Preparing to Terminate

There is nothing like a spat at the end of a property lease to raise temperatures and set the metaphorical fists flying. It’s an all too common scenario. What was previously a great relationship between a good landlord and an equally as good tenant spirals quickly into a battle of wills when the time to discuss liabilities at the end of the lease arrives. Here’s a typical story.
A tenant decides it’s time to move on when the lease expires. The landlord wants to repair the property prior to marketing to prospective tenants. The tenant was unaware of the potential financial implications of the repairing, decoration and reinstatement clauses in the lease but the landlord is fully aware of the provisions. We now have the perfect recipe and ingredients for a long drawn out battle between surveyors and lawyers as advisors to the various parties.
But all is not lost. Thanks in large part to the work of the Property Litigation Association the above story should no longer be typical. As of 1 January 2012 the excellently titled “Pre-Action Protocol for claims for damages in relation to the physical state of commercial property at the termination of a tenancy” (mercifully abbreviated to “The Dilapidations Protocol”) has been in force as a formal pre-action protocol under the Civil Procedure Rules (“CPR”).
The Dilapidations Protocol provides structure to dilapidations claims made under the terms of a lease and at the same time tries to bring an air of reality to the respective parties’ positions from an early stage. The message from the courts is getting through to advisors, landlords and tenants alike, but very slowly.
The Dilapidations Protocol encourages speed and transparency in the event of a claim. This notwithstanding, we would argue that there is a better way...
The best way for a tenant to deal with its repairing obligations under the terms of its lease, is to understand them from the outset and to deal with the obligations proactively, well before expiration of the lease term. Prior to the termination of the lease a tenant can be in control of the process of quantifying its liability. Once the lease term expires control shifts to the landlord. 
By dealing with repairing obligations proactively, a tenant can return the property back to the landlord in good repair and, in doing so, retain control over costs, reduce exposure to consequential losses and retain a good relationship with the landlord. 
The benefits of this approach should not be ignored as consequential losses alone can stack up quickly in a well prepared and thought out dilapidations claim prepared by a landlord’s surveyor.
Indeed, perhaps the best way for a tenant to plan for dilapidations liabilities is to insist on the preparation of a schedule of condition during lease negotiations. When properly integrated into a lease, a schedule of condition will draw a line in the sand at the start of the lease term and ensure that the tenant does not end up funding repairs that should have been carried out during previous tenancies. 
From a landlord’s perspective, ensuring the tenant properly fulfils or compensates for breach of repairing obligations is paramount. A landlord should engage with a tenant in a pro-active way so that repairs can be executed in good time before lease expiry.  Not only will a well maintained building be more appealing to other potential tenants, the landlord will also reduce costs in terms of engaging surveyors and lawyers – some of which may not be recoverable.  
Sometimes a formal claim may not be possible to avoid. Should these circumstances arise, thorough and accurate preparation is of critical importance to both landlord and tenant alike. Good, early advice from skilled and experienced advisors will help the tenant ensure that the claim is dealt with quickly and in the correct manner.
Similarly, a landlord should also seek timely advice following expiry of the lease term in advance of formulating and submitting a claim. Understanding the landlord’s future intentions for the property will largely dictate how any claim on a tenant should be presented. 
It is entirely acceptable for a landlord to present part or all of its claim on a diminution in value basis. This is generally the case when the landlord’s intention is not to execute repair works which should have been done by the tenant. If the landlord intends to execute the repair works, then generally the actual cost of the work is the correct way to present the claim. This is now formalised within the Dilapidations Protocol and compliance with the Protocol and Civil Procedure Rules generally is a must if abortive work and costs are to be avoided.
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations.