Dilapidations - who wants to throw money away?

In my almost thirty years of practising law, I’ve witnessed many waves of legal activity – often in response to shifts in the economy. The past four years have been no different, with a marked increase in the number of dilapidations claims being observed throughout the South West. Why should we be taking notice? Because this is something that can sting almost any business – real estate sector included – and suck up revenue that could otherwise be re-invested in your business.

Dilapidations, in short, are repairs required during or at the end of a tenancy or lease. Typically, tenants are expected to cover the costs of returning a property to the agreed standard of repair – sometimes even if the works amount to improvements on the property.

For certain disrepairs, landlords are calling for a commitment from their tenants to carry out an agreed list of remedial works ahead of a lease renewal. What’s new about this is that, unlike before, a growing number of landlords are refusing to simply roll over dilapidation issues into the renewal lease.

What about when tenants vacate? Break notices are a common point of contention, where dilapidations requirements can get in the way of bringing a lease to an end before it expires. Since break clauses are construed strictly by the courts, it’s worth thinking about how to meet all conditions ahead of submitting a notice to end a commercial rental contract.

Like for most disputes, the claims process can become quite protracted. This is because tenants will usually be disinclined to dip into their pockets unless they have to, while landlords might (sometimes) be reluctant to press ahead with works until a new tenant is lined up. However, if repairs haven’t been carried out, it’s also harder for landlords to prove their loss.

Many tenants are finding themselves playing "piggy in the middle" - sandwiched between the head landlord or freeholder and a subtenant. This can be particularly troublesome for head tenants, where the freeholder is willing to reach an early commercial (and even discounted) settlement but the subtenant is playing hardball - or vice versa. It can force head tenants into settling part of the dispute while leaving other issues ongoing – which is not ideal.

Worth keeping in mind for landlords is that, for larger claims, they now have to pay up to £10k in court fees up front - only recovering this if the legal challenge is successful. Luckily alternative dispute resolution (ADR) lends itself well to resolving dilapidations claims and we’re putting many more of these disputes to bed through mediation. This works particularly well if there is just one “big ticket” issue to resolve, like the need to replace a roof or cladding.

So what are some of the key things to consider?

Approach and timing

With ADR, timing is everything. As a rule of thumb, tenants should have a dilapidations strategy in place at least 18 months before the lease comes to an end. Leaving it to the eleventh hour can make your dilapidations liability – as a tenant - increase significantly. Legal advisers can help to identify the best ADR technique for your needs, which will depend on the main sticking points that need unsticking.

Third party liability

When building surveyors are analysing the contractual basis of liability they should not limit their investigations to the tenant’s lease, licences or deposit deeds. There may be third party liabilities, for example linked to former tenants or guarantors, to consider.

Section 18(1) Landlord and Tenant Act 1927

A prudent landlord or tenant will always consider this crucial piece of legislation which addresses the value of the freehold reversion in and out of repair, especially ahead of embarking on substantial and expensive programmes of supposedly remedial building works.

Schedule works into renewal leases

Agreeing outstanding repair works as the original lease draws to an end, recording these and including a schedule for their delivery into the renewal lease can all help to minimise the risk of a dispute arising.

Get VAT assurances

If the dilapidations figure involved is significant, VAT should not be addressed as an afterthought. A tenant can safeguard their position in any negotiated settlement by obliging the landlord to give specific and written assurances as regards its VAT status and intention for the property before any settlement is signed off.

To view the blog  on Insider's website, please click here.

Thrings is running its dilapidations seminar in Bristol on October 2 2018. Search #ThringsDilaps to follow discussions on Twitter.

For more background and dilapidation tips for surveyors, landlords and tenants, please contact Warren Reid or the Property Litigation team. You can also download Thrings’ practical guides to dilapidations here.

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