The potential alternatives to terminal dilapidations

When faced with a dilapidated property, many landlords focus only on one remedy – the terminal claim, being the claim in damages that arises at the end of the term. However, a well-advised and proactive landlord will want to consider all the available remedies, including those which arise during the term. Before looking at the main alternatives, here is a quick reminder of the key aspects of a terminal claim. Terminal dilapidations claim The purpose of a terminal claim is to compensate the landlord in damages for losses suffered which have arisen from the tenant’s breaches – usually focusing on those relating to repair, decoration and reinstatement.  Prior to the end of the lease, it is normally good practice to serve a schedule on a tenant identifying the breaches, so the tenant can understand and undertake the works prior to lease expiry and avoid the claim entirely. The schedule and covering letter should also ensure any obligation to reinstate is triggered if notice is required to do so. That schedule is sometimes called an “interim” schedule, but is in fact the precursor to a terminal claim.  Following expiry of the lease the landlord’s surveyor should re-inspect and then serve a “quantified demand”, which may well capture associated claims such as lost rent, costs and interest.  Advantages A terminal claim is arguably quite flexible and, to a degree, fairly low risk. For instance, the landlord does not need to spend the money first to make a recovery, though doing the works will almost always improve the landlord’s legal and negotiating positions; the procedure does not involve taking drastic action such as seeking possession and there is a clear mechanism (namely the Dilapidations Protocol) for the parties to follow which is designed to facilitate early resolution, or at least narrow the issues in dispute.  Unless the settlement agreement contains restrictions, then the landlord can choose how it spends the damages, though if the tenant has some concerns that the damages will not be used to undertake the claimed works then some clawback provision might be sensible.  A terminal claim is also comprehensive in the sense that, unlike some of the other remedies, it can cover all losses suffered by the landlord arising from the tenant’s breaches, including heads of claim such as reinstatement and lost rent.  Disadvantages Some of the benefits above are also the drawbacks. For instance, the mechanism for narrowing issues is generally a good thing, but only if the parties adhere to it. It can sometimes be used to slow things down, or even get in the way of sensible negotiations. It may be years before a landlord obtains any recovery, and that in turn can delay the works being done.  Of itself, a claim in damages does not get the works done and – like any form of litigation, when seeking money payment – the claim is only as good as the opponent has the means to pay.  The main “disadvantage” (from a landlord’s perspective of course) is the imposition of section 18 of the Landlord and Tenant Act 1927, which limits the amount recoverable to the amount by which the landlord’s interest has diminished because of the non-compliance. The imposition of that cap, and the need for valuation advice, also arguably creates a large element of potential uncertainty and cost.  Now let’s look at two alternatives. 1) Repair notice  Most modern leases contain an express right for a landlord to first serve notice during the term of the lease specifying breaches of covenants relating to the condition of the property. If the breaches are not remedied within a specified period (usually two to three months), the landlord is entitled to re-enter the property, carry out the works and then recharge the cost of those works to the tenant. This provision is known as either a repair notice or a Jervis v Harris clause (Jervis v Harris [1996] 1 EGLR 78).  Advantages The main advantages of invoking the repair notice procedure is that, successfully pursued, it gets the works done.  The other main advantage is that, because it is not a damages claim, the so-called cap contained in section 18 of the 1927 Act does not apply. Provided the landlord can show it has done the works which the tenant was liable to do, then the costs are recoverable as a debt. While this can often make repair notices seem very attractive, in practice it may be only in limited circumstances that a landlord will want to fund works which do not improve the value of the property or make it more lettable.  Disadvantages There are several potential disadvantages. First, the landlord has to fund the works upfront in order to make the recovery, though the threat itself may well prompt a tenant to engage and undertake some or all of the works. Secondly, the notice and schedule need to be accurate and validly served. If the landlord seeks to re-enter the premises based on an invalid notice, there are serious risks of claims by the tenant of trespass and, if the premises are occupied, for business interruption. Thirdly, if the tenant resists entry then the landlord may be obliged to obtain an injunction from the court to re-enter, which could be prohibitively expensive. Fourthly, the repair notice procedure will usually relate only to repair breaches; rarely will a landlord be able to include breaches of the obligation to reinstate, for instance.  In practice, often the repair notice procedure is best invoked when a landlord wants specific repair works undertaken, it has allowed plenty of time before lease expiry to invoke the procedure and there are clear benefits in having the works done early.  2) Interim dilapidations claim An interim dilapidations claim is a claim for damages during the term of the lease. Disadvantages Interim damages claims are rarely seen – and for good reason. There are a number of hurdles. For instance, despite it being a remedy during the term of the lease, the cap on damages imposed by section 18 of the 1927 Act still applies. If the landlord is entitled to the rent despite the disrepair, then it may be very difficult to demonstrate loss.  There are also statutory restrictions on interim dilapidations claims contained in the Leasehold Property (Repairs) Act 1938. The 1938 Act adds an additional (significant) procedural layer, such that if the lease is more than seven years and not in the last three years of the term and the tenant serves a counter-notice, then the landlord will need leave of the court before commencing proceedings. Even if the landlord proves one of the limited grounds contained in the 1938 Act, the court still has discretion to refuse, so there is a great deal of uncertainty.  In addition, claims for reinstatement of lawful alterations are usually not triggered until lease end, so the interim dilapidations claim may be limited to repair and decoration breaches only. Finally, as the claim lies in damages only, this remedy will not, of itself, get the remedial works done.  Advantages Bearing in mind these fairly numerous and serious restrictions, it may be difficult to see when an interim dilapidations claim is going to be the best option. However, if a landlord is in the last couple of years of the term and its claim relates mainly to repair, then the landlord may take the view that there is little advantage in waiting until lease end to commence its damages claim.  Tim Rayner is a partner and joint head of real estate disputes and the corporate occupiers sector at Irwin Mitchell LLP Photo © Aron Jager/Unsplash