Resolving a commercial dilapidations claim

It’s reasonably common for commercial landlords and tenants to disagree about the extent to which repair, redecoration and reinstatement obligations have been complied with when a lease ends. 

These types of disputes are known as dilapidations claims. If not treated carefully, these claims can end up in court with both parties being exposed to unfounded liability or unnecessary costs.

Dilapidations claims have the potential to get out of hand quickly if they are not managed well. If professional advice is sought at an early stage, this will help everyone to be clear about where they stand, what they want to achieve and the most appropriate way for any disagreement to be handled.

What are the 3 types of dilapidations claims? 

Interim claims

These are made during the course of the lease. They ensure tenants keep on top of their obligations and also that incidents of non-compliance are quickly nipped in the bud.

Terminal claims

These are made in the run up to the end of the lease and they give the tenant notice of the landlord’s expectations. This gives tenants a chance to voice any potential concerns. 

Final claims

These are made once the lease has expired and when a landlord is clear about the nature of the breaches that have occurred, the costs, and the related financial losses.

Why do dilapidations claims occur? 

Dilapidations claims can arise for a wide variety of reasons. The most common centre on disagreements about: 

• The tenant’s liability to reinstate the premises to its original condition
• What constitutes ‘reasonable’ repairs 
• The tenant’s entitlement to offset improvement costs 
• The landlord’s calculation of the compensation they are permitted to claim

How should dilapidations claims be approached? 

Before taking any steps in a commercial dilapidations claim, its important to seek early legal advice so everybody involved is clear where they stand. A legal advisor can inform you of the nature and effect of the repair, redecoration and reinstatement obligations set out in your lease, and any potential impacts from section 18 of the Landlord and Tenant Act 1927. 

This Act states the following: 

• Repair costs cannot be claimed against a tenant where there is evidence to show that when the lease comes to an end, or shortly afterwards, the previously occupied property will be knocked down or altered in such a way that carrying out the stipulated repairs would be pointless
• The cost of any repairs that can be claimed must not exceed the amount by which the value of the landlord’s interest in the property has been reduced as a result of it being left in a state of disrepair (referred to as the ‘diminution in value cap’) 

Interim dilapidations claims

With good commercial property management, interim claims are integral. If there is nothing present in the lease about dealing with them, then there are no set procedures when it comes to interim dilapidations claims.

However, the process listed below in relation to terminal and final notices is useful to keep in mind.

Terminal and final dilapidations claims

If landlords and tenants find themselves facing a terminal or final dilapidations claim, they should follow the Dilapidations Pre-Action Protocol. This protocol, from the Ministry of Justice, sets the framework for the relevant information to be exchanged between parties. It also encourages the use of meetings, settlement offers and alternative dispute resolution methods. 

In brief, the protocol stipulates that: 

• the landlord should send a schedule of dilapidations to the tenant, usually no more than 56 days after the lease ends, which clearly sets out the obligations which the tenant has failed to comply with, the works that need to be done to put this right and details the landlord’s costs. This should be accompanied by a quantified demand which details and substantiates the landlord’s claim for compensation
• the tenant must reply to the schedule and quantified demand, usually within the next 56 days, confirming whether the alleged breaches and stipulated remedial works are accepted or disputed
• the landlord and tenant are then encouraged to meet on a without prejudice basis to see if the dilapidations claim can be resolved and, if not, whether the issues in dispute can at least be narrowed. This meeting should take place within 28 days of the response being received
• the landlord and tenant are also encouraged to consider whether it may be appropriate for the claim to be referred to some sort of alternative dispute resolution process
• where settlement cannot be achieved, the landlord must proceed to provide a firmer quantification of losses i.e. through the production of a formal diminution valuation or an account of actual or expected expenditure and financial costs
• if the tenant intends to raise a section 18 defence, or any other defence related to diminution in value, then this must now be confirmed usually within 56 days of the firmer quantification of losses being provided
• the parties must then create some time to take stock before the landlord proceeds to take the last resort step of submitting their claim for determination by the court

How can Hegarty help? 

Our highly experienced dispute resolution team have the knowledge and understanding to deal with a range of commercial disputes, including dilapidations claims. 

We work closely with our clients to fully understand their situation and make sure they fully understand their legal rights and obligations. Our lawyers then assist you in developing a strategy to achieve a resolution as quickly and economical as possible, all tailored to your specific circumstances and needs.