I have headed this article ‘Lease non-renewal: Schedule of Dilapidations’ because the law of repair is complicated, The parties’s rights during the currency of a lease, on expiry, and on non-renewal, differ. Also, the content of this article is intended as an outline only.
With commercial property, investor preference is for what is known as a ‘clean l;ease’. With a clean lease, the landlord has no residual liabilities. In a clean lease, describing the repairing covenants is commonly abbreviated as ‘FRI”. With a full repairing and insuring lease, the tenant covenants to be responsible for the repair of the premises and payment/reimbursement of the building insurance premium. Why FRI rather than FRDI is I suspect loose terminology of the old-school. ‘FRI” is intended to mean a lease under which the tenant is responsible for everything, the landlord having no residual liabilities. The phrase ‘effectively FRI’ isn’t quite the same thing; that is where the landlord has covenanted to repair, but the cost of repair is recoverable from the tenant; the theory being that despite the onus on the landlord the tenant’s liability amounts to the same thing.
The tenant is in breach of covenant where it has failed to comply with the requirements of that covenant. Whether the breach is capable of being remedied depends upon the nature of the breach. Generally, I think it fair to suggest that strictly all tenants are likely to be in breach of covenant at some time during a tenancy but, whether the landlord cares or a remedy is capable of being enforced would depend upon the breach. Enforceability is dependent upon the difference between a literal reading of the lease and case-law interpretation. For example, where during the tenancy the tenant has screwed nails into a wall to put up a shelf, whereby the remedy would be to remove the shelf and fill the holes, a landlord would be unlikely to succeed in a claim for breach of covenant of alteration. On non-renewal, however, the tenant could be required to both remove the shelf and fill the holes in the wall and make good.
On non-renewal on termination or expiry, the tenant must yield up or hand over the property to the landlord in a state of repair and decoration as envisaged by the lease (regardless of the condition before the tenant became the tenant, unless the lease contains a schedule of condition.) The intention is that the landlord should be able to re-ret or otherwise dispose of the premises without the new letting/disposal being in any way prejudiced by the previous tenant’s failure to repair, etc.
In theory, a tenant shouldn’t need the landlord to tell him what repair needs doing before the tenant vacates, because a tenant should be able to read the lease himself. Nevertheless, in practice, it is prudent for a landlord to have a Schedule of Dilapidations prepared and possibly served before the end date, because the schedule doubles as evidence of the state the premises were in on the date of inspection. The landlord inpection after the tenant has vacated could be met by the tenant’s claim that the premises were not in a state of disrepair before the tenant vacated. Evidence is needed: the burden of proof is on the landlord to show that the items would have been in a state of disrepair at the date of vacating.
Derived from the Latin for scattering the stones (lapides) of a building, dilapidation – more usually in the plural, dilapidations – is the disrepair for which a tenant is usually liable when he has agreed to yield up the premises in good repair. A Schedule of Dilapidations is simply a list of works that the landlord or a surveyor on behalf of the landlord, considers necessary to be done by the tenant for compliance with the lease. Although a disrepair is a matter of fact, whether all items listed are as required by the lease depends upon the reading of the lease and case-law interpretation.
To yield up with vacant possession requires the tenant to remove all chattels and tenant’s fixtures and fittings – e.g, fascia, shelving, alarm systems, false ceilings, carpets, de-mountable partitioning, air conditioning – in fact, anything the tenant put in or annexed to the premises during the tenancy, whether belonging to the current tenant or a previous tenant. Whether the lease requires the tenant to yield up with vacant possession depends upon the wording in the lease. Recent case law concerning the meaning of ‘vacant possession’ has resulted in well-advised tenants wanting to delete that phrase before entering into a lease.
Annexation depends upon the intention with which they were brought into the premises and fixed in position. In principle, an article intended permanent and of lasting benefit to the building would become a fixture, but if temporary a chattel. In removing such items, any damage caused to the structure must normally be repaired. A popular rule of thumb is to imagine the premises are turned upside down: anything that falls out is likely to be tenant’s fixtures and fittings. Also see this: https://www.landlordzone.co.uk/landlordzone-update/the-art-of-tenant-repair
Failure to leave the premises in repair is a breach of covenant. What about decoration? Despite the meaning of ‘repair’ including some degree of decoration, it does not imply all decoration. In older leases, decorating covenants were at pre-fixed intervals, every few years including the last year of the term. More recently, in keeping with a relaxation of draconian terms, decoration whenever reasonably necessary has become a norm.
