Repair –v- compensation for Disrepair (Part 3)
In this final instalment our commercial property partner Michael Higgin explains how dilapidations claims are pursued and whether a tenant might do the required repair works or not.
The landlord will usually engage a firm of building surveyors to prepare a detailed schedule of the items of disrepair in the premises, listing separately each item of disrepair or failure of decoration and its related cost of remediation (including labour charges and lost rental time), referring to the provisions of the lease and other documents, of which they assert a breach.
There is a non-binding, but recommended, “pre-action protocol” for dilapidations claims which requires schedules to be served within a reasonable time at the end of the term, which is usually within seven weeks, and the tenant is to be given a reasonable time in which to respond, also usually seven weeks.
Solicitors are involved in service of the schedule of dilapidations but tend not to be very involved in the substance of the claim at this stage, which is led by the landlords and tenants’ respective building surveyors. However the surveyors will consult with lawyers to confirm the documents that apply and the obligations in them that are relevant, and to clarify the interpretation of the repairing obligations in the lease, as necessary, if there are any doubts about the effect of the obligations.
All costs properly incurred by the landlord in litigating will be payable by the tenant under general contract principles and/or specifically under the “costs” clause in its lease.
Like in all breach of contract claims, the landlord must prove:
- a duty;
- a breach of that duty;
- loss caused by that breach; and
- that the losses claimed are both reasonably foreseeable and reasonably mitigated (although many leases contain “indemnity” clauses where mitigation would not be available).
In addition certain legal principles also restrict the landlord’s ability to recover compensation for dilapidations, in particular S.18 of the Landlord & Tenant Act 1927, which states firstly that any repair works which are superseded by a landlord’s subsequent works are not liable to compensation. That is to say, if the tenant could repair a particular item and the landlord would still put it in a skip because it does not fit in with their future plans, then why should the landlord receive any compensation if that item was not put in repair? If the landlord only intends to carry out major works because the premises are dilapidated, an argument of “supersession” would not apply. It only applies where the landlord intends – NB, at the time of the ending of the lease – to alter or demolish the premises regardless of their state of repair.
Secondly, the landlord is only entitled to compensation for the diminution in value of its reversion (i.e. loss of investment value) arising from the breach. In many cases the cost of doing repair works is greater than the loss to the landlord’s investment value from the works not having been done, and the landlord is only entitled to recover the lower of those two figures.
Many building surveyors have a thorough understanding of the law on this issue and of the tactics employed by both the landlord and tenants in such claims. In that case a lot of the negotiation process can be dealt with by the building surveyors without solicitors’ input. However, ultimately matters will need to be dealt with in a legal settlement agreement “in full and final settlement”, and if appropriate agreement cannot be reached, then litigation may result when solicitors will certainly need to be involved. Tenants may well have established relationships with suitable building surveyors, but if they would like a recommendation from us, please do ask.
If a tenant intends to renew its lease and continue in occupation on the same terms and with the same rent then the landlord’s reversionary interest is unlikely to have a lower value, and the landlord would therefore not have a claim for compensation in those circumstances.
Practical Considerations – to repair or not?
A tenant will need to consider whether it wishes to carry out repair and decoration works before a lease term ends, or to do nothing and have a negotiation subsequently about compensation, when it might have the benefit of supersession and/or “diminution in value” arguments to reduce the level of compensation it would need to pay.
The tenant’s obligations to keep premises in repair is to keep them in repair given the nature of the property itself and its age. There is no obligation to handback a modern building, as built to modern standards, if the building is a historic one – e.g. a Victorian building even in perfect repair will never be to the same design and specification as a 21st century building in repair.
The landlord is entitled also to compensation for the amount of time that it cannot re-let a property because it is carrying out repair works which the tenant had failed to perform: sometimes this is expressly referred to in a lease, but will also apply at common law. Accordingly, if works are clearly required under the terms of the lease and given the state of repair of the property, then it may be sensible for the tenant to carry out those works using the tenant’s own preferred workmen when it is in control of costs and timing. This would, however, require the tenant to fit those works in around it winding-down or moving of its operations, or to require it to move out early to enable the works to be done. If the tenant cannot move early, or if its trade is particularly profitable in its current location, it may choose to trade until the very end and to reach a cash settlement after the event.