Terminal Schedules of Dilapidations
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Terminal dilapidations, as certain as death and taxes
Terminal schedules of dilapidations are as certain as death and taxes. They offer for the landlord the opportunity to ensure he gets his investment property back in the conditions as set out within the lease, which should mean that it is in a marketable and lettable condition (assuming that the market hasn't changed too much since it was originally let). For the tenant the terminal schedule of dilaps always comes as a surprise and generally has not been budgeted for. We have found this both with larger and small companies and if it is has been budgeted for it has generally been budgeted without obtain any specialist advice from a surveyor on the dilapidations likely cost and has been an accountant putting their finger in the air and guesstimating.
Take the terminal dilapidations schedule seriously
When a landlord serves a terminal dilapidation he is usually very serious about enforcing the clauses/covenants within the lease. He will nearly always have sought specialist advice from a building surveyor. The building surveyor will have followed the guidance notes within the RICS (Royal Institution of Chartered Surveyors), or we should say usually will do, and should also be aware of the Property Litigation Association's protocol, or pre-action claims guidance. This is somewhat different to years gone by when, what would best be described as, exaggerated claims were often made with dilapidations cases. There are now in theory heavy penalties in place for this in relation to not making every effort possible to agree a settlement. The Property Litigation Association's protocol has been set up to try and ensure that everything possible is done to ensure a settlement is agreed before court proceedings take place (and indeed we are advised there seem to have been a reduction in the number of court proceedings on terminal schedules of dilapidations).
The covenants that affect you within a terminal schedule of dilapidations
These can broadly be broken down into:
the repairing covenant
the decoration covenant
the reinstatement covenant
the statutory compliance covenant
Within these sections of the lease the main covenants will be set out and there may also additionally be a yielding up covenant, which requires items over and above those set out within the covenants mentioned already. You need specialist advice to ensure you are correctly serving, as the landlord, the terminal schedule of dilapidations, or equally, correctly negotiating the terminal schedule of dilapidations if you are the tenant.
What does a terminal schedule of condition look like?
A few points to remember for the tenant. This is the landlord's view of the breach and may not stand up in court. The Property Litigation Association have been concerned in the past with exaggerations from the landlord that there is now a pre-action protocol in place with heavy penalties for those that exaggerate and also the remedy that the landlord's surveyor recommends is not necessarily what you have to do it is his interpretation of what should be done to remedy a breach.
As mentioned, these terminal dilapidations can be used tactically with both the landlord and the tenant aware that it is unlikely to ever go to court, however it just could? Therefore everything has to be carried out as if it will go to court. If a terminal dilapidations is served upon you it is worth having a specialist commercial surveyor inspect the dilapidations and advise upon what your true repairing liability is likely to be in their eyes. This may give you a completely different to the landlord's view.
This is a recommended format that is used. The terminal schedules of dilaps not only needs to take into consideration the covenants mentioned, but it may also need to consider the side letters and agreements that have been made between the leaseholder and the tenant, approved alterations and unapproved alterations, but it certainly doesn't need to take into consideration informal agreements between the landlord and the tenant, or what has occurred in other units. We make this last comment because a recent case we were dealing with felt that the landlord had set a precedent with the way he had dealt with the terminal dilapidations schedules within other premises and when the landlord appointed a new surveyor (possibly unhappy with the way the old surveyor had dealt with their terminal dilapidations claims) the new surveyor interpreted the lease correctly and fully, which mean that our client, The tenant, had to carry out more work than adjoining neighbours had done in the past, but still the work as required within the lease agreement. There certainly had not been a precedent set by the landlord by the way he had dealt with other tenants.
What will a specialist surveyor do for me as a landlord?
Where a terminal schedule of condition is to be served a surveyor will prepare the terminal schedule of condition to the RICS guidelines and the pre-action protocol. The second point is very important as exaggerated claims in the past, that perhaps have been the friend of the landlord in the negotiations, i.e. over-exaggeration of the initial claim resulting in the tenant either settling with a monetary sum or carrying out repairs that he doesn't necessarily have to under the terms of the lease, are no longer sustainable when a terminal schedule of dilapidations gets to court, as the protocol quite clearly states that exaggerations or excessive claims would not be treated lightly and although, for example, a landlord may win the terminal schedule of dilaps the court may then penalise them for the exaggerated claim that has resulted in the case going to court, when a settlement could have been made outside of the court.
Nevertheless, we would have to say that for some surveyors who are stuck in their ways and landlords seem to be taking far longer than expected to understand the concept and astute tenant's surveyors recognising the negotiation leverage an ill-informed terminal schedule of dilapidations gives to the tenant, particularly when combined with the possibility of a Section 18 valuation.
What does a surveyor do for me when a terminal schedule of dilapidations is served on me as a tenant?
Once they have gathered all the information, and commented that you would be in a far better position if you had had a schedule of condition, (please see the next section of this report) we would gather all information that's available (all that the tenant can find) and check that the terminal schedule of dilapidations has been served correctly by the landlord's surveyor. As mentioned, the claim may be exaggerated or over optimistic, or just served incorrectly.
We are aware of more than one surveyor, for example, who always carry out their terminal schedules of dilapidations prior to seeing the lease and then remove any items they don't feel fit when they read the lease. This can work very well in many cases, as most leases are full repairing and insuring and have been written in a watertight manner by the landlord, but it can also lead to clauses being left in that should be struck out, by accident or design.
The first thing your commercial surveyor does is check that the correct items are in the dilapidations schedule. Secondly, they will check that the remedy recommended is appropriate. By this we mean the landlord's surveyor is working for the landlord and therefore looking to serve his interests in the best way possible and, finally, the surveyor looks at costs and sees if they are appropriate. We feel he should also step back and take an overview of the situation, once he has established that the breaches are correct, or amended them to make them correct, the remedies are realistic and the costs are appropriate. He should then be taking a business view to establish whether a Section 18 valuation is beneficial in this instance and what business risk with taking this route would mean. He then needs to clearly communicate this to the tenant. Before we go any further let us explain what a Section 18 valuation is.
Section 18 Valuation
This is the difference between the value of the condition of the property that it is in compared with that which it should be within the lease requirements. The value relates to the lettability of the property.
What can a commercial surveyor do for a tenant on terminal dilapidations?
The overview / business risk view that the surveyor needs to give to the tenant and understand fully the responsibility of his comments, is would it be more viable to carry out the requirements of the lease work or to have Section 18 valuation, as this may be cheaper, or to agree a monetary settlement, as this may be cost effective when time is taken into consideration and of course is a one off final settlement (but equally is what many landlords are looking for).
Schedule of Condition
Unless the tenant has a schedule of condition, in which case the standard of repair/reinstatement may be that set out within the schedule of condition. Just to clarify, a schedule of condition is a schedule identifying the condition of the property at the time the lease was taken on and is usually only appended to the lease where it is accepted by the landlord that this is the condition the property will return in.
We have produced a number of articles and book reviews on dilapidations, for more information go to:
Information on Dilapidations
If you need help and advice with regard to leases, dilapidations, schedules of condition, dilaps claims, Scotts Schedules or any other matters please call 0800 298 5424 for a friendly chat. Please note we are independent surveyors. If you would like Dilaps Help then please visit our www.DilapsHelp.com website and for Disputes go to our Disputes Help site www.DisputesHelp.com .
We hope you found the article of use and if you have any experiences that you feel should be added to this article that would benefit others, or you feel that some of the information that we have put is wrong then please do not hesitate to contact us (we are only human).
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