The standard, quality and extent of repair and decoration and whether, for example, the obligation includes repair of inherent or original defects, will depend upon the wording in the lease. Because there is no standard wording for repairing obligations in a lease, the law of dilapidations is complex, with a substantial body of case law; the interpretation of repairing covenants in a lease part of the process of construction of a lease, having regard to general rules: for example, the intention of the parties, surrounding circumstances, commercial purpose of the document, etc.
A tenant should carry out works before expiry but, as it may not be feasible to undertake works or remove fixtures & fittings while the premises are open to the public or occupied, the tendency is to carry on trading until the last possible day and, instead of doing works before vacating, sort out the matter afterwards by capital payment to the landlord. On expiry, all keys must be handed over to the landlord so, since a tenant normally has no right of access to carry out repairs or remove items after expiry, the usual approach to resolving dilapidations is to pay damages to the landlord.
I say ‘usual’ approach because there are two different approaches, so whether the landlord claims damages is a matter for landlord’s discretion. In any event, even if a claim were made whether the landlord would be entitled to any damages at all depends upon whether the reason for non-renewal is landlord opposition on ground of redevelopment or reconstruction. In that instance, s18(1) Landlord and Tenant Act 1927 states that “…no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement.”
When a tenant does not hand over the property in a state envisaged by the lease, including removal of fixtures & fittings, the landlord has a choice: either to claim damages for putting the property into order and consequential loss during the period of works, or for the landlord to do the work and recover the actual cost from the tenant.
Damages include the actual/estimated cost of works, VAT (subject to extent of liability or works to be undertaken by the landlord), loss of interest if the property is to be sold or mesne profits (i.e, ‘rent’ at open market value from possession to completion of works), the landlord’s surveyors’ fees (preparing and agreeing the schedule of dilapidations, supervising works, settling the claim for damages, etc), landlord’s legal costs; and business rates and water rates, cost of insuring the building, loss to the landlord of any service charge during the period of works. The tenant may have its own solicitor’s costs and surveyor’s fees for agreeing the schedule of dilapidations and negotiating the claim.
A Schedule of Dilapidations is a list of all items of disrepair in the premises, and will normally include an estimate of cost for each item of disrepair. The schedule must state what is wrong: for example, a tenant cannot be obliged to carry out tests to find out if a defect exists- but since leases contain covenants requiring compliance with statutory obligations, checking whether, for example, electrical circuits would obtain a certificate may be necessary. Agreeing the schedule is important before negotiating/settling damages because only works to comply with lease covenants, having regard to business tenancy case law, should be included. It is not unusual for a landlord’s surveyor to try to include items outside the tenant’s responsibility in the lease. For example, if the landlord has a covenant to repair the structure and recover from the tenant a proportion of the cost, then the tenant is not liable for that cost until the landlord has complied with its obligation; also if alterations have been undertaken then whether the tenant would be obliged to reinstate the premises would depending upon the wording of the licence to alter. Some leases require the landlod to serve notice for reinstatement: a failure to reinstate is not a breach of the repairing covenant, it is a separate and specific breach.
In a recent Scottish case – @sipp Pension Trustees v Insight Travel Services Ltd  – whereby the lease required the tenant to pay damages – Scotland’s Court of Appeal held that the tenant had to pay even though the landlord was not intending to carry out the required repairs. Since generally (England and Wales), a landlord is not obliged to spend the damages on repairing the premises. in attempt to resolve the problem of fairness in measuring damage, Section 18(1) (known as s18) of Landlord and Tenant Act 1927 limits damages to what is known as the “diminution in value of the reversion”: namely the cost of repairs and the difference in value of the property in the condition left by the tenant and its value as if no breach – whichever amount be the lower.
Per s18(1) “Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid….”
