Dilapidations – Pitfalls and Considerations Seminar Wednesday 20th July – Q&A

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Dilapidations – Pitfalls and Considerations Seminar Wednesday 20th July – Q&A

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On the 20th July Ben Anderson, Director of Crossley Anderson gave a well-received overview of dilapidations – pitfalls and considerations as part of our 2022 Real Estate Seminar programme.
 
Following the seminar our Partner in Real Estate Craig Burton sat down with Ben for a Q&A to find out more about why it is important to understand and the impact and key considerations for both landlords and tenants.

Craig: Hi Ben, great to see you and thank you for the interesting and insightful seminar.   Firstly, for those who are new to this, can you give me a quick summary on what you mean by dilapidations and why it is important all parties understand this term?
 
Ben: Dilapidations in the most simplistic terms relates to a claim for damages for a breach of contract between the landlord and tenant in commercial property.
 
A commercial lease will typically include; repair, redecoration and reinstatement clauses which will determine the condition the property is to be kept in during and at the end of a lease. A dilapidations matter arises when the property has not been kept in the required condition.
 
It is important for tenants to understand their liability so they can keep the property in the required condition and provision for the costs at the end of the lease, so there are no nasty surprises!

Likewise it is important for a landlord to understand dilapidations so that they can claim accordingly and understand their options if a tenant isn’t complying with the lease term during the term.
 

Craig: You mentioned during the seminar when looking at a typical dilapidations process one of the key procedural elements is ensuring compliance with the dilapidations protocol.  Can you tell us a bit more about the protocol and why compliance with the same is so important?
 
Ben: A dilapidations schedule must be issued in accordance with the dilapidations protocol which is published by the property litigation association. It is now a pre-action protocol under the Civil Procedure Rules and substantial compliance with it is required before the landlord can issue a claim for terminal dilapidations
 
In simple terms the purpose of the protocol is to ensure costs are reasonable, all works are required and the surveyor has accounted for the landlords intentions for the property.

Furthermore you must offer a meeting on site and a response to the schedule is expected within 56 days by the tenant. The protocol encourages early settlement rather than court proceedings.

 
Craig: When considering lease clauses one of the key points which feeds into dilapidations is the treatment of, and differences between, chattels and fixtures? A complex area, but can you give us a summary of the position and key differences in practical terms?
 
Ben: The particular lease clauses and understanding what it all means is crucially important and often where professional advisors are key. The difference between a chattel and a fixture are often key points in a negotiation.
 
Chattels are the personal effects of their owner. A chattel can be removed at any time by their owners, you often think of these as non fixed furniture or art works for instance.
 
However there are some items which fall into a grey area. Carpets are one these, they can be both a fixture and a chatel depending who installed and how it has been fixed. Other fixed items like a false ceiling and partitions won’t be chattels, but something like demountable partitions or freestanding kitchen units may well be a tenant’s chattel.
 
Fixtures can be thought of as two types-
  • The first being an obvious one – permanent landlord fixtures that are classed as part-and-parcel of the property
  • However, the second is where an item used to actually be a tenant’s chattel but then becomes a fixture after it is ‘annexed’ and fixed to the property.
 
The importance of this to dilapidations is often a fixture is to be kept in good condition whereas a chattel (tenant item) does not and they can be removed.

The difference between stripping out say a carpet or removing and replacing carpets to leave in good condition can be significant! 
It is generally accepted that there is a Two-Stage test as devised in Hellawell v Eastwood (1851).
 
Craig: In terms of strategic considerations, it appears section 18 (statutory cap) is a useful tool – usually regarded as a protection for a tenant but also potentially useful for landlords too?  Can you give us a brief overview of how this works in practice?
 
Ben: Section 18(1) of the Landlord and Tenant Act 1927 is frequently referred to as the "statutory cap on damages". It places a statutory cap on the amount of damages a landlord can recover from a tenant for breaches of the repairing covenants in a lease. 
 
There are two strings to s.18 The main principles are:
 
  1.  Diminution in value. In essence this means the Damages for breach by the tenant of its repairing covenants cannot be more than the reduction in the value of the landlord's reversionary interest. Diminution in value, is difficult to prove and a S.18 valuation needs to be completed. In essence this will show the value of the property in a poor state of repair v one in the required state of repair. The damages claimed cannot exceed this difference. This can then be used by a Landlord to substantiate the claim or by a tenant to reduce the obligation.
  2. Supercession - No damages are payable if the landlord is going to make structural alterations, demolish or redevelop the premises which would render the repairs valueless and superseded. eg an office being converted to residential will supersede things like suspended ceiling repairs.
 
Craig: Whilst dilapidations is often considered to be a lease end consideration, landlord’s do have options mid-term to address failures by a tenant to repair (for example interim schedules of condition).  Is this an area you see a lot in practice or becoming more prevalent? and are there any benefits to a landlord specifically with regards to interim schedules?
  
Ben: This is an area we see commonly and for one reason or another we are seeing this more often over the last year. Jervis v Harris is a prominent dilapidations court case in 1995. As a consequence of the court’s decision, most modern day leases contain a remedy for Landlords, when a Tenant is failing to maintain and repair a property in accordance with their contractual obligations under a Lease during the lease term.
 
A Lease which contains a properly drafted Jervis v Harris clause, grants the Landlord a right to first serve notice on a Tenant, specifying any breaches of covenants relating to the condition of a property. This is often a repair notice accompanied by an interim schedule of dilapidations.
 
If the Tenant then fails to proceed diligently with remedying the breaches and/or to remedy the breaches identified in the notice within a specified period, (usually within 2-3 months), the clause grants a right for the Landlord to enter the property to carry out the works and to then recover the costs in doing so from the Tenant, as a ‘debt'. This is beneficial to landlord as it takes away the s.18 requirements as discussed earlier.
 
Craig: You ended the seminar talking about green dilapidations, an interesting concept but do you think this can be achieved in real terms? 
 
Ben: This is an interesting area which is being discussed more and more within the Building Surveying networks of the Royal Institution of Chartered Surveyors. The premise of this is one of waste within dilapidations, for instance we often see a well-designed office fit out being removed at the end of a lease only to be replicated again by a new tenant.
 
Green dilapidations is a notion by which parties can collaborate to try to reduce waste at lease end, despite the law being far from aligned with these principles and despite the issues being embedded far earlier in the leasing cycle than at lease end. This requires a combined effort by landlords, tenants, solicitors and surveyors to essentially redraft typical lease clauses and mindsets.
 
Construction as most people are aware accounts for a huge carbon footprint. Professionals have a responsibility to do our bit where we can and this starts by advising clients of this approach. Can it work? In theory yes, but this starts with a conscious effort from the top to filter down and become the new norm.
 


Find out more


As highlighted above and at the seminar, the above is a complex area. If you want to find out more you can contact Ben Anderson via ben@crossleyanderson.com or  visit the Anderson Crossley website.  

Interested in attending future PDT seminars?

 
As part of our ongoing series of property seminars, we are hosting a number of further seminars throughout 2022. 
 
We will be circulating further details of these closer to the seminars however as a sneak preview we have the following seminars lined up:
  • Oct:  Compliance and Fire Regulations
  • Nov: EPC Regulations - Getting ready for 1 April 2023.
 
 
 

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.

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