Responding to dilapidations claims

Although the responses to interim claims and claims against landlords are discussed briefly, the main focus of this subsection is on tenants responding to terminal dilapidations claims.

Once the schedule has been served and the claim initiated, the tenant should consider whether it agrees that there is a claim against it. It should generally instruct a surveyor to advise it on the issues raised by the schedule and any accompanying notices or documentation, possibly with the assistance of a solicitor.

Surveyors dealing with a dilapidations claim at the end of a lease should ensure that they are fully acquainted with the Dilapidations Protocol which states that a tenant must provide a response to the landlord’s claim within a 'reasonable time', which, it suggests, would usually be 56 days. Further guidance is also available in the RICS dilapidations bulletin: Outline guidance on the preparation of quantified demands and responses (September 2014).

Generally, someone making a claim is likely to be more active than someone responding to one. The recipient of a claim should not simply assume that it is appropriate to let the claimant do the running. Indeed, as a result of the Civil Procedure Rules 1998 it is necessary to consider a claim seriously and take appropriate steps to deal with it.

The tenant’s first step towards achieving an appropriate resolution will be the appointment of a suitably qualified and experienced surveyor. In general terms a surveyor acting for a tenant in receipt of a terminal dilapidations claim should consider the factors and take many of the steps the landlord’s surveyor should have considered in preparing the claim, that is to:

• review the documentation served;
• consider whether there are any other parties (such as subtenants) that may be responsible for the claim or obliged to contribute to it;
• visit the site and take a record of the condition and arrangement of the premises.

Then, with all the relevant information to hand, the surveyor will need to consider whether the claimant’s allegations are properly justified and compile a formal response.  There is no specific format for the response document, although the Dilapidations guidance note (7th edition) includes an example in Appendix C together with a Scott schedule in Appendix D

Review the documentation served

The surveyor must review all of the documentation served and the leases and ancillary documentation, just as the landlord will have done, with the aim of assessing the merits of the claim. In doing so, the surveyor will have regard to the remedy sought by the landlord and consider this in the context of the objectives and intentions of the tenant.

Consider whether any subtenants or others may be responsible for the claim or obliged to contribute to it

Where relevant, a potential claim against such persons or bodies should be brought into the negotiations and the process of seeking to resolve the claim as soon as possible. Generally, in situations such as this, the claim that the superior tenant has against its under-tenants is limited to its own liability to its landlord. The tenant should make this clear from the outset, just as the landlord is obliged to set out its intentions if these are likely to cap the claim. For subtenanted areas the tenant should also consider whether it would be possible to recover the costs of completing some of the works via the service charge, if there is such an arrangement in place.

Visit the site and take a record of the condition and arrangement of the premises

A record of the condition and arrangement of the premises can serve as evidence in the event of a later dispute and should ideally include all areas and items even if not included in the current schedule, because the schedule may be expanded later.

Are the landlord’s allegations properly justified? (The common law claim)

The basis of the tenant’s response to the landlord’s allegations should be the served schedule. Although smaller uncomplicated claims can be dealt with by way of letter, in most cases a Scott schedule (see Appendix D of the Dilapidations guidance note (7th edition)) will be more appropriate. Essentially this means inserting additional blank columns to the served schedule in which the tenant may record its comments against each particular item of the claim. There is no ‘prescribed’ form - what matters is that the responses presented are easy to follow. Whatever method is adopted, it is generally appropriate to analyse each item of the claim.

To be deemed a valid loss to the landlord a schedule item needs to ‘pass’ each of these five ‘tests’.

Is there an obligation?	The surveyor should look to confirm that there is a covenant in the lease or other binding documents that encompasses the claim made. When addressing this point, the surveyor should consider not only whether there is an apparent covenant that relates to the item, but also whether the breach is within the tenant’s demise and hence the remit of the covenant. For example, the failure to remove partitions that pre-existed the commencement of a lease would not usually constitute a breach, and a cracked pane of glass on an internal repairing lease would normally be the landlord’s responsibility.
Is there a breach of this obligation?	Once it is established that there is an obligation, it is necessary to consider whether it has actually been broken. This analysis needs to be completed for each item of the claim. Unless the clause of the lease that has been broken can be identified, it is unlikely to be a valid dilapidations item.
Is the remedy selected appropriate?	For those items in respect of which, on balance, the surveyor considers there to be a validly claimed breach, it is necessary for the surveyor to consider whether the remedy sought is appropriate for the defect alleged. For example, there may be a claim for new carpets, when cleaning of the existing carpets would be adequate, or 40 replacement slates may have been requested, when 30 of the slates may merely need re-fixing. It is quite possible that the alleged remedy would not be appropriate, but that other, lesser works would. Examples of this might be a claim that a heating circulation pump is defective and should be replaced. If the pump is capable of repair and this is cheaper than renewal, then the claim for renewal can be struck out, but an offer will need to be made for the repair of the retained item.
Is the cost claimed reasonable?	If an item shown is accepted as being both a valid breach and a valid remedy, or if a substitute remedy has been identified as part of the earlier analysis, it is necessary for the surveyor to consider whether the cost claimed is reasonable for the work envisaged. The quantities and rates of the particular items must be considered against either past experience or publicly available price data. As noted in Costing the schedule, where the work has been actually undertaken or there are competitive tenders available, the costs shown are likely to be good evidence of the claim. However, it is not impossible for these to be rejected, if they are found to have been incorrectly prepared or to be patently unreasonable – therefore, they should always be reviewed.
Have the landlord’s actions negated the need for this remedy?	In order for the tenant’s surveyor to consider the extent of the tenant’s liability, it is necessary to have an understanding of the landlord’s future intentions with regard to the property as these may impact on the claim. It is incumbent on the landlord truthfully to tell the tenant what it intends to do with the premises, or has already done. This information should have been included as part of the landlord’s claim, but a prudent surveyor acting on behalf of the tenant will seek to confirm these by way of documentation or secondary substantiation/corroboration. If the landlord refuses to commit to what its intentions are in open correspondence, it should either be forced to provide a diminution in value assessment or the negotiations should be suspended until it has identified what it intends to do. In such instances advice from a lawyer is essential as there are procedural legal matters to consider. Once the landlord’s intentions have been determined, it is necessary to consider which items of work (if any) the landlord contends should have been carried out by the tenant are superseded as a result. If there are substantial differences between the works to be undertaken by the landlord and the dilapidations claim, then it is likely that the effect of supersession will be substantial. To make the assessment, the implications of the landlord’s intentions need to be compared with each item of the schedule. Where an item is negated or modified by the work to be carried out by the landlord, this should be stated in the response document and the source of the information upon which the surveyor relies given. Where this analysis is more complicated, it may be appropriate to include an additional column in the schedule, so that this step can be seen discretely.

These principles, in different form, were considered by the judges in the cases of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd & anor and Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd (the judges’ identification of the principles is set out in the case summaries for each of the cases).

Where it is the tenant’s surveyor’s view (or that of a specialist diminution surveyor) that the damages recoverable from the tenant may be impacted by section 18 of the Landlord and Tenant Act 1927 (or, indeed, other limiting factors) then the response may include additional information to support that argument.

Tenant's surveyor’s endorsement

As has been discussed already, 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 a requirement of both landlords’ and tenants’ surveyors, Appendix C of the RICS Dilapidations guidance note, 7th edition, includes suggests wording for the tenant’s surveyor’s endorsement which states that the works detailed in the response are:

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

As per the original schedule, the building surveyor should only endorse their own content. Content produced by third parties (such as valuers) should be endorsed by those third parties.

Effect on the claim of diminution and section 18(1)

Aside from assessing all of the above there may be another line of defence: the tenant may believe that the claim is capped to the diminution in the value of the property (under section 18(1) of the Landlord and Tenant Act 1927) or that, where the landlord has provided a section 18 valuation, the tenant disputes the figures proposed. This is discussed fully in Section 18 and diminution. The Protocol states (in section 5) that if it is considered that any items in the schedule or quantified demand are, in the opinion of the tenant’s surveyor, likely to be superseded by works to be carried out by the landlord (or are likely to be superseded by the landlord’s intentions for the property this should be stated in the response, identifying the items affected and giving particulars of the basis for their opinion.

For examples of recent cases where section 18(1) was discussed and found to be relevant, see Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd and anor and Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd.

Physical work v damages

In some cases the tenant will be compelled to carry out the work stipulated by the landlord (such as where the court has granted an order of specific performance) or risk losing the lease altogether. In other cases there may not be compulsion but there can be distinct advantages to tenants in carrying out the work themselves rather than paying damages.

Clearly after the lease has expired the tenant cannot elect to carry out the work required. At this point damages are the only remedy. The landlord still has the choice of whether or not to carry out the works, and indeed can dictate the quality and scope of the works (as far as the expired lease allows), as well as the timetable – the landlord is very much in control.

A well-advised tenant should therefore always prepare for dilapidations issues well in advance of the end of the term, and generally not less than a year before its end. This means that it will retain the ability to decide which course of action to select. Similarly landlords should be encouraged to serve dilapidations schedules with sufficient time prior to the end of the term to allow the tenants to do the works where it stands to benefit from having the buildings returned to them in good condition (for example, to secure a new tenant quickly). It is important to remember that certain claims, for instance for reinstatement, may become void if they require adequate notice prior to the end of the term. Equally, where the landlord would prefer the tenant not to do the work, then it may elect not to serve the dilapidations schedule until immediately after the end of the term.

In some instances, even after the end of a lease it remains mutually beneficial for both parties for the tenant to do the works, and the parties could agree that the tenant can enter into the premises to complete these. Such agreements need to be carefully controlled, to ensure that unintended tenancies are not created by mistake. This is therefore a matter where the assistance of a solicitor is required.

The flow chart below sets out in essence what can happen when a landlord makes a claim.

Where the tenant carries out the work

Advantages for tenants:

• the tenant will occupy a repaired property;
• potential to save money:
  • the landlord’s claim cannot include for any consequential damages
  • the tenant may be able to recover the VAT it incurs
  • avoid the professional fees that the landlord would incur if it were to carry out the work
  • were the landlord to do the work it has a duty only to choose a reasonable method to rectify defects – not necessarily the cheapest
• control of the work (the tenant has control of the contractor and therefore the programme and manner of the work).

Disadvantages for tenants:

• disruption (if still in occupation);
• risks of the project (for example, failure of components and non-performance of the contractor as well as additional items of work coming to light once works commence which must be rectified);
• risk of interpretation (it is not the landlord’s duty to explain or apply the extent of the tenant’s obligations, so in doing the work the tenant will take on the risk of interpreting what the appropriate breaches and remedies are). However, where a landlord specifically releases a tenant from an area of work, such as an element of reinstatement, then unless this is stated as being a ‘without prejudice’ position, it is likely to be binding on the landlord;
• loss of statutory defences - a tenant that completes the works cannot rely on section 18(1) of the Landlord and Tenant Act 1927 and thus loses the benefits of the ‘diminution in value’ arguments. If the works have already been completed, there is no ability to raise arguments about the landlord’s intentions to relet the building on terms less than the value of the dilapidations claim, or to argue that the landlord was likely to complete improvements that would lead to supersession of items, or indeed that it intended to redevelop.

Even if the landlord has already served a schedule on the tenant, there is no reason why it cannot (prior to any written confirmation of release of the tenant from its obligations under the lease) revise or add to it at the end of the tenant’s works. Such a revised schedule can take into account any items that the landlord believes the tenant has failed to complete or items that it did not previously see. At this point, each individual item needs to be considered on its merits; while it is possible that the residue of remaining items will be de minimus, equally, there may still be a claim to be met. In practice it is often the case that disputes arise as to whether the appropriate scope and/or standard in works of compliance have been achieved. It is therefore advisable for a close dialogue to be maintained with the landlord’s surveyor during the course of the work in order to minimise the chances of a dispute and damages claim arising after the works are completed.

Where the landlord carries out the work

Where the landlord carries out the work in lieu of the tenant, the costs incurred will provide strong evidence of the fair measure of damages. As such, and so long as the landlord’s actions were reasonable, it will have a relatively clear case if the matter goes to court. If the landlord elects not to carry out the works in default of the tenant, it may find that the claim is ‘capped’ by section 18(1) of the Landlord and Tenant Act 1927. This is discussed in greater depth in Section 18 and diminution.