For example, if the cost of repair were £20,000 but diminution in value £10,000 then damages would be limited to the lower amount of £10,000. Conversely, if diminution were £25,000 then damages would be limited to £20,000 cost of repairs. The landlord should not be worse off in consequence of the tenant’s breach, but a landlord may not necessarily be obliged to mitigate loss. If, for example, cost of works were £25,000 but the landlord re-lets the premises at £20,000 pax, the new tenant receiving 3-months rent free, damages could be limited to £5000.
Lack of repair is not evidence of damage to the reversion: diminution is a technical valuation opinion that is negotiated and agreed with the tenant’s surveyor: for example, depending on market conditions, the value of property could be about the same whether or not in good repair.
Whereas s18 limits damages for repair, decoration is excluded from the definition of repair. Most leases require the tenant to redecorate in the last year of the term and the covenant must be observed even if the tenant had decorated a year or so before and in the tenant’s opinion the property does not need redecorating. Leases will usually contain detailed requirements for decoration that must be followed: for example, two coats of paint, the colour to be used first approved by the landlord.
The tenant has no legal right to require the landlord to go down the s18 route. If the landlord chooses to carry out the works and recover the full cost from the tenant then the potential limit on cost per s18 does not apply. The landlord is not obliged to accept the cheapest price from a builder. but is expected to show value for money, and usually competitive estimates are obtained from reputable contractors.
Where the landlord intends to carry or the works, the intention should be conveyed to the tenant before expiry of the tenancy/yielding up of the premises. If the landlord changes its mind then it would have to either claim for damages and be subject to s18, or not bother. (Whether a landlord would bother is entirely a matter for the landlord: after a tenant has yielded up the premises the tenant has no right to re-enter the premises and do any repair, etc.)
Many leases contain provisions obliging the tenant to remove fixtures, alterations, to reinstate opening in walls, etc if the landlord requires. The landlord must notify the tenant before the end of the lease because the tenant cannot comply with the covenant after the lease has expired. If the landlord has not requested removal before expiration, then there would be no breach. If there is a breach of covenant to remove fixtures or alterations, then the breach is not a breach of the repairing covenant so s18 will not apply. If the tenant has carried out alterations with consent and is obliged to reinstate on termination or expiry, then damages for failure to reinstate would be outside s18.
The tenant leaving behind unwanted fixtures & fittings can prove expensive: if not removed before vacating, they become the property of the landlord, whereupon if not in good repair or decoration breach of covenant applies. For example, if the tenant were to leave damaged carpets or dirty window blinds/curtains then the cost of cleaning or repairing would constitute breach of repairing covenant, rendering the tenant liable for damages or the landlord paying and then recovering the cost from the tenant.
If the tenant has a guarantor, then the guarantor’s liability ceases on the tenant giving up possession, but remains for claims to date of giving up possession and up to 6 years from that date. Where the tenant intended to renew per the Landlord & Tenant Act 1954, but the tenant then changes its mind and serves Notice to Discontinue Proceedings, the guarantor only remains liable after the contractual expiry when the definition of term in the lease includes statutory continuance.
A landlord is not obliged to serve a Schedule of Dilapidations before expiry of the lease, although the quantum of liability is frozen at the date when possession is given up. The claim can be made at any time, subject to the statute of limitations. Delay cannot count against the tenant in terms of cost of the works and loss of rent sustained. Nor is there any requirement to preempt the position as at date of possession: the reasonable period to start is dated from the date of possession. Any deterioration in the property from possession is liability of the landlord, not the previous tenant.
In the event of a dispute involving s18, claims can end up in court. so a pre-action protocol for procedure is normally followed regardless of the circumstances. If proceedings were commenced then the court would be able to treat the standards in the protocol as the normal reasonable approach to pre-action conduct. Even when the landlord or tenant does not take advice from a surveyor, the protocol should still be complied with.
