Plan your Brexit strategy on dilapidations

No one actually knows yet what the outcome of the Brexit negotiations will be. There is even greater uncertainty as to the potential impact on the economy. Assuming for the moment that there is a negative impact, what might that mean for dilapidations claims? It is a widely held view that disputes increase in a weak economy. Dilapidations claims are no different, and there is a certain logic underpinning that assumption. What practical steps can be taken by landlords or tenants to try to guard against adverse consequences? Scale of works As a starting point, tenants may cut back their spend on maintaining their premises. That will almost certainly heighten the risk (and size) of subsequent dilapidations claims. By the same token, landlords are more likely to do only those works required to relet, as opposed to embarking on costly refurbishments. From a landlord’s perspective, the more subtle impact of the intention to do only what is needed to relet is that there is likely to be a greater overlap between the works actually undertaken and the works the tenant should have done in compliance with its lease obligations. That closer link between the costs of works and the tenant’s lease obligations may further encourage landlords to pursue their claims, especially if those costs have already been incurred. For tenants, that closer alignment between the works the tenant should have done and the landlord’s intentions means that the so-called “cap” on damages imposed by section 18 of the Landlord and Tenant Act 1927 could be far less relevant. The claim may turn only on the common law assessment, with arguments about the extent of the disrepair, method of repair and reasonable costs being at the forefront. In effect, the landlord’s claim may actually be more difficult to defend. It is, of course, highly possible that claims will be settled earlier because the issues in dispute may be less “clouded” by valuation arguments. Associated claims The impact on the associated claims in a dilapidations context may be less clear. Take loss of rent claims, for instance (ie the rent that would have been received, but for the time taken to undertake the remedial works). On the one hand, the loss of rent element may be more relevant because the landlord will be looking to relet in a compliant state and the period of works may well represent a genuine loss if there is a willing tenant ready to occupy but for the remedial works. On the other hand, if the market is so slow that no tenant could be found even if the property is repaired, then the claim for loss of rent may be weak. This might also bring in a potential diminution defence as the effect on value of the works themselves may be challenged. In a weak economy, parties will clearly want to avoid wasting money. They may fight harder to win or to achieve a better overall settlement. At the same time, mediation may become even more appealing because of its speed and relative low cost compared with court proceedings. Other impacts If a landlord needs the tenant to comply with its obligations in order to relet, then it is quite possible that we will see an increase in repair notices. Repair notices (also known as Jervis v Harris clauses – Jervis v Harris [1996] 1 EGLR 78) give landlords the right on notice to undertake the works and recover those costs from the tenant as a debt (bypassing the section 18 cap). Similarly, landlords who are looking to relet, as opposed to substantially redevelop, may look to recover the costs of works to the building and plant through the service charge during the latter part of the term. It is conceivable that we will see more service charge disputes as tenants argue that it is not reasonable to pay for big items towards the end of their lease. What can parties do to protect themselves? Tenants Prior to signing up to a new lease, check whether any service charge items are likely to need significant upgrade. Give yourself enough time to obtain advice and undertake the works, if so advised. Undertaking the works before lease-end could significantly reduce the size of a dilapidations claim, as well as the numerous “add-ons” such as preliminaries, contract administration, loss of rent, costs and interest. Take extra care if you receive a repair notice. Do not delay getting advice. Landlords Be proactive and review all your leases 12-18 months in advance of expiry. Put your claim on a sound legal footing from the outset, even if the surveyors are thereafter left to negotiate a settlement. For instance, if the tenant’s obligation is to reinstate “only if required” then ensure that notice is given in good time and in accordance with the lease terms. Tell the tenant early what works you consider are necessary to comply with the lease terms. If you intend to spend significant sums on service charge items, do the works as early as you can. Undertaking the works in the last years of the term may give tenants more scope for challenge and may reduce the amount recoverable. Similarly, by its nature, the repair notice procedure takes time, so if you consider the option only at a late stage you may simply run out of time to invoke it. Both parties Choose your professional advisers carefully. Do they have the necessary skills and experience to take the matter all the way if that is what is required to achieve the best overall outcome? Invite the other side to mediate. Make early, well-pitched offers to settle, ideally in compliance with Part 36 of the Civil Procedure Rules. If not accepted, that offer could have a significant bearing on who pays the costs. Tim Rayner is a partner and joint head of real estate litigation at Irwin Mitchell