Dilapidations The Negotiation
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Dilapidations an example
We thought an example of a dilapidations negotiation would be a good way to explain the dilapidations process.
The leaseholder, having spent ten years in the leasehold property building their business are in the nice position of being able to buy a new commercial property freehold, this having many benefits with one of the main ones being that they no longer have to pay rent.
Having had what they describe as a good relationship with the landlord over the years they duly gave notice and were surprised when a dilapidations notice was served upon them, particularly bearing in mind the poor condition they originally took the property on in. They initially started to talk with their landlord but he referred them in letter (previously he had been willing to talk over the phone) to the surveyor dilapidation specialist who was dealing with his claim. Further phone calls were made, almost in disbelief that the landlord would no longer talk to the leaseholder. The response was repeated, only this time from the landlord's solicitor.
Meeting the landlord's surveyor to discuss the dilapidations
The owners decided therefore to meet with the landlord's surveyor and discuss the long list of work requirements in the terminal dilapidations schedule. They duly met and described how the property was when they took it on and all the improvements that they have carried out over the years and explained how they thought it was very unfair that all these repair requirements should be necessary.
Have you got a Schedule of Condition and does it form part of the Lease?
The landlord's surveyor, taking note of their comments and having no reason to disbelieve them, asked if they had a schedule of condition carried out when they took on the property, to which they advised what is a schedule of condition? The landlord's surveyor advised that it is a document that records what the property looks like when the lease is signed and is duly agreed by the leaseholder and is usually prepared by an independent surveyor. The leaseholder advised that he didn't even know what a schedule of condition was let alone had one carried out. He did have some old photos of when they took over the property, would these help?
The landlord's surveyor double checks the lease
The landlord's surveyor referred back to the lease document and noted that covenants (the rules and regulations and laws by which the lease agreement is formed) advised that, repair wise, the lease was what was known as a put and keep lease, which means that the property has to be put and kept in good order. This is regardless of the condition it was originally taken in. In addition to this the surveyor also advised that there was a redecoration covenant that required the entirety of the property to be redecorated at the end of the lease and there was also a reinstatement covenant which required the leaseholder to put the property back into its original state. This last requirement particularly annoyed the leaseholder as he had made what he felt to be excellent improvements to the property, such as adding to the original basic shell, which consisted of a warehouse space, male and female toilets, he had added an office and in one of the units he had actually put in a mezzanine floor at great expense. Surely the next people leasing the property would like these things to stay?
Reinstatement clause/covenant within the lease
The surveyor repeated that there was a reinstatement clause requiring the leasehold units to be reinstated to the configuration they were originally leased in, but he would nevertheless ask the landlord.
The landlord wants the property reinstated back to its original configuration. Why?
A written response was given via the surveyor following the meeting advising that he felt the dilapidations schedule was a fair reflection of the repair requirements and that there was no schedule of condition agreed when the property was taken on, therefore the lease clauses stood, that the property had to be put and kept to a good standard.
Furthermore, he advised that he had re-read the reinstatement covenant and confirmed that his thoughts at the meeting were correct. He had taken these to the landlord, who had advised that he wished the leaseholder to return the units to their original configuration.
If the leaseholder had got a response to his question of why does he want the units reinstating then the landlord would have probably said that most alterations that are carried out by leaseholders are specific to their business and, whilst the alterations may be of use to future tenants, property is much more marketable to a wider audience of potential customers (or in this case the three units) in their original configuration and it's the landlord that has to let them and if he was, for example, to leave the mezzanine floor and office in place when he let it to the new tenants they would only have to return the property to the condition they originally took it in, i.e. with a mezzanine floor. If there were any problems at a future date with the mezzanine floor, e.g. the loading that it could take, and a problem occurred then the landlord would be liable. There is no way of knowing the quality of the original work.
So, for this reason, he would like the property reinstating to its original configuration. Unfortunately for our leaseholder the answer he got was simply that the properties had to be reinstated back to their original configuration.
I've found my pictures of what the property looked like on day one, won't this do instead of a schedule of condition?
Two points here to comment on:
1) the lease does not allow the agreement of a schedule of condition, in this particular case and,
2) even if it did and hadn't had a schedule of condition carried out, a set of old photos are exactly that; a set of old photos, with no specific date on them.
