The
two prevailing documents which govern the method by which dilapidations
is practised is firstly the Protocol and secondly the RICS guidance note
on dilapidations.
These documents
dictate the method by which Dilapidations is practised. Fundamental changes
have been made in this area during the last two years. The new draft of
the Protocol has been released in July 2002 and the new Fourth Edition
of the RICS Guidance Note is due for release in November 2002. Surveyors
should read, accordingly digest and use them. They are the future of dilapidations.
1.0 Preparation of a Schedule of Dilapidations
It is indisputable
that the practice of dilapidations is part of a legal procedure and that
the fundamental purpose of a Schedule of Dilapidations is to identify
any breaches of covenant within a lease. The allegation of breach of contract
is the first step in the legal process. Consequently, for a Schedule of
Dilapidations to have worth and perform the function for which it is drafted,
it is necessary that the Schedule is enforceable in a Court of Law.
The quality of
documentation that is provided by the landlord is many and varied. One
extreme is those that do not acknowledge either lease, covenant, or breach
of covenant and are effectively no more than a Schedule of Works reflecting
the landlords wish list and have no bearing either on the condition of
the property or the obligations of the tenant. This paper discusses below
how Schedules of Dilapidations should be produced.
The Lease is a
Contract. Consequently the principles of offer and acceptance, consideration,
capacity of the parties etc are all relevant and have an application.
However, the most significant aspect is the intention of the parties when
agreeing the lease. It is the record of that agreement and the extent
to which one or other party has or has not complied with the original
agreement that leads to the preparation of dilapidation schedules and
disputes surrounding allegations of breach of contract. Consequently the
record of that agreement is fundamental to dilapidations. The legal remedy
for breach of covenant is often a claim for damages. The Schedule of Dilapidations
is usually prepared as a claim for the cost of works.
It should also be bourne in mind
that Proudfoot Vs Hart (1890) 25 QBD 42 is still the clear guidance to
Surveyors as to the Standard of repair that should apply. The standard
must have regard to the age, character and locality of the building and
whether the condition of the subject matter of the dispute is reasonably
acceptable to a reasonably minded tenant of the kind likely to take lease
of the building.
In general the
preparation of a Schedule of Dilapidations follows three stages.
Stage
1 – Full Appraisal of All Relevant Documentation
– This Will Include
• Leases
• Licences to Alter
• Schedules of Condition
• Side letters
• Photographs
• Fit Out Specifications
• Agents letting brochures
• Any statutory notices served
• Deeds of Variation relating to the repairing covenants or extent
of demise
• Schedules of Landlord and Tenants Fixtures and Fittings
• Details of outstanding Service Charges that may have been paid
• Any rent deposit agreements.
The three main
documents are the following:
Leases
The lease records the initial agreement between the parties and identifies
the intentions at the commencement of the term.
It is this document
that will answer the question of the tenant’s liability under
the terms of the lease and in particular the repair covenant. Nicolas
Dowding QC and Kirk Reynolds QC in their book Dilapidations the Modern
Law and Practice, go into great detail over how the question of liability
should be approached and would recommend their 5 stage approach be adopted.
-
What is
the physical subject matter of the covenant?
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Is the
subject matter in a damaged or deteriorated condition?
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Is the
nature of the damage or deterioration such as to bring the condition
of the subject matter below the standard contemplated by the covenant?
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What works
are necessary in order to put the subject matter of the covenant
into the contemplated condition?
-
Is that
work none the less of such a nature that the parties did not contemplate
that it would be the liability of the covenanting party?
Remember the
principles of dilapidations. A schedule of dilapidations is an allegation
of a breach of contract. Breaches of contracts are actionable in a Court
of Law and therefore the lease should be closely analysed to establish
what covenant has actually been breached. Similarly the remedial works
proposed should also be clearly identified and no items of improvement
should be included.
The surveyor
should also ensure that the relevant covenants within the Lease are
inspected to establish those that are express, such as “redecorate
every three years”, and those that are implied, such as repairing
covenants. The method by which these covenants are drafted may change
the interpretation and obligation placed upon the tenant. For instance
a repairing covenant “to put and keep in repair”, is substantially
more onerous than “to keep in tenantable repair and condition”.
In this particular
example, the words “to put” becomes an express obligation
which emphasise that the standard contemplated by the covenant is not
necessarily the same as the state of the premises at the date of the
lease. It adds weight to the argument that the parties intended specific
disrepair at the date of the lease and therefore is an obligation to
put the premises into repair which should be performed by the tenant
upon taking on the premises.
