How to Deal With Terminal Dilapidations

The lease is likely to include provisions relating to repair, decoration, yielding up and reinstatement (for example, where the tenant has carried out alterations during the course of the lease and the landlord requires the property to be put back to how it was at the grant of the lease).

These provisions will also dictate the standard of repair, which can sometimes be onerous.

Some leases require a tenant to repair the premises, even if they were not repaired at the commencement of the lease.

Other leases will annex a schedule of conditions, which evidences the state of the premises at the start of the lease – the lease will only require the tenant to keep it in that condition.

A dilapidations claim is limited to repairs of the area demised to the tenant. The landlord cannot include a claim in relation to areas outside of the demise (such as common parts).

The landlord may suffer losses if the tenant has failed to comply with their repair obligations.

These may be costs the landlord is forced to incur in repairing the property or rent lost where the landlord cannot immediately re-let the property due to the condition in which it was left.

These losses crystallise on the expiry of the lease, at which point the landlord has a damages claim against the tenant.

However, that claim is limited by the provisions in s.18 of the Landlord and Tenant Act 1927. This provides that:

• Where the value of the landlord's interest has been reduced due to the tenant's breach, the landlord's claim will be limited to that loss in value (known as the 'diminution in value'). Effectively, the landlord's claim is limited to either the cost of the repairs or the diminution in value of the property due to the repairs.
  • To calculate the "diminution in value", a valuation surveyor must complete two hypothetical valuations:
    • Valuation 1: The Valuer assumes an auction sale of the property in repair – they identify who will pay the most and the amount the bidder will pay for the property in repair.
    • Valuation 2: The Valuer assumes an auction sale of the property in disrepair in which the tenant has left the property and identifies what a bidder would be prepared to pay for the property in that disrepair
  • The difference between these two values is the diminution in the value for which the tenant is responsible.
  • In a recent case that we have dealt with on behalf of a tenant, the landlord sold its interest in the property during the dilapidation negotiations.
  • We could adduce evidence that the sale was at market value, and as such, the landlord had not suffered any loss because of the tenant's breach of the repairing obligations.
• The second limb protects a Tenant where the landlord proposes substantially altering or demolishing the premises. Suppose the landlord intends to do work on the property, which would make any repair work undertaken by the tenant a complete waste. In that case, the landlord cannot recover damages for that disrepair.