Dilapidations In part 1 of three articles, Keith Firn and Patrick Stell look at the guiding principle behind claims and the factors that surveyors need to bear in mind when assessing loss
The draft Dilapidations Protocol was released by the Property Litigation Association in September 2006. It suggested that surveyors should be required to provide a written endorsement stating that “the overall figure claimed is a fair assessment of the Landlord’s loss” and that the surveyor should have regard to “the common law principles of how that loss should be calculated”.
In July, the RICS released the draft of its new Dilapidations Guidance Note, which has re-emphasised the importance of a careful and considered appraisal of loss. It supports the surveyor’s “endorsement of loss” as required by the draft protocol.
It is therefore vital that any surveyor dealing with a dilapidations claim has sufficient legal knowledge to enable him to assess the common law principles of loss in respect of such claims.
There is an important distinction between identifying a breach and measuring the damage (loss) sustained – or, to use legal terms, between “causation of loss” and “quantification of loss”.
These two aspects are often inextricably linked. The ability to differentiate between them relies upon an understanding of the guiding principle on loss and a consideration of the material loss appraisal factors.
Guiding principle on loss
The Latin maxim restitutio in integrum (restoration to original condition) is the recognised guiding principle that underpins the award of damages for loss in contractual relations.
Over the years, the courts have developed this principle. It is now accepted that where a party to a contract sustains a loss, through no fault of its own, that is capable of being quantified, it is to be placed, so far as money can do so, in the position that it would have been in had the contract been performed.
According to the courts, the quantum of loss is a question of fact and any award of damages does not seek either to enrich the aggrieved party or to impoverish it. Making a claim for loss imposes upon the claimant (usually the landlord) “the duty of taking all reasonable steps to mitigate the loss”.
The quantification of loss is not necessarily a straightforward mathematical calculation based upon the parties’ economic or commercial positions. It may involve an assessment of all types of risks and possibilities, including an assessment of a loss of a chance, amenity or other losses.
When preparing a claim for dilapidations damages, the landlord’s surveyor must consider various case-specific factors that will have a significant bearing on the legitimacy of the claim. The courts favour factors such as the landlord’s intentions and the reasonableness and proportionality of the claim. These factors consistently lay at the heart of leading judgments and should form the cornerstones of a surveyor’s appraisal of loss.
Landlord’s intentions
Donaldson LJ, in Dodd Properties (
In the case of damage to real property, this object [restitutio in integrum] is achieved by the application of [possible] different measures of damage [loss] Which is appropriate will depend upon a number of factors, such as the [Landlord’s] future intentions.
It has been held that an “intention” implies a state of affairs that the landlord, so far as it is able, has “a reasonable prospect of being able to bring about by its own action or volition”. The courts have also stated that: “Intention, or the lack of it can be relevant to the extent of the loss that has been sustained.” This applies equally to a landlord’s positive intention to perform a certain act at the end of the lease or to a decision not to act.
The genuineness of the landlord’s “indicated predilections” is a significant factor and the courts have stated many times that untruths or deceit concerning intentions will undermine the claim.
The surest way to prove that the landlord’s claim is genuine is for the landlord to undertake the works. The failure to carry out remedial works as claimed can raise legitimate questions regarding the landlord’s intentions. However, even where the works have not been physically carried out, the courts, for a variety of reasons and circumstances, have accepted landlords’ statements of intent, subject to sufficient “fixity of intention” and convincing undertakings that they will genuinely complete the works.
When considering the landlord’s intentions, it is important to remember that “intention” is that which can be demonstrated to have existed at the material date of the claim (normally the date upon which the lease determined). However, alternative or contrary past intentions and post-lease intentions (where they come to light) may have a bearing upon the claim if there is doubt over the genuineness of any intentions stated in it.
Ultimately, the landlord’s surveyor must endeavour to establish the client’s true intentions. A failure to do so could leave the surveyor open to allegations of negligent or even fraudulent misrepresentation.
Reasonableness of the claim
As dilapidations case law developed, the principle of restitutio in integrum was applied, and the cost of dilapidations remedial works was considered to be the measure of the loss but the courts stopped short stating that this was the absolute rule.
Over the past 100 years or so, some key judgments have reduced the original preference given to the cost of the works. However, this does not mean that the now commonly adopted and often formulaic diminution-in-value approach to measuring loss is now the only absolute, true or appropriate means of measurement.
The law lords, in cases such as Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344, continue to support and apply the long-established principle that the cost of repairs (as capped by section 18(1) of the Landlord and Tenant Act 1927) remains the “ordinary prima facie” measure of damages (loss), subject to there being no circumstances that make it inapplicable or unreasonable.
Consequently, even where the “ordinary” measure appears to apply, it is important to consider the degree of reasonableness and to ask: “What damage has the [claimant] really suffered from the breach?”
The question of reasonableness does not mean that a claim for reinstatement costs has to be completely absurd for it to be rejected as the appropriate measure of loss. However, it is equally misconceived to assume that each party’s interest is purely commercial and that the degree of reasonableness or absurdity of a claim will always be measurable in purely economic terms. The courts have recognised that parties own properties for a multitude of reasons and that there are many circumstances in which a simple economic appraisal unfairly disregards the reasonableness of an individual case.
It is necessary to adopt an objective and dispassionate common-sense approach when appraising the reasonableness of a claim. The need for reasonable consideration and the historic disregard of reasonableness both by landlords and their surveyors was in no small part behind the introduction of the statutory cap on the level of recoverable damages imposed by section 18(1) of the 1927 Act.
Many would argue that, in general, an unreasonable approach continues to be adopted by many claimants and surveyors.
Question of proportionality
Having considered and overcome the obstacles of intent and reasonableness, the issue of the proportionality of a claim remains.
In Jacob & Youngs v
In Ruxley, the law lords supported Cardozo J’s consideration, perceiving it as being important because they felt that it established two key principles concerning the appraisal of loss.
First, the cost of reinstatement is not the appropriate measure of damages if the expenditure would be disproportionate to the benefit that would be obtained. Second, the appropriate measure of damages in such a case is the difference in value, even though it would result in a nominal award.
Again, common sense suggests that a claim for £700,000 to repair or restore a property is doomed to fail for being disproportionate if it would cost only £400,000 to demolish and rebuild the same property.
Conclusion
Despite many superficial complications, such as the interpretation of specific lease phrases and the meaning of covenants, the basic assessment of loss in a dilapidations claim at the end of a lease term is determined by the fundamental legal principles outlined above.
When considering dilapidations damages and loss claims, both the landlord’s and the tenant’s surveyor, and other advisers, need to take account initially of the lease obligations. They must then consider the guiding common law principle of loss of restoration to original condition and the material influencing factors of:
(i) the landlord’s true intentions
(ii) the degree of reasonableness of the claim and
(iii) the proportionality of the claim.
Where there is a genuine intent to undertake the works and it is reasonable and proportional to do so, these common law and common-sense principles can be seen as favouring a position whereby the ordinary measure of the dilapidation loss is the cost of the remedial works, subject only to the cap imposed by section 18(1) of the 1927 Act.
Where other circumstances prevail, the quantification of the loss will have to be carefully appraised by alternative measures, which will vary from case to case.
Whatever measure of loss is adopted in any specific case, if a claim is tested and stands up to scrutiny against the above basic principle and factors, it will stand a better chance of succeeding and of complying with the Civil Procedures Rules, the Dilapidations Protocol, and the latest RICS guidance.
Keith Firn, of Barker & Associates, and Patrick Stell, of Stell Consulting are chartered building surveyors
