Dialogue and disputes

Initially this section focuses on the dialogue between the parties following the tenant’s initial response to the landlord’s claim, and the steps that can be taken to progress negotiations towards resolution of the claim.

At some point negotiations may fail and the dispute is placed on a more formal basis, either through litigation or some form of alternative dispute resolution.

Dialogue may include:

• without prejudice negotiations;
• progressing negotiations; and
• concluding the agreement.

'Without prejudice' negotiations

When a claim is made and served it is ‘open’, that is, it is admissible in court. Subsequently the claim almost invariably will be subject to discussion between the appointed representatives, usually surveyors. Assuming that there is disagreement between the parties as to the applicability of some, or all, of the claim, the usual practice at the outset of the ensuing negotiations is for the dialogue between the representatives to be expressly ‘without prejudice’. Correspondence that is intended to be without prejudice should state so either in the body of the letter or as a title. To guard against inadvertently allowing correspondence to be viewed as being open, due to a failure specifically to mark it as without prejudice, it is prudent to open the negotiations with a letter that states that all future correspondence and discussions are without prejudice unless specifically indicated otherwise. In this way the claim can be discussed in an environment where neither party will be held to account when making proposals/compromises to settle the claim.

However, while generally speaking such communications cannot be disclosed to the court, there are exceptions - most notably where an agreement is reached between the two parties. Be aware of this possibility and how you conduct yourself in negotiations as there may be significant ramifications should a costs award be made (see also Courtwell Properties Limited v Greencore PF (UK) Limited).

Also bear in mind that communications between a surveyor and a client are not necessarily privileged and such correspondence may have to be disclosed prior to a court hearing. If this is of particular concern, privilege can be created and maintained if the surveyor/client discussions are directed through the client’s solicitor if communications come into being for the dominant purpose of assisting in the conduct of litigation (actual or contemplated).   

The Dilapidations Protocol (paragraph 7.1) encourages the tenant’s surveyor and the landlord’s surveyor to meet, ideally at the building in question, before the tenant is required to respond to the claim (which is usually within 56 days of receipt of the claim) or, if not, within 28 days of the landlord’s receipt of the tenant’s response. They should meet with a view to agreeing, without prejudice, which items represent breaches and what the appropriate remedy is for the given breach. Thereafter, the costs for the various items need to be considered, preferably concentrating initially on the major items of the claim. The discussions should always be conducted in an objective, honest, constructive, courteous and professional manner, never losing sight of the overall aim of the negotiations – namely an agreed resolution, without recourse to the courts. The word ‘resolution’ is used rather than ‘settlement’ because, of course, while a landlord might consider that it has a claim for damages might be payable, the tenant might be able to properly assert that there is no claim at all. Thus, the dispute might be resolved on the basis that there is no claim. The reality is that in many case, dilapidations disputes are ‘settled’ by an agreement that involves the payment by the tenant of a sum of money to the landlord.

At times the surveyor’s knowledge will need to be supplemented by other specialists, such as services or structural engineers, or more complex legal advice may be required. While such additional input should only be called upon where there is a genuine need for it, the surveyor must be alert to situations that go beyond his or her knowledge or experience. In such cases the surveyor should make the appropriate recommendations to the client and, subject to the client’s approval, engage other specialists to assist with the claim. In these circumstances the surveyor will effectively act as lead consultant in formalising and managing the specialist consultants to ensure that dialogue is maintained and is properly progressed.

The dialogue between the parties should aim, through agreement and compromise, to narrow the differences between them. Eventually (in the vast majority of cases) the landlord’s and tenant’s positions should converge enough for one or other side to make an offer which is then up to the other side to consider and respond to accordingly. Negotiations often proceed in offer/counter-offer fashion to ’barter’ towards a mutually acceptable sum. Of course, having produced/responded to the claim in accordance with the RICS Dilapidations guidance note, 7th edition, the surveyor will be able to justify their stance on particular issues.

Even if there is no early resolution of a claim, the parties should generally be encouraged to continue their negotiations, if necessary, in parallel with the more formal dispute resolution process - see Disputes. The incentive to do so is that it is usually cheaper (and better for any continuing landlord and tenant relationship) for a claim to be resolved, even if this occurs at an advanced stage of any more formal dispute resolution process.

Progressing negotiations

The overriding ambit of the Civil Procedure Rules (and reflected by the Dilapidations Protocol) is to encourage dialogue between parties to a dispute in order to arrive at a mutually agreed resolution without recourse to the courts. Litigation is extremely expensive and there may well come a point in negotiations where commercial imperative overrides the detail of the claim. Getting the matter settled out of court should be the parties’ overriding objective.

This said it is not unusual for negotiations to stall or break down altogether. When such situations arise there are mechanisms that can be introduced to deal with this, such as:

• negotiating limited elements only; and
• making ‘Part 36’ offers.

Negotiating limited elements only

The Dilapidations Protocol encourages the parties to a dispute to narrow their differences to as few areas as possible, even if there are irreconcilable variances on other matters. One of the reasons dilapidations disputes tend to be very expensive when they go to court is because the court has to consider each of the usually numerous items of the claim in turn. Where parties have narrowed the dispute down to just a few points, then even if the dispute concerns a more general matter, such as the effect of diminution of value, the costs of a claim that has been limited in that way should be lower, and this is clearly to the benefit of both parties.

Moreover, as the number of items in contention is reduced, it becomes easier for the parties to focus on those that remain unresolved. Sometimes, it also highlights the fact that the bulk of the financial claim is accepted and that a compromise on the residual issues would be pragmatic.

