Dilapidations – How Are Damages Assessed?

Most commercial leases include obligations in relation to repair, decoration and yielding up at the end of the lease.

Where a tenant is in breach of those obligations, the landlord will seek to bring a claim against the tenant for the losses which it suffers as a result of those breaches.

However, the assessment of those damages is often complicated, particularly where a landlord has planned significant changes to the property.

In today’s market, such changes are becoming increasingly common, as landlords are required to adapt work and retail spaces for changing tenants’ needs.

In this property litigation blog, we look at the common law assessment of damages and the limitations on landlords’ claims imposed by statute.

Section 18 is split into two limbs.

Section 18(2) is the “subjective” limb and deals with supersession.

If the landlord intends to do works to the property which would make any repair works undertaken by the tenant a complete waste, the landlord cannot recover damages for that disrepair.

The onus is on the tenant to show that the landlord has a firm intention at the end date to undertake the works and that those works will render any repair works on the part of the tenant futile.

Landlords should therefore be careful that board minutes record that they are only considering redevelopment – and not that they have firm plans/a clearly formed decision to undertake these works. Minutes recording a decision would potentially limit a dilapidations claim.

Section 18(1) is the “objective” limb and puts a cap on the damages the landlord can recover.

This limb caps the landlord’s claim to:

1. The costs of the repairs; or
2. The diminution in value of the property as a result of the disrepair.

Landlords should bear in mind that s.18 applies to terminal dilapidations.

Therefore, they should consider undertaking significant works (such as those to the roof) before the term end date as part of interim dilapidations claims to avoid the s.18 cap on expiry of the term of the lease.

Often dilapidations negotiations become protracted because a tenant has not made sufficient provisions in their accounts for the liability.

By producing a schedule of dilapidations in advance and starting discussions early, landlords stand a better chance of tenants making that provision – therefore increasing recovery.

Both landlords and tenants must obtain professional advice during the term of the lease to ascertain the best way to deal with disrepair.