Dilapidations for Tenants and Leaseholders

Dilapidations are as certain as Death and Taxes

When you take on a Lease you also take on the obligations to repair a property to a set standard that is legally defined; this can often be forgotten about in the excitement of a new business venture or an expanding business venture. One thing is for certain, when your Lease comes to an end, or when you decide to leave, Dilapidations are as certain as death and taxes.

It has been said that ‘any fool can get a lease; it is getting out of one that needs an expert'. This is not strictly true because we would recommend that you don't enter into a lease without using a Chartered Surveyor that is expert in dilapidations.

Dilapidations Defined in a Nutshell  

Any business owner taking on a property as a tenant / leaseholder, also takes on the obligation to repair the property as set out within the lease or the Landlord and Tenant Act or in case history or a combination of all three, regardless of what condition the property may have been in when they took it on. A landlord / investor is looking for the business owner to pay rent over the term of the lease and then will require the building to be left in a suitable condition as set out within the lease for him to re-rent.

We frequently come across business owners who feel this is both unfair and unjust; complaining that when they took the property on it was in a poor state. A good example of this would be the leaseholder of a public house; we have lost count of the number of times that the leaseholder / business owner advices us that we ought to have seen the condition it was in when they took the property on. Unfortunately the terms of the lease that have been signed require the business owner / leaseholder to return the property in the condition as set out within the lease.

Dilapidations always take Leaseholders / Business Owners by Surprise

Earlier we said that dilapidations are as inevitable as death and taxes when you take on a Lease, but in our experience most leaseholders / business owners find it a surprise when the property owners / landlords / Management Company implement the clauses within the legal lease. Not only do they find it a surprise, they also find it a very confusing, unfair, and costly process.

Dilapidations, The Moving Target

Another intriguing element of dilapidations is that they are forever evolving as new case law modifies and amends how issues are dealt with, so your Chartered Surveyor has to have a good working knowledge of the latest case law with regard to dilapidations.

The Best Way to Avoid Dilapidations is to buy Freehold!

  There are various ways of protecting yourself against dilapidations. We would recommend the best way is to buy freehold! However, we do recognise that for many businesses the most realistic option is to initially use leasehold premises until they have enough collateral to buy freehold.

Protecting Yourself Against Dilapidations  

A wise businessman entering into a lease seeks a Chartered Surveyor with expert knowledge of dilapidations. We believe the business owner requires more than the standard Chartered Surveyor; they need a businessman that understands property, leases and how to make a business decision and who is able to offer advice on how to initially limit your liability and, on leaving the lease, how to limit / reduce your costs.

Such Chartered Surveyors are a rare breed and whilst many Chartered Surveyors have the technical knowledge to understand what should occur during a dilapidations they simply do not have the negotiation skills and ‘real world' knowledge to understand how to get the best business deal. This is all, of course, pre-agreed with the business owner.

An Agreed Schedule of Condition at the Outset of the Lease can go a Long Way to Protecting you when you Finally have to Yield-up (give back) the Leasehold Property

We would recommend that in nearly all cases the best way to protect yourself from future dilapidation claims is to have a Schedule of Condition carried out on the property when you take the lease and have this appended to and included in the lease documentation.

Many landlords however are wise to this requirement from the astute businessman and will not allow a Schedule of Condition to form part of the lease. Often larger companies will say that it is a standard lease and the property is taken ‘as seen' and has to be returned back as specified within the lease. We feel that even where this is the case a Schedule of Condition will be of benefit in years to come as a record of what the property was like in the dim and distant past as it has altered and people come and go over the years and an invaluable record of negotiating / arguing your case on dilapidations.

Dilapidations, The Landlords' Money Making Machine!  

What can seem like an unfair process to the leaseholder / business owner and what could be described as ‘money for old rope' to the landlord / investor, is often seen by the landlord / investor as being very fair, as his business is renting out property and to do that requires that it be in good condition without any cost to himself. We would cynically say that if he can get it back in good condition without any cost to himself then he is happy, but he is much happier if he can get it given back to him in reasonable condition plus a monetary consideration (the business owner's hard earned cash), being given to him as an agreed amount to allow the business owner to move on.

