Preparing and serving a dilapidations schedule

Principles of damages

It is important to understand that a landlord cannot recover more than its loss. The purpose of damages is to compensate a party for its loss; not to punish. Generally, a damages claim for dilapidations will be referenced to a combination of the cost of works required and the diminution of the value of the landlord’s reversion, to provide an assessment of loss.

It is inappropriate to prepare a claim for damages without considering, or making an assessment of, loss. At the termination date of the lease, the starting point for the assessment of the landlord’s loss is usually based on the cost of the works required. Factors which may require the cost of the works to be adjusted will include:

• the landlord’s intentions for the property;
• whether the landlord has carried out or intends to carry out the works;
• the market for the property and its potential for redevelopment and refurbishment; and
• what arrangements might be made with a new tenant.

For a recent, detailed, discussion of the principles to be considered when assessing whether or not there has been a loss to the landlord recoverable from the tenant, see Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd [2013].

Where the landlord has carried out or intends to carry out the works that the tenant failed to undertake, the cost of the works may well represent the landlord’s loss, with little or no adjustment required.

However, if the landlord does not undertake, or intend to undertake, some or any of the works, the cost of works may not be a fair reflection of the landlord’s loss. The calculation of the loss that the landlord suffers will need to take into account the effect, if any, of the works it actually undertakes on the remedies sought. It will also need to consider, especially if not all of the works have been completed, whether the effect of the breaches has caused the value of the landlord's interest to be reduced, either at all or to the same extent as the claim.

To determine whether or not the landlord’s interest has actually been damaged, it is first necessary to consider what the landlord is intending to do with the premises, and then consider whether this is going to result in the supersession of any items in the claim. With the items that remain, it is then appropriate to consider whether this has caused any diminution in the landlord’s value.

In essence, the surveyor needs to be comfortable that the claim is a fair representation of the anticipated loss. This is particularly important in terminal claims as the Dilapidations Protocol requires the surveyor to provide an endorsement to the effect that the works are reasonably required and fairly costed and that full account has been taken of the landlord’s intentions for the property. This may be difficult where landlords are uncertain about their future plans, a situation which is not uncommon. The surveyor should take a realistic view on the potential refurbishment options and ask appropriate questions of the landlord. It would be prudent to prepare a claim for client approval first, stressing that refurbishment plans may have an impact on the claim and asking for a written statement of the landlord’s intentions. The claim should reflect the stated, documented intention. See the Dilapidations guidance note (7th edition), section 8.4.5.

Both the Dilapidations guidance note (7th edition) and the Dilapidations Protocol consider these issues and emphasise the importance of addressing them. They also explain the basis on which the surveyor is to sign the claim where it concerns damages at the end of the lease.

For further information and for more detail on issues concerning or related to damages see Section 18 and diminution.

Surveyor’s endorsement (end of term claims)

An important feature of the adopted Dilapidations Protocol (sections 3.5, 3.6 and 5.4, 5.5) is the surveyor’s endorsement of end of term schedules of dilapidations. This is required of both landlords’ and tenants’ surveyors, in their response documents, to confirm that the works as set out in the schedule:

• are reasonably required to remedy breaches of covenant as set out in the lease;
• take into account the landlord’s intentions for the property; and
• are costed appropriately.

The RICS guidance note states (in section 8.4.4) that before making the endorsement the surveyor should ask the landlord to confirm in writing what it intentions are/were for the property. Appendix E of the guidance note contains suggested text to send to landlords to request confirmation of intentions.

In situations where a schedule of dilapidations is prepared before the end of the lease and the surveyor has been unable to establish the landlord’s intentions as regards the property at the end of the lease, the endorsement may be appropriately limited. However, following lease end a full endorsement will be required The endorsement is covered comprehensively in the guidance note – under section 8.4 for landlords’ surveyors and 8.6 for tenants’ surveyors.

Appendix A of the guidance note sets out suggested text for the endorsement to be dated and signed by the surveyor.