Landlord Beware! Dilapidations and a Tenant’s Defences

Background

Commercial leases will commonly include a clause for the tenant to keep the property in good repair and condition. The extent of the obligation to repair often (but not always) depends on the size, location and annual rent payable. A Schedule of Condition may be attached to the lease, limiting the tenant’s repairing obligation as to the condition of the property as set out in that schedule.

The cost of repairing a property can be huge financial burden for tenants, and this liability does not culminate at the end of the contractual term. Assuming the lease proves as such, the landlord will instruct a specialist dilapidations surveyor to inspect the property at the end of the lease. The surveyor will prepare a Schedule of Dilapidation identifying each individual breach of the tenant’s repairing covenants. The tenant then has one of two options: to repair the items as provided for in the schedule; or pay damages to the landlord.

The tenant can raise two defences to try and limit its liability with regards to a claim for dilapidation.

Defence 1 – under s.18 Landlord and Tenant Act 1927

Tenants can rely on the s.18(1) defence which effectively caps the landlord’s damages. For example, if the repair works in the dilapidations schedule cost £200,000 but the value of the property (as a result of the disrepair) is devalued (for example) by £50,000, the landlord will only have a genuine claim for dilapidations costs up to £50,000.

Defence 2 – Landlord’s Intention

Where the landlord has an intention to alter or demolish the premises on the date on which the lease expires, the Landlord cannot recover any damages for dilapidations from the Tenant.

The case of Cunliffe v Goodman [1950] produced a two-fold test for determining the landlord’s intention is as follows:

1. The landlord must have reached a firm decision to alter the property. This must be a clearly formed intention. For example; by obtaining planning permission; building regulations approvals for such alterations or actively marketing the property for sale or re-letting (tenants can request for full disclosure on marketing details). Mere contemplation is not a firm decision.
2. There must be a reasonable prospect of the landlord carrying out his intention. If there are several hurdles that the landlord would need to overcome to reach his intended alteration, it will not be seen as reasonable in prospect.

The burden of proof is on the tenant to show that the landlord has made a firm decision which has subsequently created a clearly formed intention and there is reasonable prospect of the landlord carrying out his intention. The threshold for evidence needed in the Courts must be very persuasive.

There are consequences if the landlord fabricates his intentions by falsely claiming that there was no intention to alter or demolish the property. The landlord may be subject to investigation by the relevant authorities, and his misrepresentation could amount to a criminal offence under the Fraud Act 2006.

This area can be difficult to navigate for both landlords and tenants alike. It is important to instruct a surveyor with requisite dilapidations experience in connection with the drafting and costing of Schedules of Dilapidations and on-going negotiations between the parties in the event of dispute.

Fisher Jones Greenwood’s have an experienced Commercial Property team, if you need their help, please call 01206 700113 or email [email protected].