At the end of a commercial lease term, a landlord will want to consider any potential claim that they may have against the tenant for the tenant's breach of the provisions relating to repair, decoration and reinstatement.
Landlords should be aware of timing issues in enforcing dilapidations claims. These could be:
- Contractual: for example, where the lease states that a tenant is only required to reinstate if the landlord gives notice in a prescribed amount of time. Some leases also state that the costs of preparing and serving the schedule are only recoverable if the schedule is served within a certain number of months after the end of the term.
- Procedural: for example, the timetable prescribed by the Pre-Action Protocol for claims for damages in relation to the physical state of commercial property at termination of a tenancy (as set out in the Civil Procedure Rules).
The Protocol is intended to improve pre-action communication between the landlord and tenant by setting a timetable for the exchange of relevant information.
It also sets the standard for the content of dilapidations schedules and enables the parties to make an informed early judgment as the merits of their position before proceedings are issued.
The parties' obligations under the Protocol can be summarised as follows:
Stage 1 – Landlord sends schedule of dilapidations
- This should take place within 56 days after the termination of the tenancy.
- If possible, the schedule should be in Scott schedule format and by hard and electronic copy.
- The schedule should set out the relevant clauses in the lease, the breaches, the remedial works required and the landlord's costs.
- The schedule should also contain an endorsement that all the specified works are reasonably required to remedy the breaches, full account has been taken of the landlord's intentions for the property, and the costings (if any) are reasonable.
Stage 2 – Landlord sends Quantified Demand ("QD") (this is often combined with Stage 1)
- This should be sent within 56 days after the termination of the tenancy.
- It sets out the monetary sums sought – being the landlord's likely loss (which will not necessarily be the cost of the remedial works).
- The QD should also exclude works superseded by the landlord's intentions for the property.
- The landlord/surveyor should confirm that they will attend a meeting to discuss the schedule and state a deadline for the tenant to respond. This is usually within 56 days of the service of the QD.
- If the landlord claims a monetary sum, this should be evidenced by invoices or a detailed estimate of the works in the schedule.
- The legal basis, by reference to the provisions in the lease, should also be stated.
Stage 3 – Tenant sends tenant's response
- The tenant's response should usually be within 56 days of service of the schedule.
- The tenant should use the landlord's schedule to respond and detail their position on each item and whether they consider that any items will be superseded.
- The response should endorse the necessity of the works to comply with the lease terms, the reasonable costs associated with the works, and the tenant's consideration of their beliefs about the landlord's property intentions.
Stage 4 – Negotiations
- The Protocol provides that the parties should meet both before the tenant's response and 28 days after it.
- Those meetings should be on a without prejudice basis, but the parties should aim to give full disclosure of evidence assisting or hindering their case. If disclosure is not provided, a party may need to consider making an application to Court for pre-action disclosure.
Stage 5 – Landlord sends Quantification of Loss ("QoL"), and tenant may send a response to QofL
- The QoL is a detailed breakdown of the issues and consequential losses by account of expenditure and a formal diminution valuation. The valuation must be provided unless it is unreasonable to do so.
- If the tenant relies on a defence based on diminution in value, the tenant must provide a response in the form of a diminution valuation within 56 days of the landlord's QoL.
Stage 6 - Stocktake
- The parties should review their positions and all documentation and evidence with a view to narrowing the issues to see if proceedings can be avoided.
Stage 7 – Court proceedings
- If the parties cannot resolve their differences, the landlord can issue Court proceedings to recover damages for the losses suffered.
- However, the Protocol makes it clear that the parties need to consider ADR at every stage and be able to disclose evidence of this consideration to the Court.
In summary, the Protocol and the Civil Procedure Rules set out a clear process that the Courts expect parties to follow before proceedings are issued.
Whilst the Protocol is not mandatory, the Court will examine the reasons for any failure to comply with it and use its discretion to make an adverse costs order where appropriate against the party which does not comply.
It is, therefore, within the parties' interests to ensure compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.