How To Resolve Commercial Lease Dilapidation Claims

Commercial lease dilapidation claims can be a significant source of contention between landlords and tenants. These claims arise when a tenant is said to have failed to maintain or repair the leased premises as set out in the lease agreement. Resolving these disputes efficiently is crucial to avoid costly litigation and to maintain professional relationships.

This article outlines the key strategies for resolving these types of claims.

What are dilapidation claims?

Dilapidation claims typically fall into two categories – “interim claims” and “terminal claims”. Interim claims are made during the lease term to ensure ongoing compliance with repair obligations, while terminal claims are made at the end of the lease.

The primary issues in these claims often concern the extent of the tenant’s repair obligations, the condition of the premises at the beginning of the lease, and the interpretation of “reasonable” repairs.

How can dilapidation claims be avoided?

Before entering into any commercial lease, you should obtain professional advice. Both legal advice and assistance from a reputable surveyor are recommended.

The lease agreement needs to be paid close attention to, especially in relation to the repair, redecoration, and reinstatement obligations. Understanding these terms is crucial for both landlords and tenants as these determine their respective responsibilities.

The lease agreement will often contain specific clauses detailing the tenant’s obligations regarding the condition of the property. These clauses can vary significantly between leases, so a detailed review is essential. If a dilapidation claim does arise, the terms of the lease will need to be reviewed again to determine liability arising (if any).

At the start of the lease, it is advisable to prepare a Schedule of Condition, documenting the state of the premises. This document can serve as a reference point to assess any changes or damages that occur during the lease term. A well-prepared Schedule of Condition can help prevent disputes. It should include detailed descriptions of condition and photographs of the premises to evidence condition.

Conducting regular inspections and maintenance throughout the lease term can help to identify and address potential issues sooner, rather than later. This proactive approach can prevent minor problems from escalating into significant dilapidation claims. Regular inspections allow both landlords and tenants to monitor the condition of the property and ensure compliance with the lease terms. Maintenance should be carried out promptly to address any issues identified during inspections.

To minimise the risk of dilapidation disputes, landlords and tenants alike should consider the following best practices:

a. Ensure that the lease agreement clearly defines the tenant’s repair, redecoration, and reinstatement obligations. Ambiguities in the lease terms can lead to disputes, so clarity is essential.

b. Prepare a detailed Schedule of Condition at the start of the lease. This document should include descriptions and photographs of the property’s condition and be agreed upon by both parties.

 c. Conduct regular inspections throughout the lease term to monitor the condition of the property and address any issues promptly. Inspections should be documented, and any necessary repairs should be carried out without delay.

 d. Maintain open and transparent communication. Address any concerns or issues as they arise to prevent them from escalating into disputes.

 e. Seek professional advice (including from reputable surveyors) at an early stage. Professional guidance is invaluable to help ensure compliance with the lease terms and provide support in resolving any disputes arising.

What are the key steps to take if a dilapidation claim arises?

Engaging professional surveyors to assess the condition of the premises can provide an objective evaluation so seeking such advice is, of course, advisable. Surveyors can help quantify the extent of disrepair and estimate the costs of necessary repairs. A surveyor’s report can be invaluable in negotiations, providing an independent assessment of the property’s condition and the required remedial works. It is best to choose a surveyor with experience in commercial property and dilapidation claims.

Keeping detailed records of all communications, inspections, repairs, and maintenance activities is important too. Proper documentation can support your position in negotiations or court proceedings and help clarify any disputes. Records should include copies of all correspondence, inspection reports, maintenance logs, and invoices for repairs. Detailed documentation can provide evidence of compliance with the terms of the lease and can support claims for reimbursement or compensation.

It goes without saying but obtaining competent legal advice is imperative and whether you are a landlord or a tenant you should be sure to get legal advice at an early stage of the matter so that you can ensure you are in the best possible position you can be.

Could alternative dispute resolution (ADR) help to resolve a dilapidation claim?

Before resorting to litigation, parties should consider ADR options, such as negotiation and mediation.

