How dilapidations losses are assessed
The guiding principle is that if a breach of a lease does not leave the landlord in a worse financial position, they have suffered no loss. Typically, the landlord will incur a loss either because they have to spend money to rectify matters, or because their property is now worth less money as a result of breaches of the lease.
The most common way to assess dilapidations losses is by the costs of a landlord completing remedial works but, just because a landlord has completed works, it doesn’t always mean they were necessary, so you should still ask a dilapidations surveyor for advice before you pay thousands of pounds to your landlord.
Reduction in value
If the lease breaches have led to a reduction in the market value of a property, this reduction in value can be calculated by an experienced Registered Valuer. The difference in value between the building as it was at lease end, and what it would have been had the tenant complied with their lease requirements, is known as a ‘diminution valuation’ and typically it limits the entire dilapidations claim, not just items related to disrepair.
Supersession is where the landlord supersedes the requirement to complete works by demolishing the affected building, either totally or in part. For example, there would be no reason to pay the landlord damages for failing to decorate a wall if they plan to remove the wall, even if decorating that wall was in the tenant’s lease covenant.
Time sometimes working in your favour
If a landlord decides not to complete remedial work, sometimes waiting to see what happens next can play to a tenant’s advantage, as often a dilapidations claim will naturally disappear if a new tenant takes the property on the same, or similar, terms. If this is the case, the new tenant will carry the liability to put right some or all of the technical breaches of the lease, often meaning that the landlord has incurred no loss, but will ask the new tenant to rectify any issues at the end of their lease term instead.
The reason for this is that many new tenants are happy to let properties which fall below the standard required by a full repairing and insuring lease, often because their fit-out works do not depend on the entire building being in good repair.
If a new tenant takes a lease restricted by a photographic schedule of condition, though, the landlord could still have a claim against the former tenant, as there is a future obligation for them to complete works rendered necessary by the former tenant’s lack of adherence to their lease. However, unless the content of the schedule of condition is exactly aligned with the schedule of dilapidations, it may be that some claim items drop away.
Finally, a new tenant might negotiate an enhanced rent-free period to put right dilapidations items.
For a landlord to make a successful claim for the value of an enhanced rent-free period, we would expect to see contemporaneous evidence that the additional rent-free period is actually connected to the former tenant’s outstanding dilapidations work rather than, for example, the new tenant upgrading the property. For this reason, your dilapidations surveyor will need to see background documentation for a new lease such as Heads of Terms. If it is not clearly documented that the rent free is connected to disrepair, claims calculated using this methodology will usually fail.
Common claim items
We regularly see landlords’ surveyors asking for asbestos surveys to be paid for which are not needed to comply with either legislation or the lease.
A lot of schedules of dilapidations also include costs for testing of services and fire installations where there is no requirement to do so. Lack of testing does not in itself mean that an appliance or service is in disrepair.
Although normally providing recent test certification is not a lease requirement, you should be aware that, if the landlord decides to test an installation, and the test finds defects, the tenant will become liable for both the cost of testing and for remedying the defect, so long as the testing was reasonably necessary to find the defect.
However, if no defects are found during testing, the landlord will have to bear this cost if testing is not a lease requirement.
Often, VAT will be included in a dilapidations claim, even where the landlord is not entitled to this. More correctly, as damages payments are not subject to VAT, a claim for damages in lieu of VAT might be made.
As a rule of thumb, damages in lieu of VAT can be claimed if the building is not elected for VAT (meaning that VAT is not paid on rent) and the landlord has completed the works for which they are claiming damages in lieu of VAT.
If the building is elected for VAT and VAT is paid on rent, this means that the landlord can reclaim VAT from HMRC.
If the works have not yet been completed, this element should be excluded from a claim (in whole or in part) as it is unproven whether the landlord will have to pay VAT at all.