensation for the breach.

Breaches of repairing covenants are generally considered to be remediable, so the Notice must require the Tenant to remedy the breach.

There are particular rules around whether or not a Landlord has waived its right to forfeit by treating the Lease as continuing to exist, and this is a specific technical area upon which any Tenant or indeed Landlord should obtain specialist legal advice.

Suffice it to say that where a Landlord has continued to demand or accept rent when it has knowledge of dilapidations it may be problematic for the Landlord to attempt to forfeit the Lease.

Quite often Section 146 Notices are a tactical step from a Landlord to prompt the Tenant into action, even where the Landlord does not intend to proceed to forfeit the Lease and does not wish to do so (for instance on a business and commercial basis only a less beneficial Lease would be negotiable in the current market).

A common provision in a Lease is what is known as a Jervis –v- Harris clause, which allows a Landlord to enter the property during the term to carry out any repair works and then to recover the cost of doing so from the Tenant.

The advantage of this to the Landlord is that the works can be undertaken so preventing the property from deteriorating, and the cost of the work is treated as being the recovery of a debt rather than a claim for damages. Additionally, it is possible in some circumstances for the Landlord to obtain an Order from the Court forcing the Tenant to undertake the repairs at its cost, however from a commercial point, this would be costly and not time-effective.

At the end of the lease

Following expiry of the Lease, the measure of damages to remedy dilapidations is broadly the reasonable cost to the Landlord of doing the works plus loss of rent for the period until the works have been completed.

Any claim has to be reasonable, so if a very minor remedy would cost a sum of money out of all proportion to the actual damage, a Landlord is not entitled to a gratuitous benefit, but rather the Court would look at what the actual difference in value to the premises is.

In any event, there is a statutory provision in Section 18 (1) of the Landlord & Tenant Act 1927, which limits the damages available for breach of a repairing covenant to the diminution in value of the Landlord’s reversion caused by the breach. This means that a Court would look at what the diminution in value of the property actually is as a result of the breach of repairing covenant, and any damages would be limited to this sum.

However, the Landlord may be able to additionally recover loss of rent for the duration of the period necessary to carry out the works, and a Landlord would usually need to show that there has been a loss of rent due to the Landlord being unable to re-let the property.

If evidence is available that the property would not have been re-let whatever state it was in, such a claim could not be pursued. Loss of rent does generally fall within the limitation under Section 18 (1) of the LTA 1927.

Landlords usually are able to avoid the statutory restriction by having a specific provision in the Lease to allow them to claim a sum equivalent to the lost rent as a contractual debt, rather than as damages. The same applies to claims for professional fees, for instance surveyors’ fees and lawyers’ fees. In those circumstances the fees will not be subject to the cap, but would of course still be subject to an implied term that they have to be reasonable in amount.

Evidence

There is a fairly standard procedure for assessing dilapidations at the end of a Lease, and usually a surveyor is instructed by the Landlord to prepare a Schedule identifying the dilapidations claimed, and what value the Landlord places upon them.

In more substantial cases the Tenant would then instruct their own surveyor to prepare a formal response, and the response (and indeed the Landlord’s initial Schedule) would identify the parties’ positions in relation to the works required, whether they were a breach of any terms of the Lease, and what value (if any) the parties place upon them.

Issues for the tenant to consider

A Tenant should always check the validity of any Notices that have been served. For example a Section 146 Notice or a Notice specifying dilapidations/breaches of repair and maintenance obligations may be technically incorrect, and/or the repairs specified in the Notice may not be the Tenant’s responsibility under the terms of the Lease in any event.

For example, remedying the alleged breach may go beyond what the Tenant is contractually required to do.

• These are technical issues that require the consideration of specialist property litigators, but in general if faced with a significant claim, whether during the currency of a Lease or at the end, it would be recommended that a Tenant obtains specialist legal advice.

In the same way, there are tactical considerations that a Tenant should be advised upon, for instance in the case of requirements to reinstate on notice, a Tenant might arguably have the right to be allowed to remain in occupation after the expiry of the term in order to complete reinstatement works if the Landlord gives insufficient notice.

There are numerous options available to Landlords and Tenants to resolve dilapidations claims, but even though the vast majority of dilapidations claims start out at a high level and are resolved at a much lower level, this is usually only after the parties have had the assistance of specialist surveyors and lawyers in the most substantial cases.

We are able to assist both Landlords and Tenants in the preparation of dilapidations claims, and with their resolution, call our Specialist Team