DILAPIDATIONS

Forewarned is Forearmed

PREPARING A TERMINAL DILAPIDATIONS CLAIM

Dilapidations_Lease1 and Quantified Demand

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. The draft Pre-Action Protocol 3rd Edition dated May 2008 (expected to be adopted 2010) and the Fifth Edition of the RICS Guidance. Surveyors should read, accordingly digest and use them. They are the rules of dilapidations, which the Courts expect to be followed.

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 landlord’s wish list and have no bearing either on the condition of the property or the obligations of the tenant. This article discusses 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 dilapidations 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
• Agent’s letting brochures
• Any statutory notices served
• Deeds of Variation relating to the repairing covenants or extent of demise
• Schedules of Landlord and Tenant’s 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?
  • Is the subject matter in a damaged or deteriorated condition?
  • 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?
  • 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 good and substantial repair and condition”, is more onerous than “to keep in tenantable repair”.

In this particular example, the words “to put” are present in the clause. The courts have interpreted that in order to keep something in repair, it must be put into repair first. Subsequently, the specific words “to put” do not need to be present, yet the obligation remains. It becomes an express obligation which emphasises 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, reinstatement and decoration covenants can take and careful analysis and interpretation of them is paramount. There may also be other specific obligations such as replacement of the carpeting in the last year of the term. This article 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 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.

Alternatively, where a landlord has recently undertaken refurbishment, a schedule may be incorporated into the lease to show the standard and good condition at the beginning of the term.

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 usual for these clauses to be added in the repairing covenant. The surveyor should note whether the standard contemplated in the decoration covenants are also limited by the Schedule of Condition, or does is limit the repairs only? Is there still an express covenant to redecorate periodically and in the last year of the term? If so, then the Schedule of Condition does not apply to the decoration covenants.

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 RICS Guidance Note. These include interim and terminal schedules, and notices of disrepair. This article 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

A significant issue in the 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 damages, 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 Tenant’s Comments Landlord’s Comments Landlord’s Costing Tenant’s Costing

Stage Four – 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 56 days afterwards. The surveyor should note that if the landlord is required to give formal notification to reinstate the premises (usually found in the yield up clause or licenses to alter) then this must be given before the end of the term. The general opinion is that a reasonable period is the time it would take to undertake the reinstatement works.

Following submission of the claim the tenant should respond within a reasonable time period. This is either stated in the claim, or alternatively 56 days is considered reasonable.

2.0 PREPARATION OF THE QUANTIFIED DEMAND

The Protocol 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. The claim should 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. 56 days is considered reasonable

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)

3.0 SUMMARY

A good strong dilapidations schedule and claim requires a methodical, almost forensic approach. The key is to allow enough time to begin the process. The RICS Guidance Note provides a good detailed analysis of the process and the surveyor should refer to it to gain a deeper insight. The Pre-Action Protocol is a procedural document in contemplation of court action. Whilst surveyors may not believe that it is relevant unless court action is imminent, they should be aware that it is designed to facilitate early settlement and avoid litigation. The conduct of surveyors prior to action may well be taken into account by the court, and subsequently the court will take a very poor view if the reason the issue has reached court is because the surveyor has not followed the protocol. Surveyors are strongly recommended to adopt the procedures and standards set out in both the RICS Guidance Note and the Dilapidations Pre-Action Protocol.