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Dilapidations – resistance to a windfall for landlords - 8th December 2014 - Click for larger version Dilapidations – resistance to a windfall for landlords - 8th December 2014

Two cases recently decided in the Court of Session serve as a clear marker of the Court’s attitude to dilapidations claims by landlords.

If a landlord pursues a tenant for the costs of repairs the landlord deems require to be carried out as a result of the tenant failing to adhere to the tenant’s repairing obligations then - unless the lease unequivocally states that that the landlord is entitled to be paid for the estimated cost of these repairs regardless of whether or not the landlord has undertaken or intends to undertake the repairs – the landlord must prove to the Court that the repairs will actually be carried out.

Both cases involved provisions in leases which the landlords argued entitled them to be paid a sum representing the estimated cost of repairs, regardless of whether or not the repairs were actually to be undertaken. In one of the cases the lease stated that the tenant required “to pay to the landlords the total value of the Schedule of Dilapidations prepared by the landlords in respect of the tenants [repairing] obligations…”.

A schedule of dilapidations is an inventory, usually prepared by the landlord’s surveyor, setting out the numerous repairs which it is claimