How to Deal With Terminal Dilapidations

Towards the end of a lease, the landlord will begin to think about the condition of the property and any breaches of the repair and maintenance covenants by the tenant. Typically a landlord will instruct a surveyor to inspect the property and prepare a schedule of dilapidations, detailing the works required for the property to ensure compliance with the tenant's repair covenants. The landlord will then serve this to the tenant.

At the end of the lease, a quantified demand (supported by invoices or detailed estimates) may also be served, setting out the landlord's likely losses. If the repairs are not undertaken, the landlord could issue a claim for damages against the tenant based on the quantified demand. The amount of damages that the landlord can recover is limited by the "statutory cap" (referred to in further detail below).

The standard of repair

The obligations of the tenant are usually found within the lease with regard to repair and typically include the following provisions:

• Repair
• Decoration
• Compliance with statute
• Yielding up
• Reinstatement; and
• Alterations

The lease will dictate the standard of repair, which for a tenant can sometimes be onerous. For example, the lease may require a tenant to put the premises in repair, even if they were not in repair at the start of the lease. However, some leases refer to a schedule of conditions, which evidences the state of the premises.

Damage limitation for tenants

If a landlord has spent money on repair costs or lost out on rent due to the condition in which the premises were left, they will have a damages claim against the tenant. This crystallises on the expiry of the lease.  

However, the common law position is modified by section 18 of the Landlord and Tenant Act 1927. This statutory cap restricts the level of damages the landlord can recover in two ways:

• Where the value of the landlord's reversionary interest has been reduced due to the tenant's breach, the landlord's claim for disrepair will be limited to that loss in value (known as the 'diminution in value'). Effectively the landlord's claim is limited to either the cost of the repairs or the diminution in value of the property as a result of the repairs.

It involves completing two hypothetical valuations. In the first, the valuer assumes an auction sale of the property in repair – they identify who will pay the most and the amount the bidder will pay for the property in repair.

In the second valuation, the valuer assumes an auction sale of the property in the disrepair in which the tenant has left the property and identifies what a bidder would be prepared to pay for the property in that disrepair.

The difference in these two values is the diminution in value which the tenant is responsible for.

• The second limb protects a Tenant where the landlord proposes to substantially alter or demolish the premises. If the landlord intends to do works to the property which would make any repair works undertaken by the tenant a complete waste, the landlord cannot recover damages for that disrepair.

What else to consider?

When considering dilapidations, it is also necessary to consider the leasehold market, trends in the rental market, development, refurbishment or alterations that would enhance the marketability and value of the property.

Landlords should be proactive and produce a schedule of dilapidations early to try and ensure that the tenant makes a provision for dilapidations in their accounts.

Here to help

If you have any more questions or want more information regarding dilapidations, you can contact our Property Litigation Team below.