Landlords

Green Dilapidations: more sustainable commercial property leases

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Commercial building owners and occupiers are increasingly looking to fulfil their net zero carbon ambitions with measures beyond more sustainable development and energy performance practices. In particular, the current property leasing cycle and non-sustainable dilapidations processes are generating quantities of waste and carbon, which can be mitigated with a more sustainable approach: Green Dilapidations.

TFT’s Green Dilapidations services are designed to help clients reduce the additional material, resources and cost associated with repeatedly fitting out and stripping out commercial property spaces over their lifetime. Taking a long-term view of tenancy, occupier and market requirements, we help our clients benefit from a more efficient, sustainable dilapidations process for both landlord and tenant.

Our support is rooted in facilitating better collaboration between stakeholders. That means the landlord and tenant of course, but also agents and the wider supply chain. Our sustainable building knowledge, commercial understanding and dilapidations expertise helps to formalise a better system as a whole.

We see a greater appetite from our landlord and tenant clients to adopt Green Dilapidations services. A notable occupier client is one of the leading property litigation practices, who we are helping to exit their existing offices in this way. Our recent seminar on green dilapidations in June was well attended by a cross-section of the industry, showing the breadth of interest for specialist advice on the subject.

It’s not just for offices either, and can be used for retail, industrial and other commercial property sectors.

We’re here to help you do dilapidations in a better way. Get in touch with Jon Rowling to discuss how our dilapidations and sustainability expertise can help reduce the carbon impacts of your property lifecycle.

Download our brief service outline here.

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Dilapidations Q&A: Your questions, our advice.

Are you a landlord or a tenant looking for dilapidations advice? Start here with our list of commonly asked questions. For more details and advice for specific cases, head over to TFT Dilapidations to get in touch with our expert team who’ll be happy to help!

What is dilapidations?

Dilapidations relates to disrepair and other breaches of non-financial lease covenants during or at the end of a commercial property lease. 

What is the role of a dilapidations expert?

Dilapidations experts are specialist surveyors trained to understand buildings, to interpret leases and to understand the associated dilapidations law. They provide sensible advice to landlords or to tenants on the tenant’s breaches at lease end (if any). This informs negotiation of a beneficial settlement of the dilapidations dispute. 

In addition to this, some surveyors are appointed as ‘expert witnesses’ or ‘single joint experts’ and specially-trained dilapidations specialists can also act as ‘independent experts’ to resolve dilapidations disputes.

At TFT, we have what we consider to be the most respected dilapidations experts who are available to take on any of these expert roles.

What is dilapidations law?

The law of dilapidations is complex and can be uncertain. There are different legal systems in England and Wales, in Scotland and in Northern Ireland and so dilapidations law and procedure varies throughout the UK.  TFT has published an accessible and readable guide to dilapidations called ‘The TFT Purple Book: A Guide to Dilapidations in the UK’. 

A guide to dilapidations in the UK
What is dilapidations supersession?

Supersession is an undefined legal concept which effectively means that a landlord should not claim for the remedy of a tenant’s breach, because the landlord is proposing to do something else to the building which would supersede the need for the tenant to remedy their breach. TFT has developed a two step approach to supersession based on considering (i) mitigation and then (ii) causation.

What is the law relating to dilapidations fixtures and fittings?

The law relating to fixtures and fittings (or chattels/moveable items) is complicated and uncertain. Certain common law rights and/or obligations flow from the classification, which can be varied by contract. Generally speaking, loose items are classified as chattels (or moveable items in Scotland) and fixed items are classified as fixtures, although these presumptions can be varied. Fixtures can then either be classified as ‘landlord’s fixtures’ (‘heritable fixtures’ in Scotland) or ‘tenant’s fixtures’ (‘trade fixtures’ in Scotland). It can be important to understand the classification of items, particularly when dealing with conditional break options.

When should tenants seek dilapidations advice?

Commercial property tenants should always take dilapidations advice before signing a lease. Specialist dilapidations surveyors can assist tenants prior to signing the lease, during the lease term and, most commonly, before and after the end of the lease term when a landlord makes a dilapidations claim against the tenant. It is usual for a dilapidations surveyor to be able to reduce the settlement figure against that originally claimed by the landlord, often substantially.

Do you want advice on a specific issue? Get in touch with TFT dilapidations and dispute resolution expert Jon Rowling.

In dilapidations, what is vacant possession?

There is an implied obligation that a tenant will leave at the end of their lease term, and provide ‘vacant possession’ for the landlord to enjoy. There can often also be a contractual obligation to achieve vacant possession if a tenant wants to break their lease term early. The definition of vacant possession is a legal question but there is an expectation that the tenant will achieve certain conditions, including having moved out and removed certain items from the premises. The law around understanding what has to be removed, what can stay and what should not be removed has become complex in recent years.

What is a dilapidations break clause?

A break clause gives the parties (usually the tenant) the option to end the lease term early.  Often certain conditions, including some builders’ works are required to be completed by a tenant before the break date in order for the break option not to be invalid. Specialist dilapidations surveyors can assist tenants by advising what works need to be completed, or assist landlords by advising what the tenant has failed to do. This is a contentious and specialist area of advice.

Feeling a bit overwhelmed by dilapidations terminology? Never fear, we’ve created a dilapidations glossary to help with that. Find it here.

What is dilapidations expert determination and who does it?

This is a form of alternative dispute resolution which leads to a binding determination. It is not governed by statute (as arbitration is), rather by contract law; the two parties and the independent expert have a contract to facilitate the determination. The expert should use his or her own expertise (as well as any information provided by the parties) to come to a binding determination. There is very little scope for appeal. Generally, expert determination is considered to be best suited to specialist commercial disputes, such as dilapidations. At TFT, we can accept appointments to act as the independent expert, or to help parties who are engaged in the process.

What is the dilapidations dispute resolution scheme?

Published by RICS, the Scheme is designed specifically for end of lease commercial dilapidations disputes. The dispute is settled by an independent expert with both parties given the opportunity to provide submissions to the expert.

What is dilapidations reinstatement?

As part of a dilapidations claim, the landlord might require the tenant to reinstate alterations the tenant has made to the property, or to remove the tenant’s fixtures. Often, the landlord is required to serve a notice on the tenant in order to trigger the obligation. An obligation to reinstate can also be found within a licence to alter.

What is the dilapidations protocol?

The Dilapidations Protocol is a document published by the Ministry of Justice, relevant only in England and Wales. It tells the parties within a commercial property dilapidations dispute what the court expects them to have done before getting to court.

Are dilapidations provisions subject to VAT? 

Commercial property dilapidations settlements in the UK are damages payments so are not subject to VAT. However, an allowance for VAT can be included within the settlement figure if the landlord will incur VAT and not be able to recover it from HMRC.

Dilapidations: Glossary of technical terms

Dilapidations Glossary

Absolute compliance: A term used to describe a (rare) condition to a tenant’s break option. An absolute compliance obligation indicates that there can be no outstanding breaches of any obligations whatsoever. 

Break option: An option agreed between the parties which allows the tenant (and/or the landlord) to end the lease term early. Conditions usually need to be complied with such as the serving of notices, payments of rent or other sums due, and those relating to the condition of the premises. 

Chattel: A loose item (or perhaps an item which is fixed slightly and/or so it can be enjoyed for its intended purpose) which does not satisfy classification as a fixture. 

Dilapidations Protocol: A document published by the Ministry of Justice which identifies what the courts of England and Wales expect the parties to have done before issuing legal proceedings in an end of lease dilapidations case relating to commercial property. 

Diminution in value: This means a reduction in value. Usually, the context is that a claimant landlord is, in some circumstances, limited to claiming the diminution in value of the property caused by the tenant’s breaches rather than the cost of the works necessary to remedy those breaches. 

Expert determination: A form of ADR which provides a binding conclusion to the dispute in the form of a Determination. The process is private (unlike litigation) and offers very limited opportunities to overturn the determination. The independent expert is not limited by evidence presented by the parties and can use their own expertise and evidence to inform their decision. There is no statutory framework. 

Fair wear and tear: A term to define damage or deterioration which has occurred because of (i) natural weathering and/or (ii) the use of the premises in the manner in which the parties intended. 

Fitting: A word usually associated with fixtures (i.e. fixtures and fittings) but which has no defined legal meaning in this context. Fitting might mean ‘chattel’, or ‘tenant’s fixture’, or something else, depending on the context. 

Fixture: An item installed in the premises which does not satisfy classification as an integral item or chattel. 

Interim schedule of dilapidations: A colloquial description of a schedule of dilapidations sent to the tenant during the lease term and not in anticipation of the end of the lease term. 

Jervis v Harris clause: A lease clause which introduces a mechanism whereby the landlord can require the tenant to remedy breaches, and if the tenant fails to do so the landlord is granted a right to enter the premises to carry out the works and recover the cost of those works from the tenant as a debt, rather than as damages. 

