Navigating the dilapidations pitfalls

Terminal dilapidations claims can come as an unwelcome surprise for an inexperienced tenant. The cost of rectifying disrepair may not have been accounted for in a corporate tenant’s accounts and, if no provision has been made, a corporation tax deduction will only be available when the liability is settled. Well-advised tenants will have long anticipated the claim. Accurate accounting minimises the effect of dilapidations liabilities on financial reporting. Tenants are allowed to provide for future dilapidations liability under Financial Reporting Standard 12: Provisions, Contingent Liabilities and Contingent Assets or, if it is a public listed company, under International Accounting Standard 37. This can potentially lead to greater flexibility regarding the dilapidations costs’ tax treatment and avoid a large one-off reduction in profits at lease end. Such provisions are made before lease end, at which time the landlord’s intentions for the premises at termination will not be known. It may be that the landlord chooses not to pursue a dilapidations claim following a decision to demolish or substantially refurbish the premises or a successful reletting. If so, the tenant may be keen to remove the liability from its accounts. Drawing a line under a liability Tenants are often surprised that there is no reliable means of drawing a line under dilapidations liability. Landlords who are prepared to confirm that they will not bring a dilapidations claim are rare. They may be prepared to do so for a modest payment in exchange for the release and tenants often prefer this to keeping a provision on their books potentially for six years while the limitation period on the claim runs out. However, approaching a landlord can be risky. Landlords who were previously prepared to overlook weak dilapidations arguments may change their view once a tenant’s wallet comes out. One way to accelerate matters is to apply to court for a declaration that the landlord has no claim. Unfortunately, this is a relatively expensive and potentially time-consuming process, which may encourage a dilapidations claim that the landlord might not otherwise have pursued. The landlord would only need to establish a modest recovery to claim its legal costs should the tenant not protect its position with an early settlement offer at a sensible level made in accordance with Part 36 of the Civil Procedure Rules (the CPR). This problem may be addressed at the outset of a tenancy by the parties agreeing an express limitation on the right to claim dilapidations beyond a specified period after lease end. This would be unattractive to landlords and could increase the likelihood of a dilapidations claim being issued as a protective measure to preserve a landlord’s rights. Landlord’s intentions A landlord’s intentions on the date of termination for the premises at lease expiry or shortly thereafter may be important to its claim. If a decision has been taken to demolish or substantially refurbish, no damages will be recoverable (see the second limb of section 18(1) of the Landlord and Tenant Act 1927). The ­ Pre-Action Protocol for Claims for Damages in relation to the Physical State of Commercial Property at the Termination of a Tenancy (the Protocol) adopted on 1 January 2012 requires a landlord’s surveyor, or the landlord itself, to sign an endorsement on any schedule of dilapidations to confirm that a full account has been taken of the landlord’s intentions for the premises. The RICS’ Dilapidations Guidance Note (the Guidance Note) expects parties to carefully set out their positions and surveyors must ensure that they make all reasonable enquiries to justify their position. These developments, together with the risk of criminal action for fraud by false representation under section 2 of the Fraud Act 2006 or of a claim under the tort of deceit (see Eco 3 Capital Ltd v  Ludsin Overseas Ltd [2013] EWCA Civ 413), should reduce recklessness regarding dilapidations representations. However, tenants may still wish to look behind endorsements. The landlord’s intentions will almost certainly have been recorded somewhere. Disclosure is a useful tool, which provides tenants with the ability to review early communications between landlords and their advisers. This may take the form of standard disclosure in court proceedings or an earlier pre-action disclosure application. Documents for disclosure purposes include e-mails, information on mobile phones and tablet computers and deleted and back-up electronic files. Confidential advice provided by surveyors when litigation is not yet in prospect will have to be disclosed even if it covers legal issues (see R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1). Surveyors’ fee arrangements are also subject to disclosure and may potentially be used to attack the strength of their evidence. The landlord could have taken steps to reduce the risk of unwanted disclosure by restricting its use of written records and communicating some messages verbally. If lawyers are involved at an early stage it may be that legal advice privilege can be exercised in relation to some documents. Such measures are also available to tenants, but often the best approach is for parties and their advisers to simply prepare pre-action documents on the basis that they will eventually be disclosed. Simon Hartley is a partner at RadcliffesLeBrasseur