What is a terminal dilapidations claim?

When a lease ends, landlords often make terminal dilapidations claims against tenants, seeking compensation for breaches of lease obligations related to the state of repair, and decoration of the property, and the reinstatement of any alterations made by the tenant.

How can tenants defend themselves?

Tenants can challenge such claims using various defences. They may argue that the alleged breaches were not caused by them, that the claims are unreasonable or excessive, or that the landlord failed to properly mitigate damages. These defences provide tenants with opportunities to reduce or contest the landlord’s claim, and this article outlines some of these key defences, particularly those arising under section 18(1) of the Landlord and Tenant Act 1927, which has two ‘limbs’, and is intended to prevent the landlord from obtaining a windfall.

The first ‘limb’ of section 18(1) restricts claims to lesser of either (a) the cost of the repairs properly required or (b) the reduction in property value caused by disrepair. If, therefore, the cost of the works claimed is £500,000, but the reduction in value as a result of the disrepair is only £300,000, the landlord’s claim will generally be capped at the lesser amount of £300,000, subject to being reduced further as a result of other defences.

The second ‘limb’ of Section 18(1) looks at the landlord’s actual intentions for the property once the lease ends. This limits the tenant’s liability to the landlord’s genuine financial loss, disregarding anything that would be rendered ‘valueless’ as a result of the landlord’s plans for the property. A few examples of how that might work in practice:

• If the landlord intends to demolish or significantly alter the property, repair costs might be deemed unnecessary, as there would be no useful purpose in doing the repairs if only for the landlord to demolish the building.
• If the landlord would need to bring the property up-to-date to comply with new legislation to re-let it, such as the minimum energy efficiency standards, the tenant may argue it should not be liable for disrepair to energy inefficient aspects of the property, such as outdated lighting systems, that the landlord is likely to need to replace whether they were left in a good state of repair or not.

Some other defence strategies:

While by no means covering the full range of potential defences, other key ways of defending a dilapidations claim include:

• Checking whether the item of disrepair claimed actually falls within the tenant’s repairing obligation under the lease – it may turn out to be a landlord repair obligation, or fall to neither party to repair;
• Checking whether the ‘standard of repair’ being claimed for is reasonable – the standard of repair is determined by having regard to a range of factors including the age, character and locality of the property that would make it reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take it.

Finally, tenants can challenge claims based on the landlord’s duty to mitigate losses and adhere to statutory time limits. If a landlord delays repairs, causing costs to escalate, or fails to re-let the property promptly, the tenant can argue that these actions failed to minimise financial losses, thereby reducing the claim’s value. Furthermore, dilapidations claims must be brought within statutory limitation periods, typically within 6 or 12 years from the expiry of the lease, depending on whether the lease is a contract or deed. If a claim exceeds this time frame, tenants can assert that it is unenforceable due to the expiration of the limitation period, or if it is within the time-limits, but stale, the landlord may struggle to evidence the difference in condition of the Property at that time, compared to how it was at the end of the lease.

Conclusion

Defending against terminal dilapidations claims requires careful review of the lease, the landlord’s actions and intentions, and the specific circumstances of the property. Expert valuation evidence is very commonly required. Tenants should be conscious of the Dilapidations Protocol which provides a non-binding framework for the steps to be taken before a terminal dilapidations claim is started at Court, with the aim of enabling parties to resolve the dispute before it gets that far. Obtaining legal advice early – ideally as far in advance as a year or two before the end of the lease – can significantly strengthen a tenant’s position to make sure that any liability is managed and dealt with in the most cost-effective way possible.

How TWM can help you

Navigating terminal dilapidations and assuring interests are adequately protected can be challenging. TWM’s specialist property dispute lawyers have extensive experience in dealing with terminal dilapidations claims on behalf of tenant or landlord clients, whatever the size of your property or business. To discuss your matter and find out more about how we can help you resolve your dispute as quickly as possible, please contact Simon Burdett-Dixon, Partner in our Dispute Resolution team.