VAT and Dilapidations

VAT and Dilapidations : Detailed Guide

What are Dilapidations?

Reducing dilapidations liability

Reducing Dilapidations Liability

Managing Dilapidations Proactively

Dilapidations Glossary

Dilapidations Glossary of Key Terms

Dilapidations Process Key Stages

Dilapidation Disputes

Dilapidation Disputes & How to Resolve Them

Dilapidations - Understanding Diminution in Value

Dilapidations – Understanding Diminution in Value

Dilapidations : Understanding Diminution in Value

Dilapidations Guide for Landlords

Dilapidation Guide for Landlords: Everything You Need to Know

What Does a Dilapidations Surveyor Do

What Does a Dilapidations Surveyor Do?

Dilapidations : Understanding Break Clauses

Tenants Top 5 Dilapidations Mistakes

Tenants Top 5 Dilapidations Mistakes (And How to Avoid Them)

Terminal vs Interim Dilapidations

Responding to a Schedule of Dilapidations

Responding to a Schedule of Dilapidations: A Step-by-Step Guide for Tenants

Supersession in Dilapidations

Supersession in Dilapidations: What It Means for Landlords and Tenants

Dilapidations Case Law : Jervis vs Harris

Dilapidations Case Law: Jervis v Harris

Dilapidations Case Law – Joyner vs Weeks

Dilapidations Case Law : Joyner vs Weeks

Dilapidations Case Law - Ravenseft vs Davstone

Dilapidations Case Law – Ravenseft vs Davstone

Dilapidations Case Law: Ravenseft vs Davstone

Dilapidations Case Law : Ruxley vs Forsyth

Dilapidations Case Law: Ruxley vs Forsyth

Dilapidations Case Law - Shortlands vs Cargill

Dilapidations Case Law – Shortlands vs Cargill

Dilapidations Case Law: Shortlands vs Cargill

Dilapidations Case Law-Hammersmatch vs Saint-Gobain

Dilapidations Case Law: Hammersmatch vs Saint-Gobain

Dilapidations Case Law - PGF II vs Royal Sun Alliance

Dilapidations Case Law – PGF II vs Royal Sun Alliance

Dilapidations Case Law: PGFII vs Royal & Sun Alliance

Dilapidations Tax Relief

Our Dilapidations Fact Sheet sets out guidance on dilapidations claims and how to manage them for both landlords and tenants.

Dilapidations covers a tenant’s failure to adequately repair a demised property, and/or hand it back in accordance with the covenants set out in the lease. It refers to the resultant state of disrepair. This liability to repair usual arises from express covenants contained within a lease. 

Simplistically, a dilapidation liability arises when a tenant has failed to comply with their repairing obligations under a lease. In the event that these breaches are not addressed by a tenant prior to the lease ending, a landlord will seek recompense by pursing a claim at common law for damages. This will result in a claim for compensation for the breaches of covenant or tenant’s failure to comply

The term is normally used to cover damage and disrepair which a tenant will be required to deal with or pay to have remedied when the lessee’s premises are vacated at lease end.

Landlords and tenants frequently enter into a lease without specific regard for condition at the commencement of the tenancy. Often there is no particular strategy to maintain the building in accordance with the repairing covenants during the period of occupation.

When the tenancy ends, the landlord’s attention will focus on the condition of the building and its ability to be re-let.

Unless the parties to the lease have had the foresight to consider a dilapidations process well before the end of the tenancy, this is very often the starting point for a dilapidations dispute.

A schedule of dilapidations sets out the failures to comply with the lease covenants. The schedule will set out the works required to return it to a state of good repair. This representing the state it should have been in if the tenant had complied with their repairing obligations.

A schedule of dilapidations is prepared by a surveyor for the landlord and issued to the tenant to substantiate a dilapidations claim.

When should a Schedule of Dilapidations be served?

It depends on the circumstances of the case, the wording of the lease and the complexity of the remedial works. 

In the vast majority of cases, a dilapidations claim is brought towards the end of the lease. This is when both parties need to know what the liabilities are and how they will be dealt with. In financial terms, this is also when a landlord’s loss can crystallise.

A schedule at lease end is known as a terminal Schedule of Dilapidations. In such instances, the timing of service could be important. The lease should be checked in plenty of time before the end of the lease.

A Schedule of Dilapidations can also be drawn up during the term of a lease. This is known as an interim Schedule of Dilapidations or when a lease allows, a landlord might serve a Notice to Repair seeking to enforce mid-term remedies with reference to the ruling in Jervis vs Harris.

This refers to Section 18(1) of the <a href="https://www.legislation.gov.uk/ukpga/Geo5/17-18/36/section/18">Landlord and Tenant Act 1927</a>. It is one of the most important pieces of legislation in the context of a Dilapidations Claim. 

<a href="https://www.ansteyhorne.co.uk/news/understanding-section-18-valuations">Section 18(1) operates to cap</a> the amount of damages that a landlord can recover for breach of the repairing covenants in a lease.

The cap can have a significant impact on a landlords dilapidations claim. For example, in <a href="https://www.ansteyhorne.co.uk/news/dilapidations-case-law-hammersmatch-vs-saint-gobain">Hammersmatch Properties (Welwyn) Ltd V Sain-Gobain Ceramics &amp; Plastics Ltd (2013)</a> the landlords claim was reduced from £6.8m to less than £1m.

How does a Section 18 cap affect dilapidations?

The Section 18 cap works by limiting the amount payable to the sum equal to the reduction in value of the landlord’s reversionary interest caused by the alleged breach. A diminution valuation is undertaken to determine this cap.

Even if there is actual damage caused by a tenant’s failure to repair, if the damage does not reduce the value of the landlord’s reversionary interest, then the value of that claim could be reduced to zero.

The Section 18 cap also excludes damagesin circumstances where the landlord is going to make structural alterations which would render the repairs valueless. 

For example, if the landlord is proposing to demolish the premises, such that this would supersede the remedial works necessary to address the tenants breach of its repairing covenant the landlord would be unable to claim damages for those works.

Supersession will also need to be considered in the overall consideration of the landlord’s Common Law claim for damages. In a similar manner to Section 18(1) any dilapidation work that is likely to be superseded by genuine refurbishment works (capital expenditure) will need to be excluded from a settlement.

Other breaches of covenant, such as reinstatement and redecoration, are covered in a similar way as repair under Common Law. This can allow for entire claims can be capped.

As landlord, am I entitled to claim for loss of rent?

The landlord may be able to claim loss of rent for the duration of the time reasonably necessary to carry out remedial works due to a tenant’s breach of their dilapidation obligations. This can occur if it can be shown that a letting has been held up because of term end dilapidiations.

However, a claim for loss of rent presents some difficulties. It would have to be shown that the loss of rent is due to the need to repair the property and no other reason, such as a void due to insufficient demand. 

Some claims for loss of rent will also be caught by the “<a href="https://www.ansteyhorne.co.uk/news/understanding-section-18-valuations">Section 18 Cap</a>”.

In reality, a landlord will rarely have the evidence required to substantiate an actual loss of rent claim.

VAT is always a legitimate head of claim. Whether it will feature as a genuine loss to be added to the cost of work will depend on the premises and landlord’s VAT status. For instance whether the premises is elected or the landlord registered for VAT. 

The dilapidations settlement will not however attract VAT. Despite recent press speculation HMRC have not amended <a href="https://www.gov.uk/guidance/vat-on-land-and-property-notice-742#supplies-between-landlords-and-tenants:~:text=10.12%20Dilapidation%20payments" target="_blank" rel="noreferrer noopener">VAT Notice 742, 10.12 Dilapidations Payments</a>, which remain outside the scope of VAT… currently!

This is a set of Civil Court Rules which govern the conduct of terminal dilapidations claims prior to Court proceedings. Follow the link to the <a href="https://www.justice.gov.uk/courts/procedure-rules/civil/protocol/pre-action-protocol-for-claims-for-damages-in-relation-to-the-physical-state-of-commercial-property-at-termination-of-a-tenancy-the-dilapidations-protocol" target="_blank" rel="noreferrer noopener">dilapidations protocol</a>.

Both landlords and tenants are expected to follow the Dilapidations Protocol. A failure to do so could result in costs being awarded against the non-compliant party in any subsequent proceedings.

Do I need a specialist dilapidations surveyor?

The short answer is <strong>‘Yes’</strong>.

To initiate the claim and respond to it, <a href="https://www.ansteyhorne.co.uk/news/what-does-a-dilapidations-surveyor-do">a surveyor will be required</a> to prepare a Schedule of Dilapidations for the landlord.

A surveyor will also usually be required to respond to it for the tenant. In addition the <a href="https://www.justice.gov.uk/courts/procedure-rules/civil/protocol/pre-action-protocol-for-claims-for-damages-in-relation-to-the-physical-state-of-commercial-property-at-termination-of-a-tenancy-the-dilapidations-protocol" target="_blank" rel="noreferrer noopener">Dilapidations Protocol</a> anticipates the involvement of surveyors to attempt to negotiate settlement as an alternative dispute resolution measure.

Other specialist appointments might be necessary to consider the condition of mechanical and electrical plant. A valuation surveyor might also be required to assess the Section 18(1) cap and prepare a diminution valuation.

When do I need to start thinking about dilapidations?

Dilapidations should be considered before a business takes on a new lease. It is a good idea to record the condition and layout of the premises before the lease is entered into.