Landlord’s Fixture: An item fixed to the premises which the tenant does not have a common law right to remove and is either provided by the landlord or, if provided by the tenant, would lose its amenity on removal. 

Landlord and Tenant Act 1927, s18(1): This section limits a landlord’s claim for damages from a tenant for breaches of the obligation to repair.  It is generally accepted that s18(1) has two parts (‘limbs’); one relating to diminution in value and one relating to the consequences of the landlord’s intentions. 

Law of Property Act 1925, s146: This section identifies the procedure for serving notice on a tenant during the term of a lease in order to make a claim for breach of contract. 

Licence for alterations: A document which grants the tenant consent to undertake works which would otherwise be in breach of the terms of the lease. Licences for alterations usually contain a covenant requiring the tenant to remove the licensed works at the end of the lease term. 

Payment clause: A clause in a lease which purports to allow the landlord, at lease end, to claim from the tenant the cost of the dilapidations works (plus potentially any other sums identified in the clause) as a debt rather than as damages. These clauses (where they refer to the cost of works rather than the value of the schedule of dilapidations) have been enforced in Scotland. 

Quantified demand: A document prepared in compliance with the Dilapidations Protocol which identifies the claimant landlord’s likely loss as a consequence of the tenant’s breaches, together with basic details of the claim(s) being made.  A schedule of dilapidations might typically be appended to the quantified demand. See also: Dilapidations Protocol.

Reinstatement / removal notice: A notice served by a landlord which triggers a tenant’s obligation to reinstate alterations or to remove additions or tenant’s fixtures. Failure to serve a reinstatement / removal notice when it is required to be served would mean the landlord’s right of action for reinstatement / removal falls away. The timing of the service of removal / reinstatement notices is important. 

Repairs notice: A notice served by a landlord to support the Jervis v Harris process. The Notice will usually include a schedule of breaches (or a variant thereof). See also: Jervis v Harris clause.

RICS Dilapidations Dispute Resolution Scheme: A form of ADR designed specifically for end-of-lease dilapidations disputes. Ultimately, the dispute is concluded by the publication of a binding determination; an interim stage is offered in the form of a neutral evaluation, with opportunity for the parties to settle based on the content of the evaluation. 

Schedule of condition: A record of the state of the premises at the start of the lease term, which is referred to in the repair clause (and potentially in other clauses) so as a limit on the tenant’s obligation to repair (and potentially on other obligations). See also: repair.

Schedule of dilapidations: A document which identifies breaches of the lease, appropriate remedial works and (usually) the cost of those remedial works. A schedule of dilapidations is usually prepared by a landlord and sent to a tenant (but in a service charge context a tenant can prepare a schedule of dilapidations to be sent to the landlord). 

Scott schedule: A document used by the parties’ surveyors to respond to each other’s statements. The tenant’s surveyor usually responds to the landlord’s schedule of dilapidations in the form of a Scott schedule and returns the Scott schedule to the landlord’s surveyor for further ‘rounds’ of discussion. 

Standard of repair: The bar below which the state of the property has to fall before there is a breach of the repair obligation.  The standard is judged by reference to the age, character, location and general condition of the premises at the start of the lease term. 

Supersession: A legally undefined term which describes a restriction on what a landlord can claim from their tenant, in circumstances where the landlord carries out works other than those which the tenant should have completed. 

Tenant’s fixture: An item fixed to the premises by or on behalf of the tenant which the tenant has a common law right to remove. On removal, the item would retain its amenity. 

Terminal schedule of dilapidations: A colloquial description of a schedule of dilapidations sent to the tenant near to the end of the lease term and/or in anticipation of the end of the lease term. 

Vacant possession: A legal term used to describe an obligation on the part of a tenant to remove themselves and their items (plus any other encumbrances to the landlord’s occupation) from the premises at the end of the lease term.  Vacant possession is a common condition to a tenant exercising a break option.

Click here to view the full TFT glossary of building, real estate and other industry-related terms.

Manchester’s Beetham Tower in disrepair: Lessons from a “Draconian” remedy

Beetham Tower, Manchester. Source: Craig Sunter.

A new disrepair case has been reported, relating to Manchester’s tallest building: the iconic Beetham Tower in Manchester (you know it; that new glass one with the top half larger than the bottom half). Here we explore the ramifications and lessons to learn from an unusual case.

In Blue Manchester Limited v North West Ground Rents Ltd [2019] EWHC 142 (TCC), the judge heard about three issues including potential disrepair to the cladding.

