All landlords should obtain professional advice on dilapidations, ideally at the beginning of a lease.
To minimise any risk to yourself as a landlord you must first ensure that the extent of the property must be clearly defined in the lease. Tenants’ obligations should be clearly set out in relation to repair, redecoration, & reinstatement and you should ensure that tenants are carrying out any obligations stipulated during the Lease.
A common misconception is that a landlord can benefit from dilapidations claims however this is not correct. It is important to remember that any agreement of financial settlement must only relate to actual loss because of failure to comply with their Lease. The amount that can be sought will be capped.
Self-Help: Many commercial leases allow landlords to enter property’s during the lease term in order to carry out necessary repairs, and then to recover the repair costs from the tenant. If a lease lacks such a provision, the landlord’s entry into the property may be considered a trespass. The advantage of self-help is that the landlord can control the quality of the work and subsequently claim the repair costs as a debt against the tenant.
Forfeiture: Almost all commercial leases include a forfeiture clause. Forfeiture allows the landlord to terminate the lease due to a breach of covenant, including a covenant to repair. To initiate forfeiture, the landlord must serve the tenant with a s146 notice, specifying the breach, requiring remedy, and demanding compensation for the breach.
Specific Performance: In certain cases, the landlord may seek a Court Order compelling the tenant to carry out the necessary repairs. However, other dispute resolution methods are usually more suitable.
Damages: If the tenant fails to comply with repairing obligations, the landlord is entitled to claim damages. When a lease is still active, the starting point for damages calculation is the reduction in property value, not the repair costs. If a lease has ended, a claim for damages remains the only remedy. Remember that the choice of remedy depends on many factors such as the type of disrepair, the relationship between the parties, and whether the lease has expired or is still within its term.
A diminution valuation is a calculation of the loss of value, if any, in relation to real estate legal disputes. It specifically relates to the loss of value resulting from dilapidations (damage or disrepair) during a lease period.
When assessing damages for breach of lease covenants such as repair obligations, the concept of diminution in value comes into play. It helps to determine the compensation owed by the tenant to the landlord. The damages are capped at the lower of two amounts:
Cost of Remedial Works: The expenses required to rectify the dilapidations.
Diminution in Value: The reduction in the property’s overall value due to the breach of covenant.
The Act outlines this concept. It states that damages for breach of repair covenants should not exceed the amount by which the value of the landlord’s reversion interest (whether immediate or not) in the premises is diminished due to the breach. It is notoriously difficult to determine because many factors which are not easily quantified affect this including age, character, location, condition, demand, future use, etc. It should be noted, that claims on loss of rent are possible in situations where the remedial works have caused a delay in having the property ready to be re-let.
