Dilapidations and development – building a defence

Dilapidations is not a new concept. It’s a long-standing remedy available to a landlord where a tenant leaving a commercial premises has not complied with the lease covenants relating to the condition of the premises.

Given the current state of the market, we’re seeing an increasing number of landlords looking to redevelop a premises when a tenant vacates. In this article we explore some of the key arguments a tenant can use to defend a claim in this scenario.

Where a landlord is looking to redevelop, an exiting tenant may be welcomed but a landlord will almost certainly follow up by serving a Schedule of Dilapidations on the tenant. However, pursuing a dilapidations claim against the backdrop of a redevelopment can impact the value of a potential claim and open up various defences to a tenant.

Dilapidations is a claim by a landlord against a tenant for breach of the covenants in the lease relating to its physical condition. Broadly speaking it includes breach of covenants relating to repair, redecoration and reinstatement. The starting point is that the landlord will claim the cost of carrying out the works to put the premises into compliance with the tenant’s covenants. If the premises is going to be demolished however, it is likely that the landlord will not intend to carry out all of the works in the Schedule of Dilapidations (‘the Schedule’). The burden of proof is then on the tenant to establish the landlord has no intention of carrying out the works in the Schedule.

In this scenario a tenant has the following defences available to it at law by virtue of section 18(1) of the Landlord and Tenant Act 1927:

• The damages a landlord can claim are limited to the decrease in value of the landlord’s interest as a result of the tenant’s breaches of relevant lease covenants
  • If, for example, a landlord is claiming the works to bring a premises into compliance with the lease covenants will cost £300k; the premises (in the condition left by the tenant at the end of the lease) is worth £900k; but it would be worth £1m had the tenant complied with the relevant covenants in the lease; the landlord’s claim is capped at £100k
  • A valuation defence is rarely taken at face value by a landlord and can turn the dilapidations claim from a “cost of works” argument to a valuation argument. It is important to engage a specialist valuer who has experience with these specific valuations.
• No damages are recoverable by a landlord where it can be shown that the premises will be pulled down or structural alterations will be carried out at lease end (or shortly after), so any repairs carried out by the landlord would be rendered valueless. This is known as supersession, because in essence the landlord’s proposed works would supersede the need for the tenant to carry out the works claimed in the Schedule of Dilapidations.

The above defences only apply to breach of an obligation to repair (which can include redecoration). The value of the landlord’s claim, even in a redevelopment context, will therefore rarely be zero as it could still incur additional costs removing tenant alterations. They can, however, be a useful tool to reduce a tenant’s liability.

Dilapidations claims are complex, involving a team of specialist lawyers, surveyors and valuers. Landlord’s intentions are one of the key points to defending a claim, so obtaining advice at an early stage can be highly beneficial to tenants.

At HCR Law we have significant experience navigating dilapidations disputes, particularly in a development context. Please contact our specialist Real Estate Dispute Resolution team if you need advice.