Dilapidations – Save the Fees of a Valuer! (And Pay Too Much)

Here’s a top tip which illustrates that for business and leisure tenants subject to dilapidations claims, ensuring the settlement sum is minimised requires both the building surveyor and the valuation surveyor. That avoiding the expense of the valuation surveyor’s input is a false economy.

The building surveyor’s expertise is in negotiating whether claimed breaches of lease covenants to repair, redecorate and reinstate alterations are accurate and then the methods/costs to remedy. It is the specialist valuer’s distinct expertise in performing the so-called Section 18, or Diminution Valuation (DV), to know the open market for the property in question and to, therefore, best judge what a prospective purchaser of it would most likely do to optimise its value going forwards.

If only the building surveyor is involved, that open market knowledge is missing. Whilst the most skilled building surveyor will negotiate down to the lowest total cost to remedy all the breaches, this will likely include many significant sums that the specialist valuer could have removed. This especially hinges on what the valuer knows and can articulate to be the difference between the so-called “standard” of repair required legally (judicially) and the standard required in the open market.

• The judicial standard of repair: The tenant is obliged to return the property in good (not “as new”) condition, including the M&E in satisfactory working order, but not with new equipment or any particular life expectancy. The required condition at law is that which fits with the age, character and locality of the property in question. “Good” repair does not require “perfect” repair or updating/modernising.
• The open market standard: Commonly, even if a property was handed back in perfect compliance with the lease covenants, it would be out-of-date in terms of look, fittings and M&E. So that even if key elements are “in repair” to the judicial standard – or could be put into that state of repair – that “standard” would not be good enough to optimise value in the open market.

This gap between the judicial standard and the open market standard is often missed altogether or misunderstood. If items – especially key and expensive – are likely to be replaced with new (superseded) in order to update and future-proof, the position at law (per Sunlife Europe Properties Ltd -v- Tiger Aspect Holdings Ltd [2014] 1 EGLR 30) is that the tenant is effectively off the hook. There is no liability to pay a “contribution” equivalent to the repair cost if it is probable that the hypothetical purchaser of the property at the lease end would have replaced with new, even if “in repair” to the standard required judicially.

This commonly applies to very big-ticket items such as suspended ceilings through offices, M&E (HVAC), double-glazed windows and dock levellers, to name but a few examples.

Too often, landlords secure excessive dilapidations settlements because their outgoing tenants instruct the required building surveyor but save the fee of their equally valuable teammate, the valuation surveyor.

If you have any questions in relation to the above or require advice in relation to a dilapidations claim, please contact paul@dilapsolutions.com.