Why are the landlord’s intentions important in dilapidations?
As with anything relating to dilapidations, there is often nuance which can affect the tenant’s liability to complete works or recompense the landlord for any loss.
One such factor is the landlord’s intentions for the building once the lease has ended – what they plan to do with the building.
Knowing this is important because it helps surveyors to understand whether breaches of the lease have actually led to a loss.
In this article, we look at the three common scenarios relating to a landlord’s intent that can affect a dilapidations claim.
The landlord plans to re-let the building as it is
Most commercial property is owned as an income-generating asset and this is the most common situation a landlord will be in. If the landlord plans to re-let the building having first completed necessary works, we need to consider whether works set out in the Schedule of Dilapidations affect the value of the landlord’s reversion – often the market value of the property.
To do so, we must consider the age, character and locality of the property.
This can often be the most onerous situation for a tenant, as the building will need to be at least in a tenantable condition, which means it is unlikely that the landlord’s future actions will supersede the current requirements for repair, for example.
In some ways, this can make it easier to agree a dilapidations settlement, as courts tend to consider works completed by a landlord to be reasonable once they have been completed, which sometimes leaves little scope for discussion.
There are times, however, when a landlord will declare an intention to re-let, omitting an intention to first fully refurbish a property to meet market demand. If this is the case, surveyors should use due caution and make their own enquiries, treating the claim as though the landlord plans to redevelop. Refurbishing to meet market demand, rather than simply fixing damage, can mean that the property is upgraded – an outgoing tenant should not be exposed to the costs of betterment.
Sometimes a landlord will choose to offer an incoming tenant an enhanced rent-free period to address disrepair, instead of completing the works themselves. In this instance, it is important for surveyors to understand the terms of a new letting, as liability may be passed to the new tenant.
They should also be mindful of normal market incentives which should be disregarded when calculating dilapidations costs.
For example, if it would be normal market practice to offer a three month rent-free period and the tenant is given six months instead, normally we would only expect the enhanced period, i.e. three months over the usual market incentives, to demonstrate the landlord’s true loss.
The landlord plans to redevelop
Surveyors should always be on the look out for this. It may be that the landlord has already sought planning consent for change of use, requiring adaptations to the building.
So, it is always worthwhile checking the local authority’s website for evidence of a planning application, as this can be a strong guide as to whether the landlord plans to redevelop.
In this instance, it is common that a landlord will complete works that will supersede claim items, meaning that it is pointless for a tenant to complete some works if they will be undone by a landlord. For example, the landlord will suffer no loss if a tenant has not decorated the wall that they are planning to remove anyway.
Redevelopment does not always have to mean change of use. In a high rise office block, for example, the landlord may gradually be refurbishing and upgrading floor plates to meet market demand, maybe by replacing old perimeter heating systems with air conditioning to maximise the footprint of the building.
Sometimes a landlord would have planned to redevelop, even if the entire demise was passed back in good condition. In this situation, we often find that items included in the Schedule of Dilapidations will not affect the building’s value, and therefore should be removed from the claim.
The landlord plans to sell the building
If a landlord plans to sell the building, the dilapidations claim should focus only on items which could affect the sale value. This does not always limit the claim.
If a purpose built office building or industrial unit is sold, the purchaser will often complete repair works before re-letting and the agreed price may reflect this. It is important that contemporaneous evidence is sought to confirm the extent to which a sale price has been reduced as a result of disrepair, as this can help to limit the tenant’s exposure to financial damages.
If this is not available, the landlord may commission a diminution valuation. A diminution valuation demonstrates theoretical loss which a court can use to ascertain the level of damages payable, however this method can be expensive and complicated.
As such, it is likely to be to the landlord’s benefit to be able to produce contemporaneous evidence of diminution in value. The diminution in value applies a statutory cap to dilapidations claims under Section 18(1) of the Landlord and Tenant Act 1927.
If a landlord’s intention for a building is unclear, it is possible to enter into a conditional settlement.
One example of this may be that the settlement is made in the usual way but that, if the landlord redevelops within a set period after the settlement is made, they must reimburse the tenant for some or all of the settlement value.
Alternatively, a tenant may agree to reimburse the landlord for the actual cost of specific works, even if the exact value of completing these works is not known at the time of the agreement.
If the landlord does not complete these works, no settlement will be paid in respect of the non-completed items.
Dilapidations is a specialist area of law and you will want to make sure you have the best representation available, whether as a landlord or tenant. For this reason, you should ensure that your surveyor is a true dilapidations specialist, like our team of specialist dilapidations surveyors at Harrison Clarke.
If you need advice on your dilapidations obligations, taking into consideration your landlord’s plans for the building, our team of surveyors is on hand to provide the advice you need.
How Harrison Clarke can help
Everyone’s circumstances are unique. We have a team of expert and highly experienced dilapidations surveyors who can confidently and knowledgeably negotiate your dilapidations claim, hopefully saving you a substantial amount of money.
If you would like to talk through your dilapidations situation, please get in touch. We would be delighted to help.
We have a range of videos talking through various surveying services, including negotiating dilapidations claims. You can access them via our website or our YouTube channel.
How you can contact Harrison Clarke
Call our friendly, expert and highly qualified surveyors on 023 8155 0051, or email us at email@example.com. We would welcome the opportunity to help with any queries or needs you may have.
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