These ADR methods will likely be more cost-effective and are less adversarial and emotionally draining than traditional litigation in court.

Mediation, in particular, allows both parties to air their concerns under the direction of a qualified, independent mediator to guide a constructive discussion to try to find an agreement that suits everyone.

Negotiation and mediation as ADR options can preserve business relationships and avoid the often eye-wateringly-high costs, emotional stress and delays associated with court proceedings.

Are there any limitations on how much a landlord could claim in respect of the dilapidations?

Section 18 of the Landlord and Tenant Act 1927 limits the amount a landlord can claim for dilapidation.

The claim cannot exceed the amount by which the property’s value has been reduced due to the disrepair.

If the property is to be demolished or significantly altered, the tenant may not be liable for certain repairs. This provision is designed to prevent landlords from making excessive claims and ensures that tenants are only responsible for the actual diminution in value caused by their breaches of the lease.

What is the general process for making a dilapidation claim?

Set out below is the pre-action process for making a dilapidation claim.  The Civil Procedure Rules provide for a specific pre-action protocol that the parties must follow (i.e., the steps the parties must take before proceedings commence). The full title of this is the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (the ‘Dilapidations Protocol’). Note that this Pre-Action Protocol specifically relates to claims for damages for dilapidations against tenants at the end of a commercial tenancy.

1.  Schedule of Dilapidations and Quantified Demand

1. • When the landlord sends over a schedule of dilapidations, it’s a detailed list of repairs or reinstatement work they believe the tenant should carry out.

1. • Alongside that, the landlord will also include a Quantified Demand, which is a claim for money, backed up by invoices (if work has been done) or estimates (if work is pending)

2. Tenant’s Response

1. • The tenant usually has 56 days to respond to this schedule and demand.

1. • During this time, they can either agree with the alleged breaches and specified works or dispute them.

3. Meeting Between Parties and Advisors

1. • Both the landlord and tenant, along with their professional advisors (typically surveyors and solicitors), should meet within 28 days of the tenant’s response.

1. • This meeting happens on a ‘without prejudice’ basis, meaning it’s confidential and discussions that take place cannot later be referred to in evidence if the matter has to be taken to court.

1. • The goal is to resolve the dilapidation claim or at least narrow down the disputed issues.

If everyone is on board this meeting can even happen before the tenant’s official response has been provided.

4. Alternative Dispute Resolution (ADR)

1. • Parties are encouraged to explore ADR methods, like mediation or early neutral evaluation to avoid the unnecessary expense, delays and emotional stress a court trial involves.

5. Detailed Quantification of Losses

1. • If no settlement is reached, the landlord needs to provide a more detailed breakdown of their losses.

1. • This could be through a formal diminution valuation (this is a fancy term for assessing the loss in property value) or an account of actual or expected costs.

6. Tenant’s Defences

1. • If the tenant wants to raise a section 18 defence (related to diminution in value) or any other defence, they need to confirm this within a reasonable time (usually within 56 days of receiving the detailed quantification of losses).

1. • Section 18 of the Landlord and Tenant Act 1927 deals with valuations related to the landlord’s interest when repairs aren’t done.

7. Stocktake

1. • Both parties engage in a ‘stocktake’ and they further review their respective positions when the general procedure set out in the protocol does not resolve the dispute.

1. • The parties will consider the evidence and the relevant documentation to see if proceedings can be avoided (or at least to narrow the issues between them).

The next stage would be court proceedings and the landlord will want to ensure that they comply fully with the Pre-Action Protocol before commencing proceedings.

How we can help

If you are a commercial landlord or a tenant requiring advice about dilapidation claims or any other type of commercial landlord/tenant dispute, we would be more than happy to advise and guide you to a satisfactory resolution. We will always look at engaging suitable ADR methods if appropriate, as alternatives to court proceedings – but we can deal with these, of course, if necessary.

As always, we will ensure that your matter is dealt with efficiently, diligently and effectively.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.