There may also
be reference to a Schedule of Condition, which quantifies that the premises
need only be reinstated back to the state and condition as evidenced
within the Schedule of Condition.
There are many
forms that the repairing covenants can take and careful analysis and
interpretation of them is paramount. This paper does not propose to
go into specific detail, however suffice to say, the surveyor should
be aware of the differences and their interpretation.
Licences
to Alter
These are legal documents drawn up between the landlord and tenant granting
permission to make alterations to the premises either at outset of the
lease term and may be referred to within the lease itself, or during
the term. It is important that surveyors obtain copies of Licences to
Alter so that they can establish the extent by which the tenant has
altered the premises. Some Licenses contain a specific obligation that
requires the tenant to reinstate the premises back to its original condition
at the end of the term. Other licences may include a clause that requires
reinstatement only if the landlord serves notice to do so, and in this
case a reasonable period must be given to the tenant in order that they
can have the opportunity to actually carry out the works before the
end of the term.
Schedules
of Condition
If the premises is considered to be in poor condition the tenant will
not wish to take on a full repairing lease without a document that establishes
the visible condition of the premises at the beginning of the lease
term. In a poor letting market the tenants are more likely to require
a Schedule of Condition be drawn up as this will limit their repairing
liability at the end of the term back to the standard as evidenced within
the schedule. It should be remembered that the Schedule of Condition
forms a legal document and represents the visible and descriptive condition
of the premises and must therefore be accurate. Try to imagine this
document being dusted off and read in perhaps ten years time, and a
new surveyor comparing this document with the future condition of the
premises. It will decide the extent of the tenant’s repairing
obligations and so it should be adequately detailed and easy to read.
Include plans and location details if possible.
The Schedule of Condition will only become a legal document if it is
referred to within the lease. Typical express references will be that
the premises are to be kept in “the state evidenced by the Schedule
of Condition annexed hereto” or “the state in which they
are now in as evidenced by the Schedule of Condition annexed hereto”
or “no better and no worse a state than that set out in the Schedule
of Condition annexed hereto”.
It is easy to
forget services and concentrate on the fabric of the premises. However,
the services form a critical part of the premises and consequently a
Schedule of Dilapidations, but they are all too often overlooked. Services
should be included wherever possible, and are just as important as the
fabric!
Stage
Two – Site Inspection
Every dilapidations inspection should be as complete and thorough as a
comprehensive building survey. The only significant difference lies in
the method of recording the information. In relation to each defect three
pieces of instruction are required.
- Identification of the remedial
work.
- Measurements to calculate the
necessary remedial work and associated costs
- An assessment of the original
condition of the breach(s) of covenant in question and the standard
of repair which the tenant is required to undertake. This will take
into account the age, character, and locality of the premises.
It should be borne
in mind that notes might be required in Court to refute an allegation
of the defendant’s surveyor.
Stage Three – Preparation of the Schedule
There are differing types of Schedules, which are outlined in the guidance
note. These include interim and terminal schedules, and notices of disrepair.
This paper refers to the Terminal Schedule which is served near to or
following the expiration of the Lease.
The
Protocol and Guidance Note are clear as to the content of this document.
It should:
- Indicate the
covenant in the lease which has been breached.
- Why the landlord
believes the covenant to have been breached. ie define the breach
- What in the
opinion of the landlord is necessary to remedy the breach.
- If the landlord
is claiming financial remuneration in lieu of building works being carried
out then the landlord’s costs should also be provided.
The Protocol includes
a copy of a suitable Schedule of Dilapidations.
Item No. |
Clause No |
Breach Complained Of |
Remedial Works required |
Landlord's Costing |
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One of the most
significant changes that has been made with the new Protocol is the requirement
of a Section 18 (1) Valuation (under the Landlord and Tenant Act 1927)
to be carried out, in certain circumstances, which will be discussed later
in these notes. However, to facilitate and aid a Section 18 (1) Valuation,
it will be necessary to divide the Schedule
into three specific areas and it is now considered, both in the Protocol
and the Guidance Note, good practice to list this under headings; Reinstatement,
Repair and Decoration. The reason for this will become apparent however,
briefly, repair elements include implied covenants whereas reinstatement
and redecoration are express covenants.
Section 18 (1)
caps the amount in damage, which the landlord can claim in relation to
implied covenants to repair. The express covenants such as decorations
and reinstatement do not form part of this cap and are therefore listed
separately within the Schedule of Dilapidations. The reinstatement and
decoration clauses will be subject to a similar, but not identical cap
under general common law principles.