The Landlord had obligations to the hotel-operator Tenant to keep the retained parts of the building (including the cladding) in repair.  Problems had been found with parts of the cladding installation and, prior to the hearing, a temporary solution had been implemented.  More particularly, the bond provided by the structural sealant of the insulated ‘shadow box units’ was failing in some cases.  The temporary remedy was to screw-stitch pressure plates to the frame profiles, to hold the panels securely in position.

The question for the judge to consider was whether, at the time of the hearing, the cladding was in disrepair.  He found that it was in disrepair.  In so doing, he relied to a very large extent on the 5-stage analysis of disrepair published within Dowding and Reynold’s dilapidations text book.  He also took the aesthetics of the building into account.

To the observer, informed only by the facts as reported in the judgement, it seems relatively clear-cut that the cladding would be found to be in disrepair.

For the defendant landlord though, this appears to have been a problematic case for three particular reasons:

  1. They are a ground rent company and may have had little expectation of having to get involved with works of this scale, the recovery of the cost of which might be restricted by the terms of leases with the various tenants.
  2. Matters were also complicated somewhat by the demise of Carillion and by both parties holding warranties against the cladding sub-contractor.
  3. The claimant tenant was (unusually) asking the judge to award the remedy of ‘specific performance’ as well as damages.

It is the granting of an order for specific performance which perhaps elevates this case to the unusual.

That remedy was awarded despite the judge describing it as ‘draconian’ and also despite the tenant having an alternative contractual remedy akin to a Jervis v Harris process.

It is more normal for specific performance not to be granted in England and Wales, because the terms of any order can be difficult to draft, such that it would be difficult for the party obliged to comply with the order to know whether it was doing so in an appropriate manner.  In this case the judge allowed what he considered to be a reasonably generous time frame (of 18 months) for the landlord to comply, and also allowed the landlord to apply to the court for further guidance under certain circumstances.

The Tenant was also awarded damages for any continuing loss it may suffer as a consequence of the landlord’s various breaches.

It is not known whether leave to appeal will be requested or granted, or any appeal made or won.

Lessons to learn:

  1. Parties to a lease (or indeed any contract) should understand the potential implications of the obligations they are signing up to. It sounds as though the landlord might have difficulty recovering all of the cost of the works through the service charge, and this in circumstances where their 999 year interest will have meant that any opportunity to claim against the development team would expire (relatively) quickly, because the warranties would not be for an equivalent 999 years.
  2. Don’t assume that specific performance will not be granted. It just might; going to court is an uncertain business.
  3. Inspect cladding installations regularly and frequently, even if they are ‘new’.

Japanese knotweed: a new statutory concern for dilapidations

Japanese knotweed is a concern to our clients when dealing with dilapidations and investing in property: it’s important that its presence is identified due to the potential damage it can cause from rhizomes (roots) penetrating masonry, foundations and paving and the potentially high cost of remedial works.

On top of the well known financial imperative, there is a further legal aspect which has recently come to light.

Japanese Knotweed – By MdE (page at dewiki | page at commons) – own photo, CC BY-SA 3.0 de, https://commons.wikimedia.org/w/index.php?curid=3506559

The Wildlife and Countryside Act 1981 and the Environmental Protection Act 1990 remain the overarching legislation that control the growth and correct disposal of Japanese Knotweed in the UK; with the Wildlife and Natural Environment (Northern Ireland) Act 2011 and the Wildlife and Natural Environment (Scotland) Act 2012 applicable to the respective regions, alongside the relevant disposal regulations.

However, the Anti-Social Behaviour, Crime and Policing Act 2014 introduces a further facet to what can become a problematic issue. A recent prosecution case by Bristol County Council demonstrates that local authorities are using the legislation available to them, taking action against those who fail to control invasive plants on their land. Under the Act, local authorities can serve a Community Protection Notice (CPN) on individuals or bodies acting in a way that has a detrimental effect on quality of life of those in the local area. Bristol County Council subsequently fined MB Estates Ltd £18,000 for failing to control the weed’s growth.

So landlords, tenants and professional advisers beware. It is important for property professionals and clients to be aware of the risks associated with Japanese Knotweed and that lease obligations relating to its presence and recovery of costs are carefully considered. Leases tend not to cover invasive species very well and linking its presence, and an obligation to remove, to a breach of covenant can be difficult.

For further information and advice specific to your property, please get in touch with Jay Ridings, Associate at TFT.