How to deal with dilapidations at the end of a Commercial Tenancy – a brief overview

Rebecca Smith takes us through the 7 steps of how to deal with dilapidations at the end of a Commercial Tenancy.

The Pre Action Protocol for Claims for Damages in relation to the physical state of commercial property at termination of a tenancy (“the Protocol”) applies to commercial property situate in England and Wales. It relates to claims for damages for dilapidations (damages) against tenants at the termination of a tenancy. The Protocol sets out conduct that the court would normally expect the parties to follow prior to commencing proceedings. We set out a brief overview below.

Step 1 – The Schedule and Quantified Demand

The landlord should send to the tenant a schedule which sets out what the landlord considers to be the breaches of the tenancy, the works required to be done to remedy those breaches and, if relevant, the landlord’s costings. Breaches should be separated into relevant categories (repair, reinstatement, re-decoration etc) listed separately. An example is contained within the Protocol at Appendix B and C.

Schedules should be sent within a reasonable time, which will vary from case to case but will generally be within 56 days after the termination of the tenancy.

The Schedule should be endorsed either by the Landlord or, where it is prepared by a surveyor, by the Landlord’s surveyor. It should confirm that all the works set out in the schedule are reasonably required to remedy the breaches, that full account has been taken of the landlord’s intentions for the property and, where endorsed by a surveyor, that the costings are reasonable.

A Quantified Demand should also be served. This sets out clearly all aspects of the dispute, and substantiates the monetary sum sought. It should not include items of work that are likely to be superseded by the landlord’s intentions for the property. It should also confirm that the landlord and/or the landlord’s surveyor will attend a meeting or meetings. It should be sent within the same timescale for sending the schedule and specify a date by which the tenant should respond (usually 56 days after sending the demand).

Step 2 – The Response

This should usually be sent within 56 days of the landlord sending the quantified demand. The tenant should respond using the schedule provided and the response should be set out in sufficient detail to enable the landlord to understand clearly the tenant’s views on each item. It should be endorsed either by the tenant or, where prepared by a surveyor, their surveyor. The endorsement should confirm that the works detailed in the response are all that were reasonably required to remedy the breaches, any costs set out in the response are reasonably payable for such works and account has been taken of what the tenant reasonably believes to be the landlord’s intentions for the property.

Stage 3 – Disclosure of Documents

Disclosure will generally be limited to the documents required to be enclosed with the quantified demand and the tenant’s response, being invoices or detailed estimates for the works and any other costs claimed.

Stage 4 - Negotiations

The parties are encouraged to conduct a without prejudice meeting before the tenant is required to respond to the quantified demand, usually within 28 days after the tenant sends the response. The objective is for the parties to agree as many of the items in dispute as possible.

Stage 5 – Alternative Dispute Resolution

The courts take the view that litigation should be a last report and therefore the parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation and, if so, seek to agree which form to adopt. The parties may be required by the court to provide evidence that alternative means of resolving their dispute were considered. The Courts will take into account any parties’ non-compliance with the Protocol when making orders about who should pay costs.

Stage 6 – Quantification of Loss

Prior to issuing proceedings the landlord should quantify its loss by providing to the tenant a detailed breakdown of the issues and consequential losses. This should be based on either (1) a formal diminution valuation (a report as to the loss of value, if any, in the property that was leased due to the dilapidations) to be prepared by a valuer or (2) an account of the actual expenditure (or where the landlord has carried out some but not all remedial action, a combination of both). If the landlord hasn’t carried out all the works but intends to, the landlord must identify which works it intends to carry out, state what steps it has taken towards getting such proposed works done, (preparing a specification or bills of quantities or inviting tenders) and clearly show the scope of such proposed works. This is to enable any effect on the dilapidations claim to be identified. In these circumstances, or where the landlord does not intend to carry out some or all of the works, then it should provide a formal diminution valuation. If the tenant relies on a defence on the basis of diminution, it must state its case and provide a diminution valuation to the landlord, usually within 56 days of the landlord sending to the tenant a detailed breakdown of the issues and losses.

Stage 7 - Stocktake

A further review should be undertaken including consideration of the state of the papers and the evidence to see if proceedings can be avoided or, at least, issues narrowed prior to issuing proceedings.

If you would like more information on any of the above steps please contact Rebecca Smith by email or call us on 01258 459361

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