Schedules of Dilapidations

Information Note No: 2/99 May 1999

This information note is in response to a request to the Advisory Panel in regard to advice on Schedules of Dilapidations. The main issues involved are set out below but Property Centres should note that the key factor which should govern all their dealings with dilapidations matters is getting legal and valuation advice at the right time. It is assumed that systems for monitoring the condition of leasehold premises, the repairing obligations and the trigger dates in each lease will already be in place.

The term "dilapidations" refers to a state of disrepair in a property where there is a legal liability for the condition of disrepair. Essentially there are three components necessary for a question of dilapidations to arise : a lease (usually a commercial lease of 25 years or less but may be a longer term), a piece of property or part of an estate (e.g. offices, a warehouse, or a unit in a shopping centre) and a state of disrepair for which one party has accepted legal liability and for which the other party has suffered or will suffer financial loss.

Various types of schedule can be prepared in respect of the condition of leasehold premises and the specific characteristics of each schedule depend, to a large extent, on the timing in relation to the lease term :

(a) at the commencement of a lease - two situations may arise :

• Premises may be in a poor state of repair but the tenant may agree to execute repairs in exchange for a reduced rent or a deferred rent review. If so,a precise list usually in the form of a "Schedule of Dilapidations" should be incorporated in the Lease, in the interest of certainty.
• In all other cases, particularly where the premises comprise an older building the in-going tenants repairing obligation should be limited to preserving the state of repair at the commencement of the Lease term. This is to ensure that at the termination of the Lease the tenant is not obliged to give back the premises in a better state of repair than they were in the commencment of the Lease. Best practice would involve a surveyor or architect preparing a "Schedule of Condition", this being agreed with the landlord or his surveyor or architect and then incorporated in the Lease. The Schedule of Condition will be linked to the repairing obligations in the Lease so as to ensure that at the end of the Lease the Schedule of Condition will be the standard against which any disrepair will be measured or assessed. This again leads to greater certainty and leaves less room for dispute between the parties.

(b) during the currency of the lease :

• Good estate management involves regular inspection of premises and this may lead the landlord to require the preparation of a "schedule of wants of repair". This may be served as an interim schedule ( in effect a list of defects needing to be remedied ) or as a full schedule detailing serious items of disrepair. The latter is served under s14 of the Conveyancing Act 1881 with the intention either of forcing the tenant to carry out the remedial works or of regaining possession of the premises and obtaining the cost of repair in the form of damages from the tenant.Modern leases often reserve the right of the landlord to re-enter premises, carry out the work himself and then seek to recoup costs.
• During the currency of the lease the likely level of damages in respect of disrepair will usually be assessed on the basis of the diminution in the value of the landlord's reversion as a result of the want of repair i.e. the difference in the value of the premises left unrepaired and their value if the repairing obligations had been performed.

(c) at the end of the lease :

• It is normal for landlords to have a terminal schedule of dilapidations drawn up and submitted to the tenant in the last 3 years of a lease. If the schedule is drawn up prior to the end of the lease there is a greater chance that the repairs will be carried out and that the premises will be in adequate condition for re-letting at the end of the lease. During the currency of the lease the tenant still has a vested interest in the premises and this frequently encourages him to carry out the necessary remedial works. By the end of the lease the tenant's options are drastically reduced - he usually has no right to remain in occupation and therefore no right to carry out the work. In these circumstances the tenant's only option is to make a payment based on the damage which has been occasioned to the property.
• Where the term has ended the measure of damages is likely to be the lesser of (a) cost of repairs or (b) the difference in the value of the premises in its actual condition and its condition if the tenant had complied with his repairing covenant, plus reasonable consequential damages such as loss due to delay in selling or reletting the property caused by making good the tenant's default. A surveyor or architect will be responsible for preparing an estimate of the cost of the remedial work in order to assist with computation of any claim for damages.

Other points of note

It is important to bear in mind that that the law of dilapidations is continually evolving and is affected by changes in letting practice and in statute. Some issues which have assumed greater importance in the last few years are :

• The fact that "options to break" have become much more common in modern leases
• The suggestion from recent GB case law that "specific performance" may in some circumstances be a remedy available to landlords
• The Business Tenancies Order (NI) 1996, which extends statutory protection to tenants to crown properties.

Since the last recession in the property market break options in leases have almost become the norm due to the strong bargaining position of tenants. However, these options are nearly always dependent on tenants complying with all their lease obligations, including the repair covenants, up to the relevant date. Apparently some landlords have been able to successfully refuse breaks on the basis that the repairing covenants have not been fully complied with. Obviously this was a nasty shock for the tenants concerned and it serves to re-emphasize the need for tenants, just as much as landlords, to have good estate management systems in place.

Until recently it had been assumed that the only two remedies available to landlords in dilapidations cases were damages and forfeiture (of the lease). It now seems that in some cases it may be possible for landlords to enforce "specific performance" of repairing covenants on the tenant. This follows the decision in the case of Rainbow Estates Limited -v- Tokenhold [1998] 24EG123, although it should be noted that in that particular case there was no forfeiture clause or proviso for re-entry and no self help provision for the landlord to enter and carry out repairs.

The Business Tenancies Order (NI) 1996 includes provision (Article 12(1)(a)) for opposing an application for a new tenancy if the tenant has failed to comply with his repairing obligations. With the Crown now being bound by the Order this provision will affect Departments whether they are landlords or tenants (Article 43) and this re-emphasizes the need for sound legal advice.