Dilapidation Assessments

Both Landlords and tenants have very specific repairing, decorating, statutory and reinstatement obligations in their leases. Either party can serve a dilapidation schedule should these obligations have been breached.

There are 3 types of schedule of dilapidations and the choice will depend on the strategy and timing of the schedule.

1. Interim schedules: Served during the lease term.
2. Terminal schedules: Served within the last 3 years of the term.
3. Final schedules: Served after lease end if the lease permits.

AK Property Consultants takes a very commercial approach to the preparation of dilapidation assessments, the subsequent negotiations and supervision of the compliance works. We have saved tenants significant amounts of money by negotiating lower settlements for them when they have been served with a schedule by the landlord. We have also achieved very good results for landlords enabling their property to be returned in a tenantable condition, limiting vacant periods. We get involved with anything from small retail units a few hundred square foot in size to commercial premises in excess of 100,000 sq ft including industrial, office and retail premises.

The schedules we produce are prepared in full compliance with the RICS 7th Edition Guidance notes on dilapidations and the Property Litigation Association’s Pre-Action Protocol for dilapidations (The Dilapidation Protocol), which the courts would look favourably upon, when considering the issue of costs, in the unlikely event the claim would have to be decided by the courts.

Landlords

It is always productive for landlords to review dilapidation liabilities throughout the term of a lease and not leave it to the end of the lease term, as the tenant may not be solvent at lease end in which case there is no benefit in pursuing, an otherwise valid claim. An Interim dilapidation schedule will enable the liabilities to be considered during the lease term.

Landlords should also give consideration to dilapidations during any surrender negotiations, which can have a significant impact on the settlement sum.

As part of our service, we prepare Final schedules of dilapidations and also specify, tender and supervise compliance works on behalf of the landlord after the lease has expired. We will take steps to help ensure that the landlord’s claim is not unnecessarily compromised by the standard and extent of the works. We do this by ensuring improvement works are avoided, otherwise potentially superseding the claim. We also keep a thorough photographic record of the progress of the works to prevent any disputes regarding the previous condition of the property and the extent of the works.

If the tenant carried out the works during the term we can also supervise the works to ensure the tenant is fully aware of their obligations and carries them out to a suitable standard.

Following the preparation of a dilapidation schedule we will often be instructed to deal with the subsequent negotiations and will work with the landlord’s solicitors to achieve the desired result.

Tenants

Pre-occupation dilapidation assessments

If you are considering acquiring an existing leasehold interest (For example, you are considering taking an assignment) in a property you should have a pre-occupation dilapidation assessment carried out. This will serve as an invaluable overview of the potential dilapidation liability before you sign the lease. This in itself can enable the tenant to re-negotiate terms and in the case of an assignment a reverse premium. Giving consideration to dilapidation liabilities early on can also help the tenant consider the costs and spread them over the lease term from an accounting perspective helping with cash flow and tax planning.

Pre-expiry dilapidation assessments

A pre-expiry dilapidation assessment will provide the tenant with an accurate reflection of the landlord’s anticipated claim with budget costs and drafts heads of claim. Further advice will also be given to reduce and in some cases even mitigate the liabilities altogether. If instructed early enough the pre-expiry assessment will enable the tenant to instruct necessary compliance works.

Providing defense for the tenant

More often than not we are approached by tenants who were not aware of the onerous nature of the repairing obligations in their lease and the first they are made aware is when they receive a dilapidation schedule, which is some instances is served after lease expiry.

Once the lease has ended the tenant looses the right to do the works themselves and have to pay damages to the landlord to reflect the cost of the works and in some cases other losses, known as ‘mesne profits’, such as rental, business rates and service charges for the anticipated duration of the works. This often results in higher settlement costs as the tenant will loose the opportunity to choose their own contractor and specify the standard and extent of the works.

There are also VAT implications in leaving the landlord to do the works. In many instances the landlord is unable to get the VAT back on the cost of the works (unless the property has been elected for VAT), which will be added to the claim against the tenant. As a result the tenant will have to pay an additional 20% on top of the claim, otherwise avoidable if a pre-expiry dilapidation assessment was instructed early enough.

This is when AK Property Consultants is able to assist, as we focus on representing tenants who are in receipt of a schedule of dilapidations either during or after lease expiry. We will aim to achieve the most favorable outcome for the tenant based on the true measure of the landlord’s loss. To do this we have an in-depth knowledge of the appropriate case-law and statutory instruments governing this complex area of property law

Statutory Relief for the Tenant

With an interim schedule, the tenant may obtain relief from forfeiture proceedings (eviction) under the Leasehold Property Repairs Act 1938 if 3 or more years remain of a 7 plus year lease.

In some situations the tenant may be protected in the case of a final schedule by Section 18(1) of the Landlord and Tenant Act 1927. S18(1) has 2 arms as follows:

A. The landlord cannot recover damages exceeding a sum by which the value of the landlord’s reversion (investment) is reduced by the tenant’s breach of covenant.

B. Where a landlord intends to demolish the building or carry out structural alterations such that the tenant’s breaches of covenant to repair become irrelevant, then if the tenant can prove his case absolutely, no damages will be recoverable by the landlord.

By applying S18(1) we have managed to negotiate nil claims for tenants who otherwise would have had to settle significant sums with the landlord. On the other hand it is important that the landlord also gives consideration to S18(1) to ensure that an accurate reflection of his loss is made avoiding unreasonable claims, which would be frowned upon in court resulting in cost implications.

To apply S18(1) it is often necessary for a S18(1) valuation to be prepared. As part of our services we can prepare S18(1) valuations on behalf of both landlords and tenants to ensure that the claim being made or received is an accurate reflection of the landlord’s loss.