Dilapidations: how much can landlords recover in damages at the end of a lease?

When commercial leases end, disputes often arise about the condition in which the tenant has left the property. These disputes are often centred around claims for dilapidations. Simply put, dilapidations cover damage or disrepair that a tenant should have addressed before leaving the property. Landlords may be entitled to claim damages from the tenant to get the property back into a leasable state. However, the amount they can recover is not unlimited.

Two main rules govern how much a landlord can claim:

• The general legal rules (common law) for assessing damage; and
• A legal limit, ‘the statutory cap’, set out in Section 18 of the Landlord and Tenant Act 1927

Fleur Uren, Solicitor in the Commercial Disputes team, explores these rules and the process of issuing a claim for dilapidations.

Common Law Damages

Damages are measured under common law as the reasonable cost of putting the property back into its pre-tenancy state which also includes the loss of rent. The standard of the repairs will often take account of the locality and the age of the building.

Landlords cannot require the tenant to cover the cost of new fixtures and fittings where a repair would have sufficed. However, where a lease requires the tenant to keep something in good repair, and the damage is so severe that it can’t be fixed or improved, a landlord may be entitled to claim the full cost of replacing it instead.

In 1970, the case of Harbutt’s Plasticine v Wayne Tank & Pump [1970] was heard after a factory burnt down. As the fire was caused by tenant negligence, the landlord recovered the full cost of a new factory.

The damages recoverable by the landlord are also likely to include any foreseeable knock-on damages or losses. For example, this could include the loss of rent while a building is repaired. However, the landlord must have taken reasonable steps to mitigate their loss before the end of the lease term.

The Statutory Cap

Section 18 of the Landlord and Tenant Act 1927 establishes the Statutory Cap which limits dilapidation claim amounts for repairs. The cap only applies to the tenant’s duty to keep the property in good repair while renting or to put it right before they end their lease. Several items that are commonly claimed for by a landlord will therefore not fall within the Section 18 cap.

For example, if tenants are required to paint but do not, landlords can claim that the cap doesn’t apply. Alternatively, if the lease requires the tenant to remove fixtures and they are left, the cost of removal isn’t capped.

The two arms of the cap

The law limits the amount of money a landlord can recover in dilapidations in two key ways. Firstly, a landlord cannot claim more than the amount by which the property’s value has dropped due to the disrepair. If the cost of repairs is more than the drop in value, the landlord is limited to the smaller amount.

This is often called the “diminution in value” test. For example, if repairs would cost £100,000 but the property’s value has only dropped by £60,000 because of the damage, the landlord can only claim £60,000. If the repair cost is lower than the value drop, the landlord can claim the repair cost instead.

Secondly, the law limits dilapidations claims where the property is to be pulled down or structurally altered after the lease. Whether landlords lose the right to certain claims is subjective and based on intentions at the end of the lease.

Supersession

Supersession applies to the first arm of the statutory cap where landlords or future buyers intend to refurbish or alter the property in such a way that any necessary repairs would be deemed worthless.

The High Court case of Sunlife Europe v Tiger Aspect [2013] determined a starting point for supersession. It requires establishing whether, if a tenant has complied with their repair obligations, the building could have been sold without a significant discount as a result of its condition.  

If the answer is yes, then the measure of loss is the cost of putting the building into repair or the difference in value of the building in its current state versus the state it should have been left in, whichever is less. If not, the court must consider what work would be required to let the property to an appropriate tenant.

Civil procedure rules

Before a claim for dilapidations can be issued, the Civil Procedure Rules provide a specific pre-action protocol to follow. The aim is to encourage parties to negotiate early settlement of claims and avoid litigation by exchanging information. The protocol also sets out a timetable which parties ought to follow prior to issuing proceedings.

Landlords need to prepare a schedule of dilapidations and it should set out the relevant clause in the lease that has been breached. From there, they need to explain what remedial works are required along with the cost.

Landlords must also produce what is known as a quantified demand. This sets the context and events of the dispute to substantiate the claims for the repair works needed. The demand must also confirm if the landlord and/or their surveyor are willing to attend a meeting, then provide a deadline date for the tenant to respond.

The tenant’s response requires their view on each item set out in the schedule of dilapidations and the amount claimed, supported by evidence where necessary.

Final thoughts

Understanding dilapidations is vital for both landlords and tenants. Landlords should be aware that while they can recover repair costs from tenants, there are important limits such as the Section 18 statutory cap and the potential impact of supersession.

Taking early advice and following proper procedures can help avoid disputes and ensure the dilapidations claim is handled efficiently.

Coodes’ Commercial Disputes team acts for both landlords and tenants in dilapidation cases. If you require any assistance, please get in touch with Coodes by calling 0800 328 3282 or filling in our online contact form.