The Dilapidations Protocol

The ‘Dilapidations Protocol legislation sets out a step by step guide for calculating dilapidations liability that landlords and tenants must follow in negotiations towards finding a settlement before litigating. The goal is to encourage an agreement which benefits both parties.

Although we have done our best to explain the protocol here, keep in mind that it is not your job to understand the minute details. Let us take care of the process for you and enjoy the smoothest experience possible while securing the very best outcome.

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Application

The Dilapidations Protocol applies to dilapidations affecting all commercial properties in England & Wales only. These are generally referred to as ‘terminal dilapidations claims’.

It sets out the conduct courts expect parties to follow prior to commencing proceedings, establishes a reasonable process and timetable for the exchange of information relevant to a dispute, sets standards for the quality and content of Schedules (and Quantified Demands) and, in particular, the conduct of pre-action negotiations.

Summary of Main Provisions

Landlord’s Claim

Generally, a landlord should be serving a Schedule of Dilapidations within 56 days of the lease-end.

There is a standard Excel format which separates claimed breaches into distinct categories of repair, redecoration and reinstatement of tenant’s alterations. It also attaches ‘reasonable’ remedial costings to them.

The chartered building surveyor, responsible for identifying breaches and pricing remedies, must sign an endorsement attached to the Schedule of Dilapidations confirming that:

  • The works claimed are reasonably required to remedy the tenant’s breached lease covenants; and
  • The remedial costings are ‘reasonable’; and
  • Full account has been taken of the landlord’s intentions for the property.
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The Schedule of Dilapidations is sent to the tenant as part of the Quantified Demand, which also details and substantiates any other losses claimed; for example, loss of rent.

The Quantified Demand should not include items which are likely to be ‘superseded’ (destroyed by works the actual or hypothetical landlord would be likely to undertake in any event to alter, modernise, or upgrade the property). This requirement is set by clause 4.6 of the Dilapidations Protocol.

If the landlord’s surveyor prepares the Quantified Demand, the surveyor should also comply with these principles.

The figures set out in the Quantified Demand should be restricted to the landlord’s likely loss. This is not necessarily the same as the Cost of Works to remedy the breaches (clause 4.5), thus acknowledging the likelihood that the impact of the breaches on the property’s freehold value may be less.

Tenant’s Response

Generally, a tenant should respond within 56 days of receiving the Schedule of Dilapidations/Quantified Demand adding comments and costings to the Excel document and similarly signing an endorsement as to the fairness of proposed remedies and costings.

The tenant should also reflect what they reasonably consider to be the hypothetical, or actual, landlord’s intentions.

Negotiations

Clause 7 of the Dilapidations Protocol encourages the parties to meet before the tenant is required to respond to the Quantified Demand and that they should generally meet within 28 days of the tenant sending its Response.

The meetings will be without prejudice, and the parties should seek to agree as many items as possible.

Alternative Dispute Resolution (ADR)

Clause 8 of the Dilapidations Protocol makes it clear that the courts consider litigation a last resort, and so use the threat of a costs sanction to encourage the parties to engage in ADR; mediation is most common for dilapidations.

Industrial Unit with Garden

Quantification of Loss

Prior to issuing proceedings, the landlord should quantify loss by providing the tenant with a detailed breakdown of the issues and consequential damages based on either a formal Diminution Valuation, or an account of the actual expenditure, or a combination of both (paragraph 9.1).

A Diminution Valuation should be prepared by a valuer (chartered valuation surveyor) – paragraph 9.2 of the Dilapidations Protocol.

Where a landlord has not carried out some or all of the works specified in the Schedule of Dilapidations, it should provide a Diminution Valuation (paragraph 9.4). If the tenant relies on a defence based on Diminution in Value, it must provide a Diminution Valuation (paragraph 9.5).

The tenant’s Diminution Valuation will be provided to the Landlord (within a reasonable time), generally being within 56 days of a landlord providing the detailed breakdown of actual expenditure and/or a Diminution Valuation under paragraph 9.1.

Practical Matters Arising

Landlord’s Intentions

If a landlord’s actual intentions might compromise a Dilapidations Claim (e.g. redevelopment or other significant alterations/modernisations and upgrades) they are unlikely to be volunteered. It would be careless, for example, to make a Planning application involving alterations, or even demolition.

The landlord can therefore reasonably be ‘considering all its options’, or indeed ‘intending’ no alterations works, but then choose such a path after the dilapidations are settled.

It is for the former tenant’s chartered valuation surveyor to research and apply both experience and local transactional evidence to illustrate that the property in question is likely to be altered – even demolished – in order to have the greatest value, so making some or all of the claimed dilapidations irrelevant.

Old commercial unit

Summary

The ‘Dilapidations Protocol’ sets out a step by step guide for calculating dilapidations liability that the courts expect landlords and tenants to follow in negotiations towards finding a settlement, prior to litigation.

It makes it clear that the measure of loss is the lower of the Cost of the Remedial Works or the impact (if any) the disrepair has on the property’s freehold value. The Dilapidations Protocol, therefore, refers frequently to Diminution Valuations.

This means that resolution of dilapidations disputes will only be achieved by using the highest calibre of both chartered building surveyors (to identify breaches and price their remedies) and chartered valuation surveyors (to assess to what extent, if any, the breaches impact the property’s freehold value).

We are unique in our provision of both and will turn what can be a disruptive experience with unnecessary costs into a smooth process minimising your expenditures. Get in touch with us today for more information.

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