Dilapidations: the pitfalls

Before the recession hit in 2008, landlords would often settle their dilapidations claims for a nominal amount because their new tenants were willing to accept full repairing and insuring leases, at market rent, irrespective of the state of the premises. When the crash came, tenants very quickly became few and far between. Many landlords were suddenly facing the prospect of a lengthy void period, meaning no income and various liabilities. They had to get money from somewhere. 

Dilapidations was an obvious source. Landlords started enforcing their dilapidations claims to their full extent. Outgoing tenants, accustomed to quick and cheap dilapidations settlements, had little or no money put aside to meet this liability and so they started to defend the claims just as hard as they were pursued. This has led to a significant number of cases on dilapidations in the last nine years and, more importantly, an attitude change towards dilapidations claims in Scotland. 

What to look out for

From this litigation, and practical experience, these are some of the pitfalls that any lawyer instructed to serve a schedule of dilapidations should be aware of:

• Always check all relevant lease documents.
• In particular, check any licences for works as they often contain provisions relative to removal of a tenant’s fit-out, which may not be in the lease.  
• Is there a deadline in the lease by which you need to give the tenant notice to remove alterations? If you miss it, the tenant can leave its alterations in place. That can substantially reduce a landlord’s claim.
• If the letter serving the schedule is also to constitute notice to the tenant that it is required to remove its alterations and additions, make sure that is clearly stated.  
• To be valid, it is likely that any such notice must follow the notice clause in the lease and/or any specific terms that may be contained in a licence for works, lease or other lease document. 
• If you are relying on a licence for works, understand whether the terms of the lease are incorporated into it. 
• All the usual checks you carry out for other notices under a lease should be carried out before serving a dilapidations notice. Make sure the notice is served on the correct party in accordance with the notice of provision under the lease or related document. Don’t serve the schedule on an agent or other party that is not the tenant under the lease, unless the lease so instructs you. 
• Check the lease to see whether it contains a payment obligation. Payment obligations oblige the tenant to pay a sum of money for dilapidations. They effectively change the landlord’s damages claim into a payment obligation, should the tenant fail to carry out its repairing obligations. This can benefit the landlord because the extent of the landlord’s loss does not dictate the size of the payment. A payment obligation can therefore often bring a sizeable windfall to a landlord. 
• Often payment demand notices need to be served at the expiry of the lease. If you serve your payment demand too long after lease expiry, it is unlikely to be effective. 
• Again, the notice provisions of the lease and/or related documents should be followed for a payment obligation.
• Be clear with your client about whether or not you are checking the surveyor’s schedule of dilapidations, or simply serving it. 

Clients and building surveyors now often ask their lawyers to serve schedules of dilapidations because of all of these risks. It is therefore important that you are aware of them and take the steps necessary to serve valid notices.