A-Z OF DILAPIDATIONS
It is usual that all alterations and changes carried out by the tenants have to be removed at the end of the lease, unless specifically agreed in writing between the tenant and the landlord.
B BREAK CLAUSES
Break clauses are included within a lease to allow the tenant or the landlord to terminate the lease. This is an arrangement which can be of benefit to both parties as it allows flexibility. However, it is usual that the tenant has to comply with all terms of the lease before the break can be activated. This can be very demanding as it is usually difficult to ensure that at the end of the period, and exactly on the due date, the building is, for example, maintained and has been reinstated and thus yielded up as required by all of the lease terms.
C CONDITION SCHEDULES
It is beneficial to have a schedule of the condition of the building at the start of the lease, but unless this is carefully prepared and specifically part of the lease, it provides a theoretical rather than practical support and financial comfort to the tenant.
Damages is the legal term for losses incurred by one party.
Defects occur within a building and these can either be latent or patent. The extent of any claim against the freeholder as not being an appropriate repair item depends on which category the Defect would come under, and the extent of consequential repair. The difference is as follows:
Latent Defect Not apparent at the time of the lease.
Patent Defect Obvious at the time if he had reasonably inspected.
E ENTRY SURVEY
It is very important to identify the condition of the building and the potential liability that the tenant will be carrying under their new building lease. It is a fact that most banks are not interested in the condition of the building, when agreeing to support a tenant's move into new premises, as long as the cashflow and other business models show that the rent can be covered. It is necessary that the tenant is aware of the on-going and final costs of the occupation of their building.
F FULL REPAIRING LEASE
A full repairing lease condition does not mean that the building is to be kept in the same condition as when the tenant took occupation, neither does it mean that it is to be in a state of repair which is adequate for the tenant's own use. It is a much wider definition than either of these and has evolved over the years through case law.
G GOOD REPAIR
Good repair is the standard which usually applies for a full repairing lease and is that standard of repair which a reasonably minded, appropriate tenant, would expect before they occupy a building of that age and character in that location.
H HEATING AND OTHER SERVICES
All of the services alterations and installations which the tenant has installed will usually need to be removed at the end of the lease. It should be noted that a considerable amount of damage can be caused by the removal of computer and telecomm cabling.
Again, the standard for the landlord's services is not an adequate repair, where the services are just about holding together, but one which is in good repair.
The tenant may perceive that the work which they have carried out provides an improvement and thus a benefit to the landlord. The terms of the lease, however, usually require that all tenant's alterations, whether improvements or not, are to be removed at the end of the lease and the building reinstated. This can include extensions, mezzanine floors etc.
The history and the definition of terms and issues in the whole field of dilapidations have developed and evolved through case law and the judgements handed down through the Courts.
K KEY ADVICE
It is very prudent to obtain advice from a specialist surveyor on the condition of the building and the repairing liabilities as the dilapidations costs can be substantial at the end of a lease. Usually at the end of the lease the tenant is either intending to move into other premises and will probably have budgeted for works to that property, or they are contracting their business. They will often not have allowed for a similar level of expenditure on the building they are vacating as that into which they are moving. Similarly, licences to alter buildings should be discussed with a building surveyor as well as your solicitor for maximum protection.
L LICENCE TO ALTER
As mentioned previously, it is necessary to ensure that all alterations are covered by the written approval of the landlord. It is normal for a Licence to be drawn up by the legal advisers to ensure the tenant is not required to remove the alterations they have carried out and restore the property to the original or better condition, as the building existed at the beginning of their lease.
M MONETARY COMPENSATION
It is often easier to agree monetary compensation for the agreed dilapidations which are due at the end of a lease. This ensures that the tenant is not faced with an additional last minute claim and can budget accordingly. The alternative is to carry out the works, but these have to be to the reasonable satisfaction of the landlord's surveyor.
Various notices have to be served as a lease is coming to an end, whether from the landlord or the tenant. It is essential to ensure that the correct Notices are served, in the correct way, at the correct stages. This is something which should be carried out by a competent and experiences solicitor.
The various Protocols from either the RICS, or the Civil Justice Council, require an openness in discussion and negotiations over a dilapidations claim between the parties or their surveyors to ensure that unnecessary costs and claims are not being prepared. The Court is quite likely to make judgements on costs against an adviser, if they consider they have not assisted a reasonable settlement of the claim.
P PAINTING CLAUSES
It is usual that, in addition to the repairing obligations, there is a requirement to paint, either internally or externally or both depending on the terms of the lease, on previously stated cycles. This would also include during the last year of the lease and if this timetable is not adhered to, then for example the Break Clause will not be applicable. Again, the painting has to be to the reasonable satisfaction of the freeholder's surveyor.
