Posted: Wednesday, 28 January 2015 @ 11:35
A commercial lease often contains a covenant by the tenant to keep the premises in repair and deliver them up in repair at the end of the lease. In some cases the lease also requires the tenant to “put” them in repair, whatever their state at the commencement of the lease, which is a far more onerous obligation.
Dilapidations are the repairs which the tenant has not carried out, in breach of his repairing obligations in the lease.
A repairing covenant applies throughout the term, and the landlord usually reserves the right to inspect, and may serve a Schedule of Dilapidations, demanding that the repairs are undertaken. Failure to comply could result either in a claim for the costs of repair, or could lead to steps by the landlord to terminate the lease. However, it is more often the case that disputes over dilapidation do not arise until the end of a lease, and usually after the landlord has regained possession and inspected the property. The tenant then receives a professionally prepared schedule, with costings, and a demand for payment of a significant sum of money in compensation. At this stage the tenant is already in a position of serious disadvantage.
To protect themselves tenants should be pro-active. Perhaps they should undertake an annual inspection and remedy defects on a regular basis. But what they must do is to have a professional inspection and survey carried out and schedule drawn up perhaps 4 to 6 months before the end of the lease, with photographic evidence of the condition of the premises. The tenants should then carry out repairs to comply with the repairing covenant, before the end of the lease, and have these recorded by the surveyor.
It is invariably cheaper for the tenant to do the repairs than it will be for the landlord.
It would also be advisable to get further photographic evidence of the premises after it has been cleared at the end of the lease, just before the keys are handed over. It is always a dangerous move to leave any tenant survey until after the end of the lease, when the property may have deteriorated further and evidence of the state of the premises at the lease end is no longer available.
But what if the repairs are not carried out, and the landlord makes a claim for compensation?
A Court of Appeal decision in December 2013 provides a very useful guide to the whole question of valuation of repairs. In Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited and another, Lord Justice Lewison started his judgment by giving a useful reminder of the law. He said:
“At common law the measure of damages recoverable by a landlord at the end of the lease for breaches by the tenant of his repairing obligations is the cost of the repairs that the tenant should have carried out, plus loss of rent during the period needed to carry out the works. However, the common law measure of damages is capped by section 18 of the Landlord and Tenant Act 1927 which limits damages to the diminution in value of the landlord’s reversion caused by the breaches. The conventional way of calculating that diminution is by valuing the reversion in the state in which it actually was at the end of the lease and comparing that value with the value of the reversion in the state in which it should have been at the end of the lease. The difference between the two values is the diminution in value of the reversion.”
Lord Justice Lewison approved the key issues identified by the trial judge, who said:
“…the court must consider what work would have been required at the expiry of the lease in order to put the premises (if properly maintained and put in good condition by the tenant) into a condition that would enable it to be let to the appropriate type of tenant ant a fair market rent”. He went on to say that as a result the landlord cannot recover the cost of additional work, and cannot recover the cost of work which would render any work required by the tenant’s repairing obligation worthless. For example the judge found that even if the tenant had left the façade of the building in good repair, the landlord would have re-rendered it to make the building more attractive, and so the judge disallowed the bulk of the landlord’s claim for that item.
If there is a dispute over repairs there is a Pre-Action Protocol, which means that parties are expected to follow it or face sanctions by the courts.
The protocol provides a timetable, for example, that the landlord should send his schedule of dilapidations to the tenant within 56 days of the end of the tenancy, and that the tenant should respond within a further 56 days. The landlord and tenant and/or their surveyors should then meet within 28 days. In the event of a dispute they should consider an alternative dispute resolution procedure, such as mediation, with court action being a method of last resort.
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