Ending the Lease for Whatever Reason, Leads to Conflict, Argument and Ultimately a Dilapidations Claim

Scope for argument with regard to dilapidations is almost endless! Dilapidations can lead to conflict in the following areas:

•  Arguments with regard to alleged breaches of the Lease

Unless you are familiar with the procedures and process of dilapidations the arguments relating to the breaches of the lease can be mystifying and also very costly, which is why we recommend that you employ a Chartered Surveyor who is expert in dilapidations.

•  Interpretation of the obligations under the Lease

A good Chartered Surveyor with good expert knowledge of dilapidations should be able to guide you on these matters and give you an indication how it would proceed if ultimately the dilapidation's claim goes to court.

•  Arguments as to whether you, the business owner / leaseholder, failed to meet these obligations

Again, these are endless; without the expert knowledge of a Chartered Surveyor used to dilapidations' claims these arguments can be endless.

•  Once the obligations have been ‘agreed' then arguments can ensue over the cost of carrying out the various repairs

The Chartered Surveyor dealing with the claim can identify if it is necessary to bring in a third party, but in most cases they should be able to cost the repairs and substantiate these costs and negotiate / argue them for you.

Dilapidations and the Chartered Surveyor and Negotiator

Due to the subtleties that have developed in dealing with dilapidations you need a specialist Chartered Surveyor who not only understands dilapidations law and is up to date with the latest case law, he will also need to be a keen negotiator and business person who understands the reality of arguing over a small item with insignificant costs and a large item with substantial costs and obligations.

Dilapidations Protocol

You will be pleased to know that the Royal Institution of Chartered Surveyors set up a protocol for dealing with dilapidations work (or dilaps, as they are fondly known by Chartered Surveyors); whilst this is not compulsory if the dilapidations lead to court action and the protocol has not been followed by the business owner / leaseholder or their legal advisers then the courts will usually be in favour of those trying to follow the protocol.

So What Happens when you Phone us up on 0800 298 5424?

The very first question you will be asked is whether you are acquiring a leasehold or whether you have had a Dilapidations Schedule served upon you. If you are at the acquiring stage of obtaining a leasehold then we offer a service where we identify the main issues in relation to the property and can even attune these to your business needs and a Schedule of Condition to protect you in years to come. In summary we say we can offer you a service which allows you to negotiate on your lease on day one and also on the last day.

If you are contacting us when you have had a dilapidations claim served against you, as many do, we will have an informal chat on the phone to discuss your particular situation and we would then ask that you obtain a copy of the lease and any suitably marked up drawings with regard to any alterations (and any licenses that have been approved for you to carry out these alterations) and then we would arrange to meet you at the premises where we will talk about your business, your business needs and the Dilapidations Notice that has been served on you.

The Dilapidations Notice can take the form of an Interim Dilapidations Notice, which is as it states and is served during the course of your lease and can often be what we would term ‘a shot across the bows', warning you of forthcoming dilapidations; or it can be what is known as a Terminal Dilapidations Notice, which is issued when the leasehold is coming to an end.

We will then provide (at a cost) a summary of our understanding of the situation and confirm what we understand you to be instructing us to do, and the limitations of our responsibilities, and the extent of your requirements depending upon whether you want to be ‘hands on' or ‘hands off' the process. We will then inspect the property closely again, this can if you so wish be carried out as part of the first meeting (we can work very quickly if time is pressing, producing a full report and summary within three days, all sent to you via the internet with a password code to access the document). We would then arrange a preliminary meeting with the landlord's Chartered Surveyor. The purpose of this meeting would be (i) to establish the Chartered Surveyor's knowledge with regard to dilapidations, (ii) to try and understand the landlord's stance with regard to the dilapidations, and (iii) the position of you, the business owner, in the negotiation.

Lease Clauses a Few More Thoughts

A dilapidations claim relates to clauses within the Lease; so the first thing that the Chartered Building Surveyor will request is a copy of the Lease and suitably marked up drawings in colour and any Licences that have been issued with regard to amendments and alterations. We are tempted to use the word ‘improvements', but most Landlord's do not consider any work the tenant has carried out in this light.

The Chartered Surveyor will then inspect the property and work out what is considered to be a repair and what is considered to be disrepair.

What is Disrepair?