Q QUANTUM OF LOSS
The purpose of a Schedule of Dilapidations is to ensure that the freeholder or the lessor does not suffer financial loss due to the lack of repair or activities of the tenant. However, the freeholder cannot claim more than the diminution in value as a result of the tenant's breaches of their repairing and other covenants. Under the Landlord and Tenant Act 1927, a Section 18(1) Valuation can be required to assess the drop in value by the lease breaches. This assesses the valuation of the building at the end of the lease with the breaches and the value which would exist had the building been kept in good repair and yielded up accordingly.
R RESTRICTIONS ON USE
Many leases will restrict the use of the building and these are likely to have impact on the reversionary value of the building which might be affected by the damages claim. They may also affect the relevant level of works necessary if it can be shown that the use is no longer commercially viable.
In addition to the repairing and decorating clauses, there is usually an obligation that the tenant must comply with statutes, regulations etc. Some of these are related to the tenant's actual occupation of the building and thus the statutory obligation will cease as their occupation terminates. Such matters could include the Disability Discrimination Act requirements and any relevant alterations which may be needed. However some, such as those dealing with fire escape etc., may be relevant to the building itself and should remain on completion of the lease, as they are related to the building itself and not to the use by the tenant.
This is the expression which relates to the fact that the landlord cannot claim for repairs which, if carried out, would be rendered irrelevant by the work that the landlord intends to carry out. Thus, there is no need to keep the interior in good repair if the landlord intends to gut and refurbish the interior of the building. However, there must be a clear demonstrable intention by the landlord that this is his intention, not just an expectation from the tenant. For example, a claim that the landlord intends to demolish the building would generally have to be supported by a contract having been placed with a demolition contractor and certainly a valid planning approval for a new project.
There are various issues within the lease obligations where timing is of the essence, whether from the landlord's or the tenant's perspective. This applies in particular to Break Clauses and Notices due at the end of the term.
It is quite often that a new lease is granted subject to work being carried out. This legal undertaking should usually be accompanied by a requirement that a surveyor reports, at a given stage, as to whether work has been done and there should be a clear mechanism, should the undertaking be breached, to ensure that the required and necessary works are carried out.
V VALUE ADDED TAX
If the landlord carries out work to rectify wants of repair by the tenant, then whether VAT should be added to this cost would usually be stated in the lease. VAT is generally not applicable on a monetary payment to settle a claim for damages. However, if the landlord cannot recover the cost of VAT, it would then become part of the constituent elements of the claim for damages, although VAT would not be levied on the amount being paid.
W WHY SURVEYORS?
Surveyors provide a valuable source of expertise in assessing the likely repairing obligations and liabilities within a lease. Many tenants are aware of the cost of refitting and refurbishing their new premises, but are not necessarily aware of the cost of repairing where they have been trading or their final exit costs. All of these costs should be built in to their Business Plan when assessing the relevant options of a building. It would also be very useful to assess changes to the value of the property, say by local developments, during the period of the lease, thus it is prudent to discuss these issues with a surveyor prior to a lease reaching its end.
X X-RAY EYES
It should be noted that surveyors do not have x-ray eyes and therefore cannot assess the full scope of any repairs or damages which may exist where the defect is covered or inaccessible.
Y YIELD UP
At the end of a lease, the tenant is required to Yield Up in accordance with the repairing and redecorating covenants contained within the lease. They are also required to remove any alterations which they may have carried out, including the removal of demountable partitions, for which an express licence is usually not required. It should be noted that even the removal of such partitioning can seriously affect the appearance of the carpet, walls and ceilings, such that full replacement may be necessary in order to leave the building in good repair.
Z ZZZZ ZZ!
Avoid the temptation to doze off through the consideration of the lease before taking up occupation of your new premises. The temptation can be to concentrate on the exciting changes which this may herald, but the dreams can turn to nightmares if suitable financial allowance has not been made for the obligations which run with the current lease.
Author: Roy J Ilott, FRICS
After working in private practice and for several property owning companies, Roy Ilott set up his own practice in 1980 and this developed in the maintenance, refurbishment and extension fields. Over the last 15 years, this has been re-focussed to deal with defects analysis, dilapidations and reports on building surveying matters as an Expert Witness.
Roy is extensively involved with the RICS and other bodies promoting the skill and role of the Building Surveyor. This has included appearances on radio and television, often as an Expert in building maintenance and defects.
To demonstrate his commitment to providing independent expert reports on properties and defects across Southern England, he has opened a new office in Warminster, Wiltshire.
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