How to Read a Dilapidations Schedule
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What are dilapidations?
To most tenants/leaseholders/businessmen the first time they are interested in dilapidations is when they have a dilapidations schedule served upon them. They normally seek guidance from a solicitor on the matter, who explains to them that the dilapidations schedule is a list of items the landlord considers aren't in the condition as set out within the lease. They usually specifically related to:
- Repair requirements
- Redecoration requirement
- Reinstatement requirement
- Statutory compliance
- Yielding up
Types of dilapidation schedule
There are two types of dilapidation schedule:
This is served during the course of the lease. Known as an interim dilapidation, it can often be used be used by the landlord to make the tenant aware that he is not complying with his lease obligations (in the landlord's eyes of course). It can also be used in what we term as tactically by the landlord to help with rent reviews and lease renewals, by showing the tenant just how much cost he would incur if he was, for example, to take the option of ending the lease.
This is one served, as the name indicates, at the termination/end of the lease and is as certain as death and taxes that the landlord will serve one, but nevertheless, in our experience, it comes as a complete surprise to the tenants. In both cases they should be set out in a similar format following the RICS (Royal Institution of Chartered Surveyors) Guidance Notes.
The format of a schedule of dilapidations
First of all let us offer you the definition given within the Royal Institution of Chartered Surveyors Guidance Notes. A schedule of dilapidation records the work required to be done to a property in order that they are put into a physical state the property should have been put in if the tenant had complied with its covenants or obligations contained within the lease of the property.
Carrying on with the guidance notes, it states that the claim of schedule should include the following:
- A reference to the specific clause under which the obligation arises.
- The breach
- Remedy works suggested by the landlord's surveyor
- Suitable remedy for the breach compliance
- Landlord's view of the cost
The landlord's surveyor should offer a list, which gives a fair reflection of the requirements of the lease, with a fair view of the remedy and also the costs.
Note the term fair view. This has been reiterated by the property litigation associations pre-action protocol for claims for damages in relation to the physical state of commercial properties at the termination of a tenancy (the dilapidations protocol), which has now been amended several times and is the subject of a separate article, where we have set out the aims of this document, which is to increase the number of pre-action settlements, i.e. those that don't go to court by setting out reasonable timescales for the surveyors to operate within and standards and ways of exchanged information, together with preventing exaggerated claims.
Take a second look at the schedule of dilapidations
However, sometimes (although less so these days) we come across surveyors that have their own format (or is it that they don't understand the dilapidations format) and have been carrying out these for many years and simply have not changed or read the new guidance notes. Many don't refer to the specific clause the obligation arises under, often this is because they haven't seen a copy of the lease and do a coverall schedule of dilapidations. Be very careful that you don't end up carrying out the work, even though it isn't within the lease.
This reads very much like a specification of work required and we have seen this ranging, depending upon the surveyor, from very detailed, such as replace three tiles on the north elevation, to very vague, such as overhaul the damaged tiles on the roof. The latter, of course, will need further clarification and the former checking.
Remedial works suggested by the landlord's surveyors
This can look like a specification of work, but remember it's the landlord's surveyors recommended work and isn't necessarily how you (as the leaseholder or the tenant) may wish to resolve the problem. We have seen some schedules where the remedial works required has been left blank so that the tenant's surveyor can make a decision, but in most cases today we see remedial work required. Following on from the earlier example, the requirement may be such as provide suitable access (scaffolding) and replace two Marley tiles on the north elevation, or it could be more performance based and, for example, ensure that the roof is watertight.
Landlords costs always need to be looked at closely. There are many ways to cost small works, these can range from estimating the number of tradesmen and labour days and then adding materials, together with overheads and profit margin, that can be a finger in the air estimate. It can be a costing as if each item has been carried out individually when, for example, the scaffolding required to repair the roof could also be used to clean the cladding and redecorate off of.
Whilst we are talking about costs let's mention carrying out dilapidations work on day work rates. Day work can be quite a dangerous way to carry out dilapidations work, but first of all let me explain what day work rates are; these are rates where you literally pay the tradesman by the day. The argument for it is that it is fairer to the tradesman; a good tradesman will still carry on working at a reasonable rate. The argument against it is that the tradesman has no incentive to finish the work quickly, as he will literally be paid for the days that he is working. In our experience, using day work rates on dilapidations work can be a problem as most builders don't understand the requirements and the standard of work needed is that set out within the lease, not necessarily that with which they are used to carry out the work. A good example of this would be repainting of walls, where there is only the requirement to repaint walls that have previously been painted, which may mean you literally paint one wall of four, which can look strange. If you have builders working on a day work rate you may find that they will simply paint all the walls, which of course is the last thing you want. A good way round this is to negotiate with the landlord's surveyor at the time of agreeing the work that it would look strange with only one wall painted and do they want to pay for the remaining walls?
So what does a surveyor do on a dilapidations claim?
First of all they will look at the breach and check the clause is correct, as mentioned often the landlord's surveyor hasn't actually seen the lease. Secondly they will check that a breach has actually been made. In today's world of word processors and digital dictation we have found old sections that have been wrongly cut and pasted from other reports. Thirdly they will look at the remedial work and see if they consider it to be the best way to carry out the work to meet the obligations within the lease. Finally, they will cost the work.
Step back and have a Section 18 Valuation view
We would then expect the surveyor to step back and have a section 18 view of the dilapidations claim, i.e. does it exceed the diminution in value? This is the value between the property as it is and as it would be if the work was carried out. If it is there is the potential for the work to be capped at this value and consideration needs to be given. We would recommend any leaseholder / tenant has a look at the items above and forms their own view, as this will help the surveyors considerably from defending the dilapidations claim.