On the expiry of a lease, a landlord may be able to claim damages from its tenant for losses arising from the tenant’s breach of its repairing covenants in the lease.
The Pre-Action Protocol for Claims to Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (the ‘Dilapidations Protocol’) applies to such claims where they relate to commercial property situated in England and Wales. The stated objectives of the Protocol are:
- to encourage the exchange of early and full information about the dispute;
- to enable the parties to avoid litigation by agreeing a settlement of the dispute before proceedings are commenced; and
- to support the efficient management of proceedings where litigation cannot be avoided.
The Protocol is now a pre-action protocol under the Civil Procedure Rules and substantial compliance with it is required before the landlord can issue a claim for terminal dilapidations.
The Protocol itself states that the Court, when considering non-compliance and the sanctions to impose where it has occurred, will be concerned about whether the parties have complied in substance with the relevant principles and requirements and is not likely to be concerned with minor or technical shortcomings. Both parties to a terminal dilapidations claim should be aware that failure to comply with the Protocol may be taken into account by the Court under CPR 44.2(5)(a) when exercising its discretion as to any costs order. It will therefore be important to be able to evidence compliance where possible.
The Protocol sets out the steps that both the landlord and the tenant should take in relation to terminal dilapidations claims and the timetable within which these steps should be carried out. It is important for both parties and their advisers to read the Protocol carefully and to consider the implications of section 18(1) of the Landlord and Tenant Act 1927 on the damages that may be claimed before proceeding. The key steps are discussed below.
Schedule of Dilapidations
The first step in the process is for the landlord to prepare and send the tenant a schedule setting out what the landlord considers to be the breaches (separated into their relevant categories: repair, reinstatement, redecoration etc), the works required to be done to remedy those breaches and, if relevant, the landlord’s costings. The schedule must be in the form set out at either Annex B (where the schedule is prepared by a surveyor) or Annex C (where the schedule is prepared by the landlord) of the Protocol. Both forms set out the relevant endorsement that is required by the Protocol, which differs depending on whether the landlord or a surveyor has prepared the schedule.
The Protocol provides that the schedule should be sent within “a reasonable time”. What is reasonable varies from case to case, but is said to be generally within 56 days after the termination of the tenancy. This does not prevent a landlord from serving a schedule before the expiry of the lease; if it does serve one before, on termination of the tenancy it must confirm to the tenant that the situation remains as stated in the schedule or send a further schedule within a reasonable time. A schedule served prior to the termination of the tenancy does not strictly have to comply with the provisions of the Protocol, unless it is intended to commence the process under the Protocol. However, it would be good practice for any such schedule to comply with the provisions of the Protocol.
The landlord should also ensure that the provisions of the lease in relation to serving the schedule are followed. These may specify the time within which the schedule should be served and the address at which the tenant may be served. The Protocol states that wherever possible, the schedule should be sent electronically, to enable the tenant’s comments to be incorporated into one document.
The Protocol also provides that a Quantified Demand should be sent to the tenant, within the same timescale required for sending the schedule of dilapidations to the tenant. The Quantified Demand should set out clearly all aspects of the dispute and set out and substantiate the monetary sum sought as damages in respect of the breaches detailed in the schedule, as well as any other items of loss for which damages are sought. The Quantified Demand should also set out whether VAT applies, confirm that the landlord and/or its surveyor will attend a meeting, and specify a date (being a reasonable time) by which the tenant should respond. This will usually be within 56 days after the Quantified Demand is sent.
Both the monetary sum sought and any other losses should be fully quantified and substantiated, by either an invoice or a detailed estimate in the case of the monetary sum. The legal basis for the recovery of losses should be explained. The figures set out should be restricted to the landlord’s likely loss, which the Protocol states is not necessarily the same as the cost of the works to remedy the breaches. Nor should items of work that are likely to be superseded by the landlord’s intentions for the property be included. In practical terms, this means that the landlord and/or its surveyor should consider carefully at this stage whether to claim for the cost of the works or whether section 18(1) of the Landlord and Tenant Act 1927 operates to cap the claim at a lesser amount.
The tenant should respond to the Quantified Demand within “a reasonable time”, usually within 56 days after the Quantified Demand is sent. The Protocol does not provide a form for the tenant’s response, but states that where appropriate, the tenant should respond using the landlord’s schedule of dilapidations. The Response should be set out in sufficient detail to enable the landlord to clearly understand the tenant’s views on each item. The tenant, or the tenant’s surveyor as appropriate, should endorse the Response to confirm that the works detailed in the Response are all that were reasonably required for the tenant to remedy the alleged breaches, any costs are reasonably payable for such works, and account has been taken of what is reasonably believed to be the landlord’s intentions for the property.
The Protocol also provides that if the tenant or its surveyor considers that any items in the schedule or Quantified Demand are likely to be superseded by works to be carried out by the landlord or the landlord’s intentions for the property, then this should be stated in the Response, identifying the items to which this view is relevant, and particulars should be given of the material on which the tenant or its surveyor is relying in this respect.
Tenants should note that there is no requirement in the Protocol to respond to every item set out in the Quantified Demand, but it would be good practice and consistent with the objectives of the Protocol for the tenant to provide the landlord with its views on each item in order to narrow the issues.
Procedure Prior to Issue
Both parties should note that neither the Quantified Demand nor the Response are intended to have the same status as a statement of case in Court proceedings.
Disclosure before proceedings are issued is generally limited to the documents required to be enclosed with the Quantified Demand and the Response, but the Protocol permits the parties to agree for further disclosure to be given. An application for pre-action disclosure under CPR Part 31 may be appropriate in certain circumstances, but the Protocol states that parties should assist each other and avoid the necessity for such an application.
The Protocol encourages the parties to meet before the tenant is required to respond to the Quantified Demand. However, they should generally meet within 28 days after the Response is sent. Meetings are on a without-prejudice basis and the Protocol encourages the parties to seek to agree as many of the items in dispute as possible. The parties should also consider whether some form of alternative dispute resolution would be more suitable than litigation. The Court may require both parties to provide evidence that ADR was considered.
The Protocol further provides for the landlord to quantify its loss by providing the tenant with a detailed breakdown of the issues and consequential losses based on either a formal diminution valuation (where the landlord has not and does not intend to carry out some or all the works specified in the schedule) or an account of the actual expenditure or a combination of both, unless it would be unreasonable to do so in all the circumstances. This should be provided to the tenant before proceedings are issued and should take into account any works that the landlord is proposing to do but which have not yet been carried out.
If the tenant relies on a defence on the basis of diminution, the Protocol provides that it must state its case for so doing and provide a diminution valuation to the landlord within “a reasonable time”. This is generally 56 days after the landlord sends the detailed breakdown of issues and losses.
Finally, the Protocol provides that where the procedures set out have not resolved the dispute, both parties should review their respective positions and consider the evidence in order to see if proceedings can be avoided, or at least if the issues between them can be narrowed.
The Protocol sets out a very clear and detailed procedure prior to the issue of a claim for terminal dilapidations and should be followed as closely as possible by both parties. No provision is made for the costs of either party’s compliance with the Protocol to be paid by the other party, but these may be recoverable as part of the costs of the proceedings if a claim is subsequently issued. Therefore evidence of each party’s compliance with the Protocol may be required by the Court and it will be important to be in a position to show this.