Hamish James Associates (HJA): Dilapidations — Current Findings and Practical Recommendations

Dilapidations: Current Findings and Practical Recommendations

Recent client-side experience has reinforced a clear point: many landlord dilapidations claims are not being presented strongly enough.

A schedule of dilapidations should not be treated simply as an opening negotiation document. It should be a clear, evidence-based assessment of the landlord’s loss arising from the tenant’s breaches.

Findings on Current Dilapidations Practice

1. Schedules are too often prepared as broad opening positions, rather than as disciplined records of breach, remedy and loss.

2. Defects and remedies are sometimes described too generally for a tenant, tenant’s surveyor or quantity surveyor to cost. Or/ and a contractor to understand and price. If the defect, the required remedy and the cost basis are unclear, the claim is exposed to challenge.

   Put more bluntly, the schedule is often treated as a negotiation stance rather than as an assessment of breach and the landlord’s loss.

3. Stronger claims are supported by evidence. Specialist input — for example on concrete, cladding, drainage or mechanical and electrical services — can turn a disputed item into a properly evidenced claim.

   On one large claim, the landlord’s surveyor had not prepared the claim with sufficient diligence. The tenant’s surveyor used that weakness to argue that the landlord intended to redevelop the site. The lease ended around 2018, yet the building remains standing.

   Following review, specialists were instructed on M&E, concrete, glazing and drainage. Once their evidence was incorporated into the schedule, the tenant’s objections to the SoD largely fell away and the dispute moved to the legal issues. Some works were then instructed.

4. Landlords and their advisers should be clear about future intentions for the building. If demolition, conversion or substantial alteration is genuinely intended, that will affect recoverability. If no decision has been made, that should also be stated clearly.

   A tenant should not assume that, at lease termination, the landlord has already decided to redevelop and that Section 18 automatically applies. That said, if demolition follows within a short period, the current court climate may make the tenant’s argument harder to resist.

5. Valuation arguments and Section 18 should be considered carefully, but they should not obscure the practical position: buildings still need to be repaired, maintained and made lettable. Buildings do fall into disrepair, and some become superseded.

   In the main, property is not a depreciating asset like a car; it is held because it is expected to appreciate over time, even where yield is modest. That distinction matters when assessing loss and should not be overlooked.

   Section 18 of the Law of Property Act 1925 is a cap where works are not undertaken. It is not a line-by-line pricing mechanism, nor, in our view, does it prevent a landlord from inducing an incoming tenant to undertake the works.

6. There is more than one way to undertake the repairs, or decide who pays. The landlord does not necessarily have to carry out the works directly. Practical routes can include:

   • A financial contribution to an incoming tenant to undertake the works as part of the letting arrangement.
   • An extended rent-free period for the incoming tenant to undertake the works before occupation or during the early part of the term.
   • An agreement for lease where the building needs NDEA/EPC compliance before the new lease is completed, with the incoming tenant carrying out the required works and obtaining the updated EPC as part of the transaction.

7. Lawyers, valuers, asset and property managers and surveyors all influence the outcome. Weak evidence, unclear advice, or unwillingness to explain and argue the landlord’s loss can reduce recovery and encourage tenants to offer only a small proportion of the actual loss. This becomes self-reinforcing and contributes to poor landlord recovery rates.

Recommendations That Follow

1. Prepare every schedule of dilapidations with proper regard for the tenant and their professional team. The schedule should be detailed enough for contractors, surveyors and quantity surveyors to understand, test and price.

2. Prepare the schedule a year in advance. If necessary, just prepare the schedule and cost later. This allows the property manager to negotiate a new lease. If negotiations get trickier, cost the schedule to focus the tenant's mind.

3. Set out breach, remedy and supporting evidence clearly. Where technical issues are likely to be disputed, instruct the appropriate specialists early.

4. The landlord needs to pay up front for the SoD to be prepared properly. The tenant needs to reimburse, where required in the lease, for a properly prepared claim. Not just for the Building Surveyors' part of the inspection and claim documentation.

5. Use a quantity surveyor to price the schedule. Building surveyors can prepare budgets, but construction pricing, particularly in London, benefits from dedicated cost expertise. Building surveyors tend to under-cost works within the city and West End.

6. When the tenant vacates, inspect and, where necessary, undertake intrusive testing and surveying. Update the Schedule of Dilapidation accordingly.

7. Present the landlord’s loss honestly. If the future use of the building is undecided, explain the options under consideration. If demolition or conversion is confirmed as the course of action, avoid claiming for loss that will not in fact be suffered.

8. Negotiate from evidence, not assertion. Track the original claim and the adjusted claim as further information emerges, so the discussion remains focused on recoverable loss.

9. The objective should be to reduce the landlord’s actual loss arising from the tenant’s breaches, rather than to justify a target figure in an asset-management spreadsheet.

10. Never tell or guarantee a recovery sum to an asset manager. It is a claim for losses, not a mechanism for investment decisions. It is not for Building Surveyors to drift into the role of Investment Surveyors.

Achieving 80% to 90% Recovery of the Adjusted Claim

Using this approach, HJA has achieved adjusted-claim recovery rates of 80% to 90%.

By contrast, recovery is often significantly lower where claims are treated as broad negotiations rather than properly evidenced statements of loss.

From client-side experience, the incumbent approach appeared to be recovering only around 10% to 20% of the claim value, largely because of the weaknesses identified above.

Interested in discussing this further?

If this interests you, please contact Charles Grace at:

Charles.grace@hamishjamesassociates.co.uk
Telephone: 020 3051 7206

Disclaimer

This newsletter is for general discussion only and does not constitute professional advice. If you are considering any of the issues raised, please contact us to discuss your circumstances or obtain professional advice before taking action. Please see our website for our full blog/ newsletter disclaimer.