New guidance upgrades the status of the schedule of dilapidations and debate over its practical implications is an inevitable consequence, argues Edward Shaw
The new dilapidations guidance note has been launched at a small but select gathering at RICS headquarters, and a fine document it is too.
The document has been produced to reflect changes in dilapidations procedure that result directly from the application of the new Civil Procedure Rules, and these have had a significant impact on dilapidations. Inevitably, when revisions are required to procedure, debate follows over the application of the areas of the revisions. Notably, there is debate over the switching emphasis arises from a schedule of dilapidations no longer being a negotiating document but instead one that reflects the landlord’s claim and, more appropriately, the actual level of loss suffered by the landlord as a result of any breaches of covenant.
Attached to the guidance note is a copy of the draft dilapidations protocol produced by the Property Litigation Association. This document should be treated in the same way as the guidance note, as a guide to good practice and not a mandatory procedure. Nevertheless, it may be used as a benchmark against which a practitioner could be judged.
Assessment of loss
Both the guidance note and the draft protocol introduce the concept of a landlord making an assessment of his loss at the time the schedule is prepared. The protocol refers to a section 18 valuation and the guidance note to a diminution valuation, but essentially they are the same thing. The intention is to ensure that when the claim is made, the level of claim reflects the actual loss suffered due to the breaches of covenant. That is not necessarily the same as the cost of works required to remedy the breach of covenant as it is possible that works carried out by the landlord when he gets the building back will negate areas of liability on the former tenant.
An assessment of this actual level of loss has to be made at an early stage – the time that the schedule is prepared. Appraisal of the valuation method used in Shortlands v Cargill will show the significance of supercession in the diminution valuation process, and the assessment of supercession can be carried out effectively by the building surveyor preparing the schedule.
Initial inspection says it all
It is frequently clear from the initial inspection whether or not the landlord will need to upgrade or improve the property or even carry out more extensive works that will reduce the level of claim recoverable from the former tenant. A calculation of the effect of the landlord’s works on the dilapidations claim is a simple yet effective diminution valuation that can be carried out by a surveyor when the schedule is prepared.
The guidance note also refers to situations in which it is not immediately clear whether there is a need for a diminution valuation. Under these circumstances, it may be appropriate for the tenant to prepare the valuation as part of the defence to the claim.
Whereas a building surveyor could make the initial assessment of the extent of diminution for the purposes of making or defending the claim, it is not appropriate for a building surveyor to prepare valuation evidence for the purposes of court proceedings. This has to be carried out by specialist valuers, of which there are very few. It is, however, unlikely that this will cause a log jam in dealing with dilapidations cases due to the small percentage that end up litigating.
Edward Shaw is associate director of FPDSavills and chair of the RICS Dilapidations Working Group
