It is not uncommon for me to get a call from a client, who has been renting commercial property, telling me they have been served with a Schedule of Dilapidations by their former landlord and are faced with a claim running into tens of thousands of pounds. The client frequently has no idea that there are safeguards in place which mean that, notwithstanding the terms of the lease, they may still be able to substantially reduce the claim or avoid having to pay anything at all.
In a recent case my client was asked to pay about £140,000; when I looked into the circumstances, I was able to negotiate the claim down to just £13,000 which was the amount of deposit held by the landlord and my client was happy that he did not have to find any additional money at all.
The key is for the tenant to take specialist legal advice at the outset, as this is not just a case of making a commercial bargain where both parties weigh up how much costs, time and effort it will take to bring the claim against how much is on offer to settle the matter.
Once the former tenant has received the schedule, he should scrutinise each breach listed to see if that which is claimed is something which is recoverable under the lease. For example, is the landlord claiming for a whole new carpet where a panel could be lifted and replaced with minimal cost? Another example might be that the landlord is claiming for the costs of repairing the roof but the roof may not fall within the tenant’s demise and be outside of the tenant’s obligations.
Once the tenant is confident that the schedule only lists those items of breach that are properly his responsibility under the lease, he can then consider what else may reduce the claim against him. If the landlord has claimed for the costs of reinstating alterations carried out by the tenant, the tenant should check if this is subject to any period of notice to be given by the landlord prior to the expiry of the lease. For example, if the lease obliges the landlord to give the tenant at least three months notice that it requires the tenant to reinstate the alterations but the email to the tenant arrived two and a half months before the expiry then this element of the landlord’s claim is lost, it is not a question of bartering.
Further, in the case where the landlord requires reinstatement of alterations, is there an argument that the landlord has waived the breach of covenant to reinstate by his subsequent actions.
Once the above has been considered, the tenant can then consider what statutory safeguards might be in place to further limit the landlord’s claim. Section 18 (1) of the Landlord and Tenant Act 1927 can mean that the claim is substantially reduced or extinguished altogether.
The landlord’s claim for terminal dilapidations is a claim for damages. The purpose of a damages claim is to compensate for actual loss and Section 18 applies to limit the damages in a claim for a breach of the repairing covenant. It is important to point out that Section 18 does not apply to other breaches such as a breach of the obligation to reinstate alterations.
The first part of Section 18 limits the landlord’s damages to the amount that the value of the landlord’s reversionary interest is diminished owing to the breach of the repairing covenant. So if it known that the landlord relet the premises as soon as the tenant’s lease expired, on better terms with a full repairing lease, it is unlikely that the landlord will be able to prove that the value of his reversionary interest has diminished at all and this aspect of his claim may be reduced to nil. It is generally for the landlord to show that the damages should not be reduced by application of Section 18 unless the landlord has actually done the repairs himself and incurred the costs.
The second part of Section 18 may assist the tenant in circumstances where the premises have not been relet following the expiry of his lease but the landlord has plans to alter the premises. Where it is known that the landlord intends to carry out substantial alterations to the premises or demolish them at the expiry of the lease, or shortly thereafter, such that would render any repairs carried out by the tenant as valueless, then the landlord is unable to recover the costs of those repairs. This is referred to as supersession, i.e., the tenant’s repairs are superseded by the landlord’s proposals to carry out alterations.
Every client’s circumstances are different and there may be any number of other reasons why the amount that a landlord first claims for terminal dilapidations should be reduced. What is important is that the landlord or tenant gets the right legal advice at the commencement from someone who has specialist knowledge in landlord and tenant disputes. These claims cannot be treated as straight forward breach of contract claims; to do so could lead the tenant into having to pay out far more than they should or lead to the landlord incurring several thousands of pounds in irrecoverable legal fees.
By Helen Bell