There are two main case laws on this:

Post Office v Aquarius Properties 1985

To repair you need to establish that the repair is in a worse condition than it was at an earlier time; i.e. you need a Schedule of Condition to protect yourself.

Profit v Heart 1885

This defined what is a good tenant full repair.

Some Dilapidation Terms and Schedule of Condition Terms Defined

Yield up

This term relates to the tenant / leaseholder returning the property in accordance with the Lease to the landlord / investor and is the very basis upon which dilapidations are discussed.

Defects

Defects fall into three categories:

Latent Defects

These are defects that are not visible at the beginning of the Lease but become visible during the course of the Lease.

Patent Defects

These are obvious defects.

Inherent Defects

Defects inherent within the design of the property.

Tenant / Leaseholder Services

Tenant / leaseholder services are often one of the most forgotten areas. For example computer cabling may have been added over the years and possibly air conditioning or air handling units or possibly an alarm system. In theory and often in practice the landlord can ask for all of these to be taken out and the walls to which they have been fixed repaired and made good; even if it can be argued that they would be of benefit to any future tenants. This is at the landlord's discretion and good negotiation can save a lot of time and effort for the tenant.

Statutory Requirements or Statutory Compliances

Most modern leases require statutory compliance; within dilapidations this normally relates to such items as Fire Regulations and the Disability Discrimination Act and is a standard requirement in most modern standard leases which, unfortunately, due to the way that legislation is progressing and forever being amended, means that your requirements are forever changing and evolving.

Fire Regulations

If you took out a Lease some twenty years ago the Fire Regulations would have been quite different and would have probably used the red wording for a fire exit whereas today a surveyor would expect a green and white sign showing a man exiting through a door or, as I was once advised, a man kicking an ice cube!

Disability and Discrimination Act (DDA)

The Disability Discrimination Act (DDA) has come into force in recent years and may not form part of the original Lease terms if the Lease is a decade or so old; however, equally, arguments and discussions can take place as to whether the broader wording within the Lease requires such new Statutory Requirements to be adhered to.

Asbestos

Asbestos is another area where things have changed over the years and more recent Leases would have required an Asbestos Survey, which should be yielded up when the property is vacated, or alternatively the Landlord or the new tenant will have to make provisions to carry out suitable work.

Work Place Regulations

Work place regulations cover a wide and varied area and are being updated and amended.

A Section 18 Valuation

Under the Landlord and Tenant Act 1927 Section 18 this says, in layman's language, that the landlord cannot recover more than the difference, known as the diminution, in the value of his property if it was yielded up in good order to the value it has not yielded up in good order, which is known as a Section 18 and can lead to all sorts of discussions, arguments and disagreements. Many people consider a valuation to be an art with an element of science. This is certainly true with a Section 18 Valuation which looks at the value of the property if it was reinstated as set out within the Lease, compared with how the property actually is.

Dilapidations Protocol

The Dilapidations Protocol was drawn up by the Property Litigations Association in 2002 and establishes a time table for exchange of information and sets standards for the contents of the claim and sets a standard for the conduct of the negotiations and follows the following procedure:

• The landlord serves a Schedule of Dilapidations outlining the breaches of repair obligations, which is served within a reasonable time.

• The landlord's claim is qualified and quantified in a separate document.

• The tenants response is also qualified and quantified and submitted to the landlord, again within reasonable time, using the Schedule provided by the landlord, often known as the Scott's Schedule.

• The next step is for the negotiations to take place, preferably at the place where the dispute is. Meetings are without prejudice.

Scott's Schedule

This is a standard format utilised to allow the negotiations to proceed in a logical process. The Scott's Schedule takes the following form:

The remedial work required: this should not be too specific, and certainly not prescriptive i.e. it should be ‘repair roof' rather than ‘repair roof with an elastomeric felt.

We would also recommend that the surveyor, whilst in negotiations, also manages the client's expectations, ensuring these are realistic.

The Ugly Matter of Supersession

Supersession is where the Landlord claims for repairs that are not necessary due to the future use of the property, i.e. it may be being demolished.

Finally, at the start of a Lease it is often said that ‘any fool can get a Lease, it is getting out of them that is the problem' and at the dilapidation stage where the Lease has come to an end for whatever reason it is often said that ‘you have probably got a good settlement if both parties are unhappy'!