The protocol comprises a series of steps to be taken. The first step is for the landlord or landlord’s surveyor to inspect the premises, read the lease, and prepare a schedule. The schedule should (a) indicate the breaches of the tenant’s covenants or obligations that have not been remedied at the termination of the tenancy;( b) what in the opinion of the landlord or the surveyor is necessary to put the property into the state required by the terms of the lease and any licences or other relevant documents; and (c) the landlord’s costings (that may be based on its estimate or on invoices if the works have been done). The breaches should be separated into categories, repair, reinstatement, redecoration, etc.
Next the schedule is served, usually by the landlord’s solicitor or surveyor. A reasonable time is expected and will vary but generally no more than 56 days after the termination of the tenancy. The landlord may serve a schedule before the termination of the tenancy. However, if it does so it should confirm either at the termination of the tenancy that the situation remains as in its earlier schedule or serve a further schedule within a reasonable time.
The schedule will also include a claim, setting out and substantiate the monetary sum the landlord is claiming as damages in respect of the breaches, or the estimate cost if the landlord intends to do the work and recover, the claim should include the VAT status; also the fees and costs payable, and the loss of rent, service charge or insurance rent quantified.
The tenant must respond to the claim within a reasonable time, 56 days is usually considered reasonable. The response should state what works are in the opinion of the tenant or tenant’s surveyor reasonably required for the tenant to comply with the lease.
The parties’ surveyors are encouraged to meet or discuss within 28 days of service of the tenant’s response. The meetings/discussions are ‘without prejudice’ and the aim is for the parties to agree as many of the items in dispute as possible. When a schedule of dilapidations is served before expiry then it pays the tenant to do as much of the repair as it can because the cost of the work and time-table is then under the tenant’s control; the tenant may avoid potential claims for loss of rent and interest, and there may be a financial advantage for VAT when the tenant is VAT registered, but the landlord’s property is not. Unless the tenant expects all items listed in the schedule to be necessary per the terms of the lease, then it makes sense to agree with the landlord/landlord’s surveyor what works are necessary before the tenant sets about doing anything. When some but not all the work is done before expiry and giving up the premises, the tenant is exposed to either claim for damages per s18 or the full cost of having the work done.
It is not open to the tenant to decide whether doing repairs or decorations is necessary based on the tenant’s opinion of what needs doing or what the tenant would consider reasonable if the tenant were the landlord: the test is the leasing requirement and interpretation of case law so, as the property belongs to the landlord with action at the landlord’s discretion, it pays to budget for the worst. In general, landlords seek damages because they relish a capital sum and prospect of profit on reletting subject to rent-free less than damages received. Whilst the claim should not contain a negotiating margin, tenant cope for reduction depends upon the lease, s18 and understanding landlord psychology. For clients, I myself do not prepare Schedule of Dilapidations; I subcontract the task to experienced chartered surveyors with whom I have informal association. My role is to project-manage the claim, from serving the schedule to negotiating the claim and dealing with matters arising.
Costs are an issue. Most leases require the tenant to pay the landlord’s costs in contemplation of and/or in connection with preparation and service of as Schedule of Dilapidations. In my experience, leases rarely mention the other costs arising, such as negotiating and settling the claim, supervising the works, and so on, which means some costs might not be recoverable from the tenant. Some leases require the recoverable costs to be reasonable, which avoids inflated costs.
It is no good reading the wording in a lease literally. https://www.landlordzone.co.uk/industry-expert-guest-writer/michael-lever/whats-in-a-word
Understanding the case-law meaning of the wording of the repairing covenant is essential. The word ‘condition’ in the typical requirement ‘To keep the property in good and substantial repair and condition” can mean over and above mere repair. It has been held that to ‘keep’ the property in repair means it has to be ‘put’ into repair, so generally ‘put’ is considered redundant. Where the lease is a renewal, I reason that the word ‘put’ should be inserted to ensure that any failure to repair under the old lease is carried into the renewal lease.
In conclusion, dealing with a Schedule of Dilapidations is time-cost-consuming, and somewhat of a hassle. The alternative approach, to carry out the agreed works and recover the full cost from the tenant circumvents s18, but is only likely to be the better course of action where the tenant has financial wherewithal and remains on the hook. Where the tenant is a ‘man of straw’ then regardless of which approach is adopted the bottom-line is whether the damages and costs would be recoverable.