Further important
elements to the Schedule of Dilapidations are the breach and remedy columns.
These should clearly identify the specific breach within the lease under
which the landlord alleges the tenant has failed to comply with their
obligations. The remedial works column identifies the works that are deemed
necessary to rectify the alleged breach. These remedial works should not
include for any improvement works or betterment.
Both the Protocol
and the RICS Guidance Note recommends that electronic versions of the
Schedule of Dilapidations are provided to the tenant’s surveyor
to enable them to respond to the landlord’s Schedule with their
own comments. This is known as a Scott Schedule and the RICS Guidance
Note is quite clear as to how this should be set out. An example of this
is given below. Surveyors should use this document when exchanging travelling
drafts between the parties, monitoring the changes made at each stage.
Item
No. |
Clause
No |
Breach
Complained Of |
Remedial
Works required |
Landlord's
Costing |
Tenant's Comments On |
Landlord's Comments On |
Breach |
Remedy |
Cost |
Breach |
Remedy |
Cost |
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2.0
PREPARATION OF THE CLAIM
This is where the Protocol has made substantial changes in the way in
which dilapidations is practised. A Section 18 (1) valuation must now
accompany the claim in a number of instances. To quote from the Protocol
in particular Clause 4.1.2.
- If the landlord
has carried out the work, it is not required to provide a valuation
under Section 18 (1) of the Landlord and Tenant Act 1927.
- If the landlord
has not carried out the work but intends to, he must state when he intends
to do the work and what steps he has taken towards getting the work
done eg. preparing a Specification or Bills of Quantity or inviting
tenders, and the landlord should prepare a Section 18 (1) Valuation
unless, in all the circumstances, it would be reasonable not to.
- If the landlord
does not intend to carry out the work, then it must provide a Section
18 (1) Valuation which should provide sufficient costing of the works
to demonstrate that the cost of the works would exceed the Section 18
(1) Valuation.
Historically, and
in many circumstances currently, the landlord will seek to settle dilapidations
financially with a view to securing a new letting with a new tenant and
granting them a rent free period in lieu of carrying out the required
building works. The landlord must now prove loss at the claim stage and
furthermore must now prove that this loss exceeds the cap provided under
Section 18 (1).
Programming
The Protocol states that the Schedule of Dilapidations should be served
within a reasonable time which can be before the termination of the
tenancy, but generally should not be more than two months afterwards.
The claim should
be quantified in a separate document to that of the Schedule. It is
not clear when the claim should be submitted. However it is reasonable
to assume that this should be done as quickly as possible following
submission of the Schedule of Dilapidations. If the claim is to include
a Section 18 (1) Valuation and other supporting documentation such as
Specifications then this will have a major implication on the timing.
Landlords should be aware that it is now even more important that surveyors
are involved at an early stage. In some cases this may be as far ahead
as two years before the termination of the Lease.
Following submission
of the claim the tenant must respond within a reasonable time period,
usually two months.
The Build
Up of the Claim Itself
This must include:
- The landlord’s
name and address.
- The tenant’s
full name and address.
- A clear summary
of the facts in which the claim is based.
- The Schedule
of Dilapidations.
- A clear summary
of the claim which is discussed in more detail below.
- Any documents
such as invoices and evidence of costs.
- Confirmation
that the landlord and his advisors will attend meetings.
- Date by which
the tenant should respond.
Summary
of the Claim
This should include:
- Cost of Works
- Preliminaries
- Overheads and
Loss of Profit
- Surveyor’s
Fees for Preparing Schedule (quantified and substantiated)
- Loss of Rent
- Loss of Service
Charge
- Surveyor’s
Fees for Negotiating a Settlement (projected)
- If Section
18 (1) cap applies then this should be shown
The Protocol
in line with the aim of the Civil Procedure Rules brought out in April
1999 is designed to ensure that Schedules of Dilapidations and accompanying
claims incorporate all relevant documentation and information that may
be necessary to prove that the landlord has suffered a loss. It aims
to remove the ambiguity from dilapidations with an emphasis on trying
to reach an early settlement.
3.0 SUMMARY
The changes that have been made in the field of dilapidations during the
last two years are fundamental, yet surveyors are still not adapting to
these changes. Once the Protocol has been accepted by the Lord Chancellors
Department it will be incorporated as a legal document. Surveyors should
start practising dilapidations in line with the Protocol and the RICS
Guidance Note now, and they will then be prepared for the future.
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