Jon Rowling and Kevin Woudman discuss the characteristics of a new form of ADR created to deal with lease-end dilapidations disputes
In September, the RICS launched its Dilapidations Dispute Resolution Scheme (the “scheme”). It is based on independent expert determination with two particular features that distinguish it: these are “pauses” intended to give the parties the opportunity to settle the dispute themselves.
There are scheme rules that set out the standard model of the scheme, but parties can agree to vary any aspect to better suit their requirements. Ideally, both parties agree to participate before any particular dispute has arisen or has become contentious; however, the parties can agree to sign up to the scheme at any time.
The landlord will prepare and send its schedule of dilapidations and quantified demand to the tenant in the normal way and the tenant will respond in the normal way. Both parties can therefore be represented by the surveyor of their choice and those who have portfolios of properties can continue to have their dilapidations disputes managed by their usual surveying practice.
The first pause
If the dispute is not resolved nine months after the lease has ended (both parties having previously agreed to participate) then either party can activate the scheme. The parties can agree on the identity of an independent expert (normally a chartered building surveyor) or the president of the RICS can make that appointment from its list of trained and accredited dilapidations independent experts.
In a similar way to independent expert determination of rent review disputes, the dilapidations independent expert is engaged to consider the dispute and, ultimately, to make a binding determination. The parties can make representations to the independent expert and respond to the other side’s representations. However, if either party decides not to make a representation or to respond they should not be disadvantaged. This is because the independent expert will use their own expertise, knowledge and investigations in making a determination and is guided, but not bound, by the representations made.
The scheme can be used for simple or complex disputes, small or large. The independent expert is expected to manage the process proportionately, which may well be easier in relation to higher-value disputes. If the dispute includes complex engineering or legal issues then the independent expert can take advice from suitably qualified third parties.
In the first instance the independent expert will consider only the breaches, the remedial works and the cost of those works. Once an opinion is reached as to the cost of remedial works, the independent expert will publish that figure to both parties as a neutral evaluation.
Building surveyors take landlords’ intentions into account when they prepare schedules of dilapidations or responses and, in the same way, the independent expert takes those intentions into account when preparing the cost of works neutral evaluation figure.
The second “pause”
With this information the parties can take the opportunity to reconsider their positions and attempt again to settle the dispute. However, if that is not possible then, after a pause of three weeks, the independent expert starts work again and considers issues relating to loss and diminution in value (almost certainly with the input from suitably qualified third parties) before publishing the determination.
By default the determination will be published without reasons – to keep costs down – and either party can request outline reasons from the independent expert.
Costs
Other than any recoverable costs relating to the preparation and service of the schedule of dilapidations, and the independent expert’s own costs, no other costs are considered. This is for two reasons: first, as an incentive for the parties to keep their costs down and, secondly, if costs were considered, the overall cost of the determination process itself would be greater.
The independent expert issues his or her own fee accounts to the parties in the first instance and, within the determination, identifies the proportion of his or her fees that each party should be responsible for. The parties are, of course, able to commence a separate action in relation to costs, should they so wish.
Advantages for landlords
- Landlords will know that the dilapidations dispute will not run on indefinitely; there will be resolution no later than about a year after lease end.
- If a landlord indicates within its schedules of dilapidations that it will agree to participate in the scheme then, in the event that the tenant declines to participate, the landlord can show very early compliance with the Dilapidations Protocol’s requirement to consider ADR. At a case management conference the landlord could point to that offer and would be able to say, with certainty, that the dispute would have been resolved some time previously had the tenant also participated.
- The landlord can engage its usual property advisers to prepare the schedule of dilapidations, quantified demand and, if required, representations to the independent expert.
- If the tenant does not engage in discussions about settlement, the landlord has an opportunity to conclude the matter without recourse to litigation.
Advantages for tenants
- If the tenant does not have experience of engaging dilapidations surveyors to represent them, they can have access to expert opinion; the costs potentially being split with the landlord.
- If the tenant is faced with an over-optimistic demand from their landlord, they have a mechanism to trigger resolution of the dispute without recourse to litigation.
- If the tenant does not wish to go to the expense of engaging their own dilapidations surveyor they could just suggest that the scheme is activated straight away.
- If tenants indicate that they will agree to participate in the scheme (perhaps even before a schedule of dilapidations is published) then, in the event that the landlord declines to participate, the tenant can show very early compliance with the Dilapidation Protocol’s requirement to consider ADR. At a case management conference the tenant could point to that offer and would be able to say, with certainty, that the dispute would have been resolved some time previously had the landlord also participated.
- If dilapidations has come as a surprise to the tenant then they can spend up to a year saving for the settlement.
Consequences
If the parties’ surveyors know that their schedules of dilapidations, quantified demands and responses will be reviewed by an independent expert in due course, they might be more likely to take care to include only content that is appropriate.
Also, if the parties’ surveyors know that they will lose control of the settlement discussions after nine months, they may be more inclined to make sure that the matter gets settled well in advance of that deadline.
If the parties know that costs incurred in advance of the determination being published will not be apportioned within the determination, they may be less inclined to rack up large costs.
However, because surveyors may be concerned about their documents being reviewed by an independent expert, they may not recommend the scheme to their clients. Dilapidations surveyors’ work is very rarely verified or audited except by the adversarial process against their opposite number, which can easily be explained away.
Aims of the Dilapidations Scheme
- Ensure both parties are on an equal footing
- Discourage exaggeration by either party
- Keep costs limited and proportionate
- Avoid lengthy disputes
- Assist in compliance with the Dilapidations Protocol
- Encourage settlement in advance of the Dilapidations Scheme being activated
The RICS Dilapidations Dispute Resolution Scheme guidance is available to download here >>
Jon Rowling FRICS is a chartered building surveyor, dilapidations specialist and the immediate past chairman of the RICS Dilapidations Forum; Kevin Woudman FRICS FCIArb is a chartered building surveyor, chartered arbitrator and chairman of the RICS Dispute Resolution Professional Group Board
