Dilapidations: five top tips for landlords and tenants

Here are our five top tips for landlords and tenants in claims for terminal dilapidations.

1- Consider dilapidations in good time

A landlord should consider serving a terminal schedule of dilapidations on a tenant as lease expiry approaches and while the tenant is still in occupation. This gives the tenant the opportunity to carry out the work themself.   

If the tenant complies with the schedule and returns the property in the required condition, from the landlord's perspective, it may mean that the property can be re-let quickly and without giving the incoming tenant concessions to reflect the property's condition. If the tenant does not carry out the works, the landlord will have to either (a) undertake the work itself and pursue the tenant for the cost of the works or (b) agree a concession with the incoming tenant to reflect the property's condition and then pursue the tenant in respect of the losses.

Landlords should check the lease and any relevant licences/deeds to ascertain whether any notices need to be served on the tenant requiring, for example, reinstatement of alterations. Leases often provide that landlords must give the tenant x months' notice to reinstate. If the notice is not served in time, the tenant is not obliged to reinstate, thereby potentially reducing the claim.

There is no obligation on a landlord to serve a schedule of dilapidations during the currency of the lease. Accordingly, tenants should also review the relevant documents prior to the lease end, to ascertain its end of lease obligations. In the absence of a schedule, the tenant could pre-empt likely works. If a tenant carries out the work themself, they will have control over the costs. However, the landlord could consider the works unsatisfactory and still pursue the tenant in damages.   

2- Seek professional advice and negotiate

All parties should seek early advice from a building surveyor specialising in dilapidations. The landlord's surveyor should prepare a schedule of dilapidations. The schedule will set out the lease breaches and the works required to comply with the lease.  The schedule should also include a quantified demand, being the costs associated with the claim.  A solicitor usually serves the schedule on the tenant. The tenant should appoint a building surveyor to review the schedule and negotiate the claim with the landlord's surveyor.   

In some instances, the parties may need to appoint a 'section 18 valuer'. A "section 18 valuation" can limit elements of the landlord's claim, if the cost of the works will exceed the amount that the property has diminished in value, as a result of the state of repair.

There is a pre-action protocol that provides for negotiation between the parties' building surveyors to try and agree a settlement and avoid expensive and time-consuming litigation.

3- Consider the landlord's future intentions

The landlord's future intentions for the property are highly relevant. For example, if the landlord intends to demolish the property, this will effectively wipe out its claim for dilapidations on the basis that it hasn't suffered any losses as a result of the tenant's lease breaches.

Tenants should try and find out what the landlord's future intentions are and consider whether this information can be used to reduce the landlord's claim. Conversely, landlords may not want to be forthcoming with this information. However, the protocol requires the landlord's surveyor to confirm in the schedule that consideration has been given to the landlord's intentions for the property.

4- Cash flow/budget considerations

Some dilapidations claims can be fairly significant. It is therefore important from both a landlord's and tenant's perspective to give thought to cashflow and budgeting issues.

If you're a tenant, you should make sure that you have a budget to either (a) cover the costs of undertaking the works or (b) meet the landlord's damages claim.

Landlords should consider whether their cashflow position will enable them to carry out works themself before seeking to recover the cost of the work from the tenant.

5- Carefully document any settlement agreement

If the parties agree terms of settlement, these should be documented in a formal agreement, to make sure there is no scope for future argument, as to what was agreed.

Before signing a settlement agreement, the parties should check what elements of a landlord's claim are included. Tenants will want to ensure the agreement is in full and final settlement of all of its liabilities arising following their occupation of the property. However, if the landlord has other claims against the tenant outstanding e.g. service charge arrears, it should be clear that these claims are excluded from the settlement of the dilapidations claim.   

The parties should seek advice from a tax advisor on the tax treatment of dilapidations payments.

If you require any advice in relation to claims for dilapidations, please contact Katie Hickman, in our Property Litigation team on 07557 528 936, or complete the form below.