A survey will establish the condition of the premises. This will give an indication of work that may be needed, both immediately and later.

If the premises are already in poor repair, additional considerations apply [Link]. During the term of the lease, regular or planned maintenance can avoid greater expense later.

What if the premises are in a poor state at the outset?

Most commercial leases require the tenant to put and keep the property in repair.

Unless the tenant and the landlord specifically agree otherwise, the fact that the premises were in a poor condition at commencement is irrelevant. There will still be an obligation to repair.

In such circumstances a tenant should negotiate for a lower rent to compensate for the costs of repair. Alternatively the dilapidations liability can be written out of the lease by varying the repairing covenant or excluding those elements of the premises that are in disrepair.

Alternatively, it should be agreed with the landlord that the premises be returned at the end of the lease in a condition similar to the state in which they were taken. In this case, after the premises have been surveyed, make sure that their condition is established, recorded and attached to the lease as a ‘schedule of condition’. Ensure that your solicitor varies the lease clauses to reflect the reduced obligations.

When is the landlord likely to submit a dilapidations claim?

Generally speaking, landlords do not serve dilapidations claims earlier than three years before the end of the lease. 

If a tenant has a statutory right to a new lease, the landlord will probably not serve a dilapidations claim. This will apply unless or until an indication is given whether the tenant will renew the lease.

What is the position on alterations I have made?

This depends on the terms of the lease and any licences that the landlord granted regarding alterations. 

On granting consent for alterations the landlord will likely required that the property is restored to its original state at the end of the lease.

Therefore, unless the landlord thinks the alterations have added value, tenants will probably be required to reinstate the property at the end of the lease or pay the cost of doing so. 

The exception is if neither the lease nor the licence for alterations gives the landlord the option of requesting reinstatement.

As a tenant you are not entitled and unlikely to receive recompense from a landlord for any perceived betterment resulting from additions or alterations you have made.

Do I have to accept the landlord’s dilapidations claim in full?

No, do not accept it without taking professional advice. 

We may be able to negotiate the costs or demonstrate that certain items should not have been included. The landlord may not in fact intend to repair the property and may plan to demolish or undertake alterations. 

In these circumstances you would have a good defence in law to the claim. This is because landlords should not claim for more than they have actually lost. A landlord cannot profit from a dilapidations claim.

What if I cannot reach a compromise with the landlord?

If you cannot reach agreement, the landlord has recourse to the court. However this is a slow process and expensive for both sides. 

Landlords and tenants will generally avoid it if they can. 

In a court hearing we will be able to act as an expert witness on your behalf. The court process is expensive for both parties and we try to avoid it where we can. There are also Alternative Dispute Resolution options available, such as mediation.

What is a “Yield Up” clause and does it affect dilapidations liability?

Dilapidations generally concern the tenant’s failure to observe certain obligations within the lease, thereby breaching one or more covenants. 

In general terms, these breaches fall in to four main categories: Repair, Redecoration, Reinstatement and Statutory Compliance.

99% of all commercial leases will contain a “Yield-up” covenant. This will stipulate how the tenant should hand back the premises at the end of the term. Sometimes the yield up covenant will be detailed and prescriptive. Other times it will simply ask the tenant to observe the preceding covenants to repair, redecorate, et al.

Arguably, it is the most important clause. It should be read carefully before signature of a lease and before a schedule of dilapidations is prepared.

Does a landlord have to serve a schedule of dilapidations at the end of a tenancy?

There are two types of schedule of dilapidations, which are served at different times during and after the tenancy.

An interim schedule is served during the term of the tenancy. It is prepared in contemplation of remedy of any alleged breaches during the contractual term of the lease. Not in anticipation of the lease end.

A terminal schedule of dilapidations is prepared towards, at, or shortly after the end of the lease term. The tenant will not be entitled to undertake remedial works themselves once their right of occupation has come to an end.

Is there a body which governs dilapidations procedure?

The <a href="https://www.rics.org/uk/" target="_blank" rel="noreferrer noopener">Royal Institution of Chartered Surveyors</a> has issued its own <a href="https://www.rics.org/uk/upholding-professional-standards/sector-standards/building-surveying/dilapidations-in-england-and-wales/" target="_blank" rel="noreferrer noopener">Guidance Note on Dilapidations</a>. This gives practical advice to surveyors and explains how to prepare, serve and respond to dilapidations claims, both before and after the commencement of proceedings.

How can a tenant avoid a dilapidations claim?

It is almost impossible for a tenant to avoid a claim in its entirety. This is because it is very difficult to return the premises to the landlord in the specific condition required by the covenants in the lease particularly after a long period of occupation and continuous use.

Dilapidations Fact Sheet Blogs

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