Usually, as they have not been taken for a specific purpose of recording the condition of the property, details can only be seen in the background. So in answer, the photos are not acceptable.
Is a side letter acceptable to defer a dilapidations claim?
The leaseholder was so infuriated by the unfair way he felt he was being dealt with that he managed to find all the paperwork concerned with the original lease. Part of this was a side letter that had been produced by the solicitors at the time, saying that the cracking in the property would be excluded from the leaseholders responsibility. The landlord's surveyors response was that he had not seen such a letter, could he have a copy? This was duly provided.
It's not the information you have relating to the dilapidations claim, it's what you do with it that is important, like poker playing
The surveyor duly wrote dismissing the letter, saying that the repair work that is required within the schedule of dilapidations was covered under the lease requirements and therefore the work had to be carried out.
Dilapidations claim the tipping point or turning point
At this stage the leaseholder bumped into us. We were carrying out a commercial structural survey for the commercial property that he was buying and he advised us of the various problems and issues that he thought he was having with the dilapidations schedule and could we explain a bit more about how this worked? We agreed to have a meeting with him and provide a summary information pack including everything you need to know about dilapidations, which in a line is appoint a specialist surveyor and solicitor, and also recommendations of how he should proceed.
Our brief resume of the leaseholders position got an almost instant response, saying that he would like our help as he wished to focus his attention on taking his business forward in the new property rather than going backwards and talking about the old property. We advised we'd inspect the documentation available and provide a report and then have a meeting as time was of the essence.
In a dilapidations claim time is often of the essence
In this particular case it was very true as if the dilapidations work was not carried out satisfactorily or to an agreed standard and this was upheld in court, then the landlord was entitled to recoveries and losses of the rent, amongst other things. This fact horrified the leaseholder and helped him focus his attention.
Overview recommendations for a dilapidations claim
We sent a list out of information that we required to help the leaseholder. He responded with copies of the lease and copies of correspondence that they had had with the landlord, although much of it they advised was verbal, as they had until this stage, got on very well with the landlord. They also found a copy of the side letter identifying the cracking and excluding it from the lease and photos of how the property originally was when they took it over and also a copy of the schedule of dilapidations.
Vagueness is the friend of the leaseholder when a dilapidations claim is made!
To summarise, the negative points were that the leaseholder had not had a schedule of condition provided at the time they took on the property and appended to the lease. The thing against the leaseholder was that the landlord understood what a dilapidations claim was and had appointed a specialist to work on his behalf, but the thing the leaseholder had in his favour was the vagueness of the side letter that had been attached to the original lease. In this instance vagueness can be a great friend to the leaseholder as, whilst the side letter related to the cracks that were there some ten years ago, there was no specific record as to which walls they were in, the size of them, etc. So the cracks that were visible within the walls could all have originally been there when the lease was taken on and, indeed, we would always argue that it is up to the landlord's surveyor to prove otherwise, or they should be excluded from the lease. This brought a smile to the face of the leaseholder who advised, so does that mean that we don't have to carry out the work relating to the cracks? and he was correct. This reduced the bill of the dilapidations considerably. We advised the leaseholder it was still subject to negotiation, as is everything with a dilapidations notice.
Dilapidations is always subject to negotiation, particularly due to Section 18 valuations
Next we looked at the schedule of dilapidations, which was very detailed and harsh, and erred, of course, on the landlord's surveyor's side. We say of course, although this used to be common practice. In recent times the courts have taken a very dim view of dilapidations claims where the landlord throws literally at the leaseholder expecting him to negotiate a little off, but the landlord still to win and the leaseholder not to go to court due to the costs. Therefore the government introduced the Civil Procedure Rules (the CPR) in April 1999, which in turn had an impact on how civil litigation is conducted in the course of England and Wales . The whole tone of the Civil Procedure Rules is to encourage parties in dispute to put all their cards on the table (ahead of the proceedings even being issued) to take any path available to them to settle the case without the necessity of a trial and any parties seen to put forward anything other than this, such as an exaggerated claim, will not be looked on kindly by the courts. In this case, from what we could see, the dilapidations claim was heavy and in breach of the Civil Procedure Rules as well as the Royal Institution of Chartered Surveyors protocol.
There are other factors with regard to the dilapidations claim that didn't meet the protocol as well; such as the surveyor not listing the clause that he felt had been broken. There is also the important section 18 valuation. We have covered this in depth in another article, but to summarise this states that the sum total of the dilapidations claim cannot exceed the difference between the diminution in value. Diminution value is the difference between the open market value of the leasehold property and the market value in its current state. Effectively this caps any claim. So, we did some calculations and soon found that the dilapidations claim far exceeded the diminution in value. Effectively the maximum claim was capped by the difference in value.
Almost anything can be used in negotiations.
The photos that have been taken during the opening weeks (apart from showing the leaseholder in his younger days) showed that the walls had been marked and covered with spray cans prior to them coming into the property. They also showed old wooden shutter doors that he had had replaced with metal shutter doors, and the general condition.
We commented in our summary that it was worth testing the water with the landlord's surveyor if he was prepared to negotiate, for example on the decoration, where if we painted the walls that were originally painted, as required under the dilapidations redecoration covenant, and left the graffiti covered walls (for want of a better term) these would stand out. Would he trade us painting those walls (easy enough to do when the painter is on-site with his sleeves rolled up) with some other item? It was certainly worth exploring the possibilities.
A meeting between the landlord's surveyor and the leaseholder's surveyor
Duly armed, we met the landlord's surveyor and, whilst having a pleasant enough meeting, it soon became clear that, in his mind, everything had to be as per the lease and that he had had a limited brief from the landlord and had to take further advice on nearly every item, as he didn't have the authority to agree anything specifically. However, he did speak off the record advising that he didn't think the landlord would adjust the claim.
The tactics of dilapidations
We therefore decided to carry out the work to make the properties into a leaseable standard. Fortunately we had good examples of this in nearby units, who were friendly with the owner of this unit, having known them for years, who had recently both leased out some of the units and taken leases on some of the units and so we were able to see the standard of which they were let at. It was felt that, with relatively little work compared to the dilapidations claim, we would be able to bring up these units to a similar standard.
So the decision was made, after a meeting between the leaseholder and the specialist dilapidations surveyor, to carry out work without the agreement of the landlord's surveyor to bring the properties up to a good standard, bearing very much in mind the Section 18 valuation. The landlord's surveyor's reaction was do you want to negotiate a financial settlement?
Dilapidations: is a financial settlement the ultimate aim of most landlords?
In our experience, most landlords wish to have their cake and eat it, so to speak. They would like to have their rental property in as near new condition as possible, and also have a financial settlement from the outgoing tenant/leaseholder, and in many cases they get it to where the leaseholder doesn't understand what is going on. The way this works is the present leaseholder wants to get out of the lease as quickly as possible and doesn't have the time or the wherewithal to carry out the building and repair works recommended in the schedule, or simply needs to move on. A schedule adds up to, say a sum of £200,000, and, without looking in too much detail at the document, the leaseholder thinks £100,000 will be acceptable. Various negotiations go on and £150,000 is agreed. The leaseholder is happy as he feels he has saved £50,000 and the landlord is happy as he has a cash lump sum and the work may only cost him £100,000 to carry out, if he carries it out at all.
This is very much a double edged sword because it is usual for a landlord to lease out as quickly as possible and for the new incoming lessee to carry out work to the property to bring it up to the standard or to configure it to how it works best for him. So this is the beautiful situation for the landlord where they can end up having a sum of money from the last leaseholder and also all the repair work carried out by the new leaseholder. This for the landlord is very good business!
What sort of money are we talking about for a dilapidations claim?
In this example, for a 2000 metre squared warehouse, originally consisting of the workspace and a male and female toilet, in a 1970's structure, dilapidations came to nearly £100,000 in each of the three properties. This far exceeded the diminution in value (we recommend that you read this section above again, as this is very important), which was more like £50,000 and we felt we could get the units into a very lettable state, very quickly and easily for £30,000. So the initial claim of £100,000 has worked out as £30,000, plus of course the fees of the independent surveyor that had given advice.
Should we say any more?