There may well be merit in negotiating and settling on only certain elements of the claim at a particular point in the negotiations. This might occur, for example, where the landlord has relet one floor and has thereby set a cap on its loss in respect of that part of the claim, but is still considering its actions on the other floors. It might also be appropriate to negotiate the common law claim (for example, the cost of works) without prejudice to the effect of any diminution in value arguments.

On other occasions, it may also be necessary to conduct dual negotiations that assume an event either has or has not occurred or might or might not occur. For example, there might be an argument as to whether or not a particular notice was correctly given. It would be possible to agree the outcome for either situation, leaving the selection of which one was to be adopted for later. An alternative example might see the parties agree the costs of correcting a defect, subject to an agreement on the diminution in value cap.

It is also possible to make a Part 36 offer on only parts of the claim or that assumes certain outcomes to specific points. Such an approach could protect a party on the costs that could be incurred in pursuing that part of the claim.

Offers to settle – Part 36 offers

If negotiations are not progressing as they should and either surveyor feels that the steps taken so far to resolve the dispute, particularly past without prejudice offers to settle, are reasonable, the surveyor may wish to put the client in a position that it is able to draw this to the attention of the court, in the event that litigation ensues. This is the point at which it is worth considering whether to make a formal offer to settle under Part 36 of the Civil Procedure Rules (often known as a Part 36 offer) – the modern day equivalent of the Calderbank offer. A Part 36 offer is essentially a formalised offer to the opposing party, which will be without prejudice and not admissible in court, should the dispute not be settled, until it comes to the court deciding the liability for the costs of the dispute.

Landlords and tenants can make a formal Part 36 offer to settle the dispute at any time from the service of the schedule. Changes introduced in 2007 mean that neither party to ongoing litigation has to make a payment into court when making a Part 36 offer. Previously tenants were required to, with the result that making a Part 36 offer was often not practicable for many as the sums of money involved were both substantial and could be tied up for long periods of time. No doubt this former requirement curbed the making of Part 36 offers, but with this obstacle out of the way their use merits even more serious consideration.

But what makes Part 36 offers so powerful? In essence it is money. Ignoring or rejecting a Part 36 offer that a court subsequently decides was a reasonable one will expose that party to a greater risk as to costs (which may be very substantial) than would otherwise have been the case; it would also face a penal rate of interest, particularly if the offer has been made by the claimant in the proceedings. Therefore, Part 36 offers can concentrate the mind of the recipient and help to reinvigorate the negotiation process. Incidentally there is nothing to stop a landlord from making a Part 36 offer at the same time as serving the claim documents – and the offer need not represent the full amount claimed. This would be particularly useful where a landlord wants to avoid the risks of without prejudice negotiations and achieve a speedy settlement by accepting less than the full claim amount. Making an offer in this way is very much down to experience and judgement but, used properly, it can be a very commercial approach.

On the basis of all of the evidence that the surveyor has gathered, whether acting for a landlord or a tenant, he should consider early on in negotiations whether making a Part 36 offer would be appropriate. As with any offer the surveyor should obviously liaise with the client and any solicitor appointed. The surveyor should inform the client that he will also need to appoint a solicitor and stress as there are a number of procedural requirements that must be complied with in making a Part 36 offer.

The trick when making a Part 36 offer is to assess the relative merits of the claim and defence very carefully and pitch the offer at a level that the party making it feels confident that the court judgement would equal or ‘beat’. On a practical level it is often helpful, when making the offer, to set out the costs issue, so that a less experienced recipient can appreciate the implications of refusing or ignoring the offer.

Technically nothing needs to be said in the offer about the liability for the costs of the dispute if the offer is accepted because the terms of Part 36 CPR make provision for that. Often, however, one party or the other might want to make an offer on the basis that each side bear its own costs. Strictly speaking that would take the offer outside the provisions of Part 36 so that its benefits might not be available if the offer were equalled or beaten, but it has to be accepted that the court is still likely to take into account and may well award those ‘benefits’ nonetheless.

If a Part 36 offer is made in relation only to specific parts of a dispute, rather than the whole, it is important that the offer documentation clearly states which elements of the claim the offer relates to and which items are still at large.

Generally, an offer to settle must be left open for acceptance for a period of not less than 21 days from service. If not previously withdrawn, an offer can be accepted at any time, although late acceptance may mean that additional costs may be incurred. This flexibility may be particularly useful when dealing with larger, more complex claims.

That said, landlords or tenants in receipt of a Part 36 offer will need to seek advice immediately from their solicitor and surveyor regarding the relative merits of the offer. The surveyor will then consider whether it should be accepted or not, or whether it might be appropriate to make some kind of counter-proposal and advise/act accordingly.

Part 36 offers are discussed further under Offers to settle in Civil Procedure Rules and the Dilapidations Protocol.

Concluding the agreement

Once the parties have completed their negotiations and reached agreement as to the whole or part of the claim, then the agreement should be confirmed in writing in open correspondence (which makes the agreement disclosable to the courts).

There is no prescribed form of this ‘release’ correspondence and the surveyor should take instructions from the client as it, or its solicitor, may prefer to use their own form of words.

Sections 12.6 and 12.7 of the RICS Dilapidations guidance note (7th edition) sets out the basic requirements of settlement offers and agreements, and the mechanism by which payment is discharged. There are many matters that need to be considered and, depending on the complexity of the matter in hand, it may well be prudent to involve a solicitor. That said, for small, uncomplex claims the surveyor should be comfortable dealing with settlement offers and agreements - See also the Typical form of release.

See also VAT.