Key dilapidations issues

Obligations to reinstate are generally only applicable at the end of the term or when a tenant is leaving. Reinstatement obligations are usually specific and are contained either within leases or licences for alterations. They can be triggered either by a lease obligation to reinstate under any circumstances or upon notice given by a landlord. Without some form of reinstatement obligation in the tenure documentation, a claim for reinstatement cannot be legitimately included in the schedule.

Once an obligation to reinstate has been established, the next step is to determine what alterations have been carried out, whether authorised or not. In looking for evidence of alterations, in addition to documentary evidence (such as plans, photographs, and so on), the surveyor might look for:

• obvious differences in construction and materials;
• materials which are inconsistent with the age of the building;
• parts of the property which directly identify with the trade or occupation of the tenant (such as an extension constructed to store chemicals); and
• the existence of partitions and fitting-out.

Agents’ letting brochures, fitting-out specifications and schedules of condition can be particularly useful when attempting to establish the nature of the original fit-out and specification of the property that was leased at the commencement of the term. There might also be correspondence between the landlord and tenant, even if it did not result in a formal licence. These could include fire certificates, Building Regulations approvals or other documents that were prepared prior to the new lease (but to be useful they do need to be contemporaneous with the commencement of lease). The physical evidence on site is often useful, as mechanical plant often carries a manufacturer’s date. The best information is often held by the staff on site, be it the tenant’s managers or building maintenance staff. Similarly, tenants often have surveys or fit-out proposals prepared as they moved into the premises and these will show what the premises were like before any alterations were undertaken.

Ultimately, this task takes some investigation to complete, and professional judgement is often required to make decisions ‘on balance’. Occasionally, it is necessary to make assumptions and some pragmatism is required by both the tenant’s and the landlord’s surveyor in this regard. However, such assumptions should be sensible, as it is fundamentally the landlord’s obligation to prove what has happened, not the tenant’s obligation to prove that the landlord’s optimistic assumptions are wrong.

In many cases, it is also helpful to consider what consequential damage will be caused by the reinstatement of the tenant’s alterations. Any consequential damage should be set out as a continuation of this head of claim, because the effect of the diminution in value differences will apply to such consequential items in the same manner as to the actual alterations.

Where alterations are unlicensed and the lease contains a prohibition on alterations without consent, the breach of that covenant should entitle a landlord to obtain reinstatement. However, it has been suggested that where the breach of covenant occurred more than 12 years previously, the Limitation Act 1980 applies and the right of reinstatement is lost. It is also suggested that the critical date will be 12 years from the point at which the landlord could reasonably have been expected to discover the breach rather than the date of actual breach, although legal advice should be taken under such circumstances. A landlord continuing to accept rent while unaware of an unauthorised alteration would not mean that the landlord would lose the right to ask for reinstatement of the unauthorised breach. Similarly, the landlord ought not to have lost the right to forfeit the lease.

In some instances, leases stipulate that the landlord is obliged to give notice prior to the end of the term, often to inform the tenant whether or not the landlord requires it to reinstate the tenant’s alterations. In some cases there is a counter-obligation on the tenant to seek direction from the landlord in this respect. Whatever the precise circumstances in any one case, given that reinstatement obligations can form a significant part of the overall claim it is vital that the surveyor examines the appropriate lease clause and any licences carefully, to note and follow such obligations in order to make a valid claim against the tenant.

In most lease covenants the use of a dilapidations schedule is considered to be a valid form of a notice (on the facts of the case, this view was confirmed in Westminster City Council v HSBC Bank plc [2003] 16 EG 103). However, it is more advisable to provide an express notice to avoid any doubt over the landlord’s expectations. If such a notice is issued after the end of the lease, it may be invalid, as by this time the tenant cannot comply with the notice, because the right to occupy the premises has ceased. If a notice is issued late in the term, such that the tenant will not be able fully to comply with it, it will probably remain valid, and the tenant will be obliged to comply with it. This could lead to a temporary continuation of the lease to allow it to finish the works (see Scottish Mutual Assurance Society Ltd v British Telecommunications plc: unreported decision of Anthony Butcher QC, sitting as an Official Referee, 18 March 1994). Care must be taken though to ensure that staying on does not have some adverse consequence, e.g. where a break clause has been exercised and the failure to give vacant possession when required can result in the break not being effective (see Ibrend Estates BV v NYK Logistics (UK) Ltd. Some concluded agreement about occupation with the landlord is almost essential. In addition, in terminal claims the Dilapidations Protocol requires surveyors ‘to specifically identify in the schedule (where appropriate) any notices served by the landlord requiring reinstatement works to be undertaken’

Depending on what alterations the tenant has carried out there may well be a benefit to the landlord in not requiring reinstatement and the surveyor should bear this in mind in their advice.

See also Importance of reinstatement.