Back to Basics: Fixing things up

The term “dilapidations” generally refers to claims brought by landlords against tenants for items of disrepair which are covered by repairing covenants contained in commercial leases. Normally these claims are pursued at the end of a lease, when the tenant has left, although, as set out below, it is possible for a landlord to pursue dilapidations claims during the term of a lease. Most commercial leases will contain an obligation on the part of the tenant to keep the property “in repair”, “in good repair”, “in good and tenantable repair” or “in substantial repair”. In reality, most of those obligations amount to the same thing: an obligation to put the property into repair if it is in disrepair. That position can be altered if, for example, the tenant’s repairing obligation is limited to a schedule of condition. If the parties have agreed at the start of the lease to limit the tenant’s repairing obligation to a schedule of condition, then the tenant will be obliged to return the property to the landlord at the end of the lease in the same or no worse condition as that shown in the schedule. However, it is also important to bear in mind, that, while the term dilapidations is primarily concerned with repairing covenants, dilapidations claims will also capture the following other covenants given by the tenant: repairing covenant; decorating covenant; covenant to comply with statute/laws; the covenant to yield up; and any covenant(s) to reinstate alterations (whether made with or without the landlord’s consent); this covenant may also be set out in a separate document, such as a licence to alter. Where the tenant fails to adhere to any of its repairing obligations, it will be in breach of covenant, and the landlord will have an action in damages against the tenant at common law for breach of the repairing covenant. Landlord’s options It is worth considering, however, the options available to a landlord during the term of a lease. 1. Damages: A landlord’s right to claim damages for breach of a tenant’s repairing covenant, by its tenant, is restricted by section 1 of the Leasehold Property (Repairs) Act 1938.  If the lease was granted for a term of at least seven years and has at least three years left to run, a landlord is not allowed to bring an action for damages against the tenant unless it has served a notice in accordance with section 146 of the Law of Property Act 1925 in relation to the breach of covenant at least one month before bringing the damages claim. The section 146 notice must also refer to the tenant’s rights under the 1938 Act. The tenant then has 28 days to serve a counternotice on the landlord. If it does so, the landlord needs the permission of the court before it can take any action to forfeit the lease or claim damages for the breach of the repairing covenant. It is also important to note that the assessment of damages during the term of a lease is different – the amount of damages available for breach of a repairing covenant is limited to the diminution in the value of the reversion (section 18 of the Landlord and Tenant Act 1927). In simple terms, where the 1938 Act applies, it is very difficult for a landlord to claim damages from a tenant during the term of a lease. 2. Forfeiture: It is possible for a landlord to forfeit a lease as a result of breach(es) of the repairing covenants. For the landlord to have this remedy available, there must be an express right of re-entry contained in the lease (which is likely to be the case in most commercial leases, although it is clearly important to check). To action this remedy, the landlord must serve a notice on the tenant in accordance with section 146 of the Law of Property Act 1925. The section 146 notice must: (a) specify the particular breach or breaches complained of; (b) require the tenant to remedy the breach (if the breach(es) are capable of remedy, which is generally accepted to be the case where the breaches relate to disrepair); (c) must require the tenant to pay monetary compensation for the breach; and (d) where the 1938 Act applies, the section 146 notice will, in addition, need to contain a statement informing the tenant of its right to serve a counter-notice under the 1938 Act. Landlords must also be careful not to waive their right to forfeit. This can be done unintentionally, for example, by continuing to accept or demanding rent when the landlord has knowledge of the dilapidated state of his premises – where a landlord is aware of a right to forfeit arising, it must choose whether to assert that right or to treat the lease as continuing. If it does the latter, the right to forfeit can be lost or waived. 3. Self help: A further remedy for landlords during the term of a lease is “self help”. This essentially means that the landlord enters on the premises, completes the repairs itself then recovers the cost of doing so from the tenant. Clauses which stipulate such a right are referred to as Jervis v Harris clauses following Jervis v Harris [1995] EWCA Civ 9; [1996] 1 EGLR 78. As with forfeiture, this remedy will only be available where the lease contains an express right to do so. The cost the landlord will want to recover for the cost of completing the repairs is treated as a recovery of a debt, rather than a claim in damages. The advantage of this is that the landlord can circumvent the restrictions that apply to claims for damages under section 1 of the 1938 Act and can also avoid the application of section 1 of the 1927 Act (discussed below). 4. Specific performance: Specific performance is an equitable remedy from the court which would constitute an order, akin to an injunction order, requiring the tenant to perform its repairing obligations. The key case in relation to court orders for specific performance as a remedy for dilapidations is Rainbow Estates Ltd v Tokenhold Ltd and another [1998] 2 EGLR 34 where the court held that specific performance was conceptually available in respect of repairing covenants in leases. However, landlords should be aware that specific performance will only be appropriate in rare cases as it is a discretionary remedy and, generally speaking, landlords will have other more suitable remedies. Terminal dilapidations claims Having considered the remedies available to a landlord during the term of the lease, we now consider the most commonly encountered form of dilapidations claim, which is essentially a damages claim brought by a landlord against a tenant at the end of a lease. The claim normally starts life by way of the landlord serving a “schedule of dilapidations” on the tenant at or around lease expiry, setting out an itemised list of the various items of disrepair which have been identified by the landlord’s surveyor, with a correlating cost claimed for each item. The dilapidations schedule will also claim other heads of loss, such as loss of rent and/or rates, as well as the landlord’s costs (if the lease contains a provision for the tenant to pay those costs). Given that this will be prepared by a surveyor, it is important to instruct a qualified building surveyor to undertake this work. There is also an accompanying court pre-action protocol (the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy), which sets out the steps that the parties should take before a claim is issued at court, such that it is also likely to be necessary to obtain legal advice at this stage from a solicitor who has experience of dealing with dilapidations claims. Often the schedule will be served by the landlord’s solicitors on the tenant. In the majority of cases, the tenant will appoint its own surveyor, who will respond to the landlord’s schedule and, all being well, the parties will reach a negotiated settlement. If that happens, an agreed sum will be paid to the landlord by the tenant and the parties will often enter into some form of settlement agreement recording that. Where the parties are unable to reach an agreement, the landlord can instigate court proceedings against the tenant. Whether during the context of a negotiated settlement or where court proceedings have been issued, the measure of damages at common law is the reasonable cost of doing the works, plus loss of rent for the period until the works have been completed, where appropriate (Joyner v Weeks [1891] 2 QB 31). However, the following considerations will also be relevant to how the assessment of damages is carried out: (a) The overriding principle which guides courts on measuring and awarding damages is that of “reasonableness”. The purpose of damages is to compensate the claimant, in this case, the landlord, for its loss. As a starting point, therefore, the landlord must be able to show that it has suffered a loss. If, for example, following the termination of the tenancy the landlord re-let the subject premises to a new tenant at the same or similar rent to that comprised in the former lease, it may be difficult for a landlord to establish that it has in fact suffered a loss. If, on the other hand, the landlord is unable to re-let the premises because of the state of repair, or has to put the premises into repair itself, it may be able to crystallise that as an actual loss. (b) Section 18(1) of the Landlord and Tenant Act 1927 limits the damages available for breach of a repairing covenant or a covenant to leave premises in repair on termination of a lease. It provides that damages are: (i) Limited to the diminution in the value of the landlord’s reversion caused by the breach. This is generally known as the “first limb” of section 18(1). (ii) Not recoverable where it can be shown the property, in whatever state of repair it might be, is to be pulled down or where structural alterations are to be carried out at the end of, or shortly after the end of, the term such that any repairs would be rendered valueless. This is widely referred to as the “second limb” of section 18(1). In relation to the first limb of section 18(1) in particular, the parties will often instruct a separate surveyor to consider the diminution valuation point, such that, in complicated or high value cases, each party may be instructing two surveyors. Practical tips While we have set out here a refresher on dilapidations claims generally, it is clear that some of the matters referred to can be complicated. It is very important for landlords and tenants to obtain advice from a specialist surveyor and/or solicitor when bringing (or facing) a dilapidations claim in order to obtain the best possible outcome. Andrew Rogers is a partner and head of real estate litigation at Brabners Image © Olaf Kruger/imageBROKER/Shutterstock