Just the mention of the ‘D’ word can send shudders down a tenant’s or landlord’s spine. If can appear all theoretical until you realise just how severe it can affect property interests and your purse – that’s the dreaded ‘dilapidations’ liability.
In short, this is a list of alleged breaches of the lease to do with keeping the property in repair. It’s therefore often issued by a landlord on a tenant wanting them to ensure that the building is in ship-shape either when they leave at the end of the lease, or during the main lease term.
This tends to affect commercial property more where you’re dealing with bigger repair issues, costs and tenancies, where the nature is that a tenant must keep things well maintained during the lease, but it can be involved with residential leases as well, particularly, long leasehold interests.
Therefore, it boils down to specific clauses in a lease to repair this or that, and with this ‘dilapidations’ obligation to comply with all of this stemming back to legislation and case law.
So, right back to the Ecclesiastical Leases Act 1571 and Ecclesiastical Dilapidations Act 1871 – and more modern ones like The Law of Property Act 1925, The Landlord and Tenant Acts of 1927 and 1954, The Leasehold Property Repairs Act 1938, and even The Bribery Act 2010.
Plus, case law where parties end up in court, has also shaped this area of property expertise, notably Proudfoot v Hart in 1890 which established the principle that this dilapidations and repairing liability should reflect the ‘age, character, and locality’ of the property – common sense really.
The Six Main Factors to Consider
Anyway, enough of the techie-talk, let’s get down to practicalities.
If you’re involved in these through say a Schedules of Dilapidations or proposed works, then here are the basic factors you need to consider. No matter what side of the fence you’re on, or a middleman advisor, these will help clearly show how you need to deal with things.
Dilapidations liabilities can in actual fact get very specialist, requiring the right surveyors or lawyers involved; however, even in these scenarios you need to know what the bigger picture really is.
1. Understanding the Documents
There can be a whole host of different documents talked-about with dilapidations, some of the main ones being:
Schedule of Dilapidations
The initial summary from a landlord saying what repairs are required, and specific remedial works to resolve these. If completed by a surveyor, then this will need to be endorsed by them as fair and true.
Breaking this down further, a Terminal Schedule of Dilapidations is generally served in the last 18 months of the lease as you prepare for the tenant to complete works before they finally leave – it therefore has the full proposed works and costings to boot.
A Final Schedule of Dilapidations is right after the end of the lease, when it’s too late for the tenant to have a legal right to be there and do any repairs now, so this is all about the pay-out needed from them for the landlord to carry out direct.
And the Interim Schedule of Dilapidations is during the lease before the last 18 months, notifying the tenant to keep on top of things and carry works out (therefore not usually costed).
A Quantified Demand
Served within 56 days after a lease ends by a landlord saying what is outstanding, and what their loss is as a consequence of this (which might be different to the literal cost of works from the previous Schedule).
A Response and Scott Schedule
Basically a tenant’s response within 56 more days to the above Schedule or Quantified Demand which might be just a normal letter or email along with a tenant’s version of the original Schedule or Demand with comments on.
A specialist property valuation that looks at how the value of the property has reduced by not being in repair now.
You can also come across various guidances and help on the subject, particularly those governing how property professionals need to deal with things, for example:
A Clear, Impartial Guide to Dilapidations
From the RICS (Royal Institute of Chartered Surveyors) which is a helpful start on the subject, and applicable to England and Wales (with differences for Scotland and Northern Ireland).
The Dilapidations Protocol
Guidance for surveyors to resolve any disputes issued by the Ministry of Justice, with Alternative Dispute Resolutions (ADR) like Arbitration, Independent Experts, and Mediations being recommended.
Amidst all this talk of documents and guidance, the overall gist is to communicate to the tenant what repairs are expected, and for them to agree what these are and how they will be completed or paid for.
2. What Can Be Used, and When
So okay, you have an idea of what documents can be used to achieve whatever type of repairs or damages and compensation that you are after – now it’s time to see how this all ties together.
The key here is to remember that such documentation in itself is of no use – they’re only reflecting the legal duty under general law and the specific lease in question.
So this ‘dilapidations’ liability can exist by law and have legislation saying how it can be used, irrespective of how and when a document is actually sent. And then the lease itself may well prescribe what is and isn’t included, and when this all happens.
You also need to know whether the actual works of dilapidations will be completed or damages paid. In short, is the tenant going to actually do the works, or pay the landlord damages to reflect them or someone else doing them afterwards.
Which is why you must go into this well advised and knowing that any issues may still exist even though it’s gone quiet and even after the lease has ended. A good dilapidations surveyor and solicitor can be worth their weight in gold at this point.
And probably the best way to look at this is in three stages like the three colours of a set of traffic lights:
a) The Green Go Period
This is when the main lease is ticking along up to around 18 months before the lease formally ends.
The Interim Schedule of Dilapidations is the one to send or receive under three ‘powers’. Firstly, just informally to alert the issues, and hopefully get into sensible conversations for an agreed outcome.
Secondly, if there is a specific ‘Repairs Clause’ or what they call ‘Jervis v Harris’ clause, then this gives the right for the landlord to demand works within a certain time to be completed before they can actually gain entry to the property in order to do the works and recharge the costs to the tenant.
And thirdly, this can be by notice under Section 146 of the Law of Property Act 1925 which provides power for the courts to get involved and force certain works to be done before being able to end the lease early.
Technically this is known as forfeiture – a drastic measure to terminate the lease for the tenant breaching their obligations.
Or if you don’t want to actually forfeit the lease, you can just apply to the court in order to force the tenant to strictly abide by the lease and perform what repairs they should do.
However, there is another piece of legislation called the Leasehold Property Repairs Act 1938 which applies up to three years before the end of the lease which must be more than seven years long anyway. This provides the tenant protection against a lot of these works, with the gist being that they can sort a lot of these repair issues out towards the end of the lease unless critical wind-and-weather-tight ones are needed now as ‘stiches in time’ , to stop a landlord getting to pedantic with things now.
So if a ‘section 146’ is served by the landlord to try and force forfeiture of the lease for non-compliance with the repairing obligations of the lease, the tenant can claim relief from this within 28 days under the 1938 Act – all very complicated and a little theoretical in reality.
b) The Orange Waiting Period
This is during the last 18 months of the lease and the Terminal Schedule of Dilapidations being served.
This must have specific action-points for the tenant which has a cost against them in order that they know what needs to be completed.
Because this is encouraging the tenant to crack on with these directly, then it can’t be served under the ‘Section 146’ procedure as before then, as it’s getting towards the end of the lease now anyway without threatening to forfeit the lease, and the tenant has no ‘1938 Act’ protection as well.
And when you reach the end of the lease and not all of the works are completed, then the landlord can process a court claim for financial damages and loss.
c) The Red Ending Stage
This is where the lease has ended, and the tenant has no legal right to even be in the property to do any works directly – it’s a case of seeing how much they need to pay the landlord in order for them to complete out directly.
Therefore, there may need to be a separate claim or damages made to court if this figure can’t be agreed between the parties as well.
Even though the lease is long gone, this legal duty can still linger on for up to twelve years afterwards as a claim for ‘damages’ from the landlord under the Limitations Act 1980 (assuming the lease has been signed and sealed, whereas only up to six years if just a non-sealed signature).
3. The Right Legals
Now the basic principle and process of dilapidations has been looked at, it’s important to go back and understand what actual legal documents are in place which will then help shape the extent of this liability.
It’s the golden rule of property management really – what’s agreed in writing between the parties.
Therefore, here’s a quick summary of the sort of legals to be watching out for, not only when you’re facing the issue, but what really needs completing way before hand:
a) The Main Lease
This is the nuts-and-bolts of what a tenant is promising to carry out for the landlord to keep the property in repair.
b) Schedule of Condition
Sometimes attached to and referred to within the lease which basically limits the repairs due to only those made worse during the lease and excluding ones that existed at the beginning.
c) Break Options
Basically a certain clause within the main lease, but worth a specific mention and check of any other associated documentation.
These can make the ability to end the lease early conditional on it being handed back in tip-top condition and any dilapidations liability already completed. It can therefore be in certain party’s interests to deliberately drag-out things and not agree a dilapidations liability on the hope that the other party doesn’t fully carry out and therefore makes the break option invalid.
d) Rent Deposit Deeds
These will show if a landlord holds a tenant’s deposit, and whether it can be held back to pay towards this dilapidations liability as well as usual rent arrears say.
e) Insurance Cover
In addition to usual building and contents insurance policies that may determine how things are to be maintained, parties could arrange special dilapidations insurance cover, which would pay out any liabilities afterwards.
f) Future Parties
Any ancillary Licenses, Deeds of Variations, or Settlement Letters can help show who’s taking on the liability going forward. So although a current tenant may be directly responsible, any previous tenants may also still be on the hook. And even new landlords may try and claim that a settlement with the former owner was unique to them and therefore try and open-up a new dilapidations claim for their new property.
g) Sub Tenants
With different layers of tenants and head-landlords, life can get tricky. Agreeing something direct now may need the formal agreement with these other parties first or afterwards.
h) Other Interests
A general hunt around for other agreements and title restrictions is also worth checking, and whether other parties like lenders or legal title interests and restrictions need to be involved with things.
4. What ‘Repairs’ Are Included
Now it’s time to get down to the nitty-gritty, and what exact repairs are being included in this dilapidations liability.
This can be much wider than what people may at first think, and include the following:
a) The Disrepairs
Although it sounds obvious, it’s worth stating. In order to be responsible to repair something, then it must be first in disrepair.
And then it must be clear just how far these repairs must go, for example needing to replace things where needed, or even improving them if sensible to do so. Also, if this is limited by say a Schedule of Condition as mentioned above.
A dig-around the repairing clause in the lease should help clarify this, although also check other parts of the lease and that what the landlord is left to maintain matches what the tenant does directly.
Getting into the detail of what the demise and physical extent of a lease is will help bottom-out what’s required. So this might only include up to the finishing surface of the ceiling and not the actual structure itself, or may include an area of outside yard as well.
These can cause you problems on two levels. Firstly, knowing which ones are included, particularly those that may be linked to else where in a property. So electric wiring just for this unit may trail back to a shared cupboard outside the demise and still the tenant’s area, whereas a fire-alarm system that is interlinked to the rest of the property remaining within the landlord’s responsibility even though it encroaches into the tenant’s demise.
And secondly, you may need to bring in specialists for the detail of what’s needed with these, for example M&E equipment such as heating, cooling, and lifts.
This is often a separate clause to regularly re-paint the internal and external parts of the property within a certain timescale and specification.
e) Fit-Out & Re-instatement
Understanding what a tenant’s own fit-out is, and whether you assume this is part of the landlord’s property to fall under this dilapidations liability is a whole separate issue worth noting.
f) Statutory Compliance
This can be a bit of a sweeper clause outlining compliance with legislation. So although the electrics may all work okay, a current 5-year electrical test may still need completing in order to show this.
One interesting aspect of this now is compliance with MEES and energy efficiency, which is becoming more important in buildings and may not be clear in older leases as to whether a tenant is expected to bring these up to today’s standards and not those of when the lease was taken out.
5. Adding up the True Cost
Now it’s time to get down to brass-tacks, and see just how much this dilapidations liability is going to cost.
Even if the tenant is going to complete themselves, this is important in order to clarify if they’re spending on contractors, but also if they’re going to pay the landlord damages then this needs to reflect the reality of what it will take to do the works, and any related costs with this.
So, here are the factors to bear in mind:
a) Loss of Rent
An official element of the claim along the lines that if the landlord has to spend say two months carrying out repairs that a tenant should have done during they lease, and this delays a new letting by two months, then the landlord could add on the loss of rental income on the claim as well.
Although this sounds fair in principle, the detail does need carefully watching, including other related lease costs like service charges and outgoings to add in. Plus, that the failure to repair has genuinely affected this loss of income.
b) Specialists Works
So you may need all kinds of specialists looking into things like lifts, heating and cooling, and cladding that can soon rack-up extra costs as well.
c) Implementation Costs
So reasonable professional and management fees for carrying out whatever works can also be included
These can be specifically referred to within the lease and related more to the actual dilapidations process and preparing schedules or serving notices. This is helpful to get agreed up front, with the main damages claim being resolved afterwards.
So VAT is the main issue, with the rule of thumb that no VAT needs to be paid on any settlement damages figure. Also, SDLT will not be applicable unless tied-in with another land transaction, and each party’s own taxation status must be considered when dealing with all these agreed sums and payments.
Also, it’s worth making sure that any final payment and settlement actually makes sense and is fair. If not, and can be shown to not genuinely reflect the liability, it could be inferred to be a penalty being paid.
In addition, make sure this does not then change over time. Even though it might be agreed three months before the actual lease ends, the tenant may cause further problems before they actually leave that really need an additional payment.
Plus, from a landlord’s perspective, they may want a non-reliance clause in the settlement saying that they can then do with this payment what they wish rather than being tied-down to specific things as plans change for the property.
6. The ‘Section 18’ Cap
This is finally worth a specific mention as it can crop-up in detailed talk about dilapidations, and that’s the amount a landlord can claim from a tenant being limited by Section 18 of the Landlord and Tenant Act 1927.
So let’s assume that the cost of doing all these dilapidation repairs adds up to £10,000. This legislation says there are two scenarios where the landlord is only allowed to receive a lower amount.
The first is where the works will be useless anyway because there are plans to either completely re-develop the property or carry out separate refurbishment works. So £10,000 spent on carpets and redecorations are going to be pointless if the building is no longer there anyway in six months time.
And secondly, the landlord can’t claim more than what they have lost in the value of the property from it being in disrepair. So if the property is currently worth £100,000 as it stands today with all these dilapidations being due, but you would only self it for £105,000 if all these works were then completed, then the landlord can only claim £5,000 and their difference in value and not the £10,000 actual costs of works.
This can get technical, and the need of a specialist valuation of the property before and afterwards and carefully looking at the true value-change in these two scenarios
Dealing With the Dread of Dilapidations
Therefore, as you face the world of the dilapidations liability at a property, it’s important to take a step back and go through these above basic issues in order to understand the real issues at hand, and what the next stages are.
Even if you have property advisors already involved, and upset tenants receiving an expensive dilapidations liability or happy landlords expecting a paid-for better-condition property – these are a must to get to grips with in reality.
After all, it should boil down to the fact that a party like a tenant has promised to keep the property in a certain condition through a lease, and another one like a landlord is now formalising what these need to be.
Ideally this all needs looking at and clarifying right at the beginning of course, but don’t worry, all is not lost if you’re reactively dealing with at the end.
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