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What can landlords and tenants do to minimise the risk of disputes in relation to dilapidations?
Typically where a tenant is in breach of a covenant to repair, the landlord will serve a schedule of dilapidations requiring the tenant to carry out various works to the premises. This may be done during the tenancy or on its termination. As repairs can potentially involve significant costs, the assessment of dilapidations can be a source of dispute, particularly in the case of longer occupational leases that have ended or are about to end.
There are a number of measures, however, that landlords and tenants can take to minimise the risk of a dispute and to protect their position in the event of a dispute arising.
1. Agree a condition report at the outset
Where a premises comprises an old building, the parties can agree a condition report at the commencement of the lease and append it to the lease so that it forms part of the agreement. The parties may agree that the tenant’s repairing obligation is limited to preserving the state of repair of the premises as reflected in the condition report. The condition report can then be referred to in the event of a disagreement between the parties as to the extent of their respective repair and/or reinstatement obligations.
The condition report should contain a detailed description of the condition and layout of the premises, and ideally include contemporaneous maps, drawings and photographs of the premises.
A condition report may not be appropriate for pre-lets where the tenant is typically required to accept the specification of the premises on practical completion and obliged to yield up the premises in accordance with that specification on lease expiry.
2. Be aware of the extent of the repair obligations in the lease
When preparing a schedule of dilapidations or where there is disagreement over a schedule of dilapidations, the parties should first check the lease covenants in respect of repair, reinstatement and yield up.
In particular, the parties should check:
- the definition of “demised premises” (or similar) – to identify those parts of the leased property covered by the repair obligations.
- the wording of the repair covenant – this will clarify the scope of the tenant’s obligations. For example, the term “repairs” may not include improvements to the premises. Also, the repair covenant may require a tenant to “put” the premises into a better condition than it was received by the tenant.
- the wording of the yield up covenant – for example, a break option may be conditional on the tenant complying in full with this covenant.
- the decoration covenant – to identify whether the tenant is required to redecorate the entire premises or any part of it prior to the termination of the lease.
As a lease is typically drafted by a landlord, the Irish courts are likely to interpret any ambiguity in favour of the tenant, rather than the landlord.
3. Do not enter a new lease without first addressing dilapidations under old lease
Landlords should always address the issue of dilapidations with an existing tenant prior to renewing the lease.
It is not uncommon to see disputes arise where a lease with an existing tenant was renewed without any discussion as to dilapidations when the old lease ended. This is particularly the case if the two leases contain differing repair and/or reinstatement obligations.
The issue of dilapidations should also be addressed on the assignment of a lease so that any non-compliance by the outgoing tenant with the repairing covenant can be dealt with in the landlord’s consent to the assignment.
4. Consider how dilapidations are to be assessed
In general there are two methods for assessing dilapidations that landlords and tenants should consider:
- the cost of carrying out the repairs: The landlord will engage a surveyor to identify the parties’ respective repair and/or reinstatement obligations, the areas of repair that are covered by the tenant’s obligations and the cost of these repairs. These will then be included in the schedule of dilapidations. The tenant may engage their own surveyor and put forward an alternative list of repairs and their associated cost. In the event that the landlord brings a claim for damages, both the landlord’s and tenant’s view on the cost of repairs can be compiled into a composite “Scott Schedule” for the benefit of the court.
- the diminution in the value of the landlord’s reversion as a result of the tenant’s failure to comply with their repair obligations: This method is often used where a tenant disputes the cost of repairs as calculated by a landlord, and claims that only a lesser sum reflecting the diminution in the value of the premises to the landlord is due. Valuation evidence will be required to support this claim under section 65(2) of the Landlord and Tenant (Amendment) Act, 1980. If the landlord applies to court for damages for breach of a covenant to repair or maintain the premises during the tenancy or to yield up or reinstate the premises at the end of the tenancy, the damages which a court may award will be capped at the amount of the diminution.
Under section 65(3) of the 1980 Act, the landlord will not usually be entitled to damages from a court where:
- having regard to the age and condition of the premises, its repair is physically impossible;
- having regard to the age, condition, character and situation of the premises, its repair would involve expenditure which is excessive in proportion to its value; or
- having regard to the character and situation of the premises, it could not be profitably used when repaired (unless it was re-built, re-constructed or substantially structurally altered).
However, damages will still be available to a landlord where the lack of repair is shown to be due, wholly or substantially, to wilful damage or wilful waste committed by the tenant.
5. Dilapidations issues in the current market
Increasingly, landlords are seeking to minimise their dilapidations risk by negotiating stronger repair, yield up and reinstatement covenants which expressly entitle the landlord to recover certain lease costs as a contract debt if the tenant fails to comply with its repair and yield up obligations. Such costs can include rent, outgoings, service charge and insurance contributions referable to the period of time it would reasonably take the landlord to complete the reinstatement works as well as the cost of the works themselves.
Whilst a typical yield up covenant usually requires the tenant to remove alterations and fit-out works on the expiration of the lease, landlords are seeking additional flexibility by retaining the right to require the tenant to leave fit-out works in situ. To counterbalance the risk of the tenant not having adequate time to facilitate this request, tenants will typically request a timeframe within which the landlord must make this request. This timeframe ensures the tenant has clarity as to its reinstatement obligation in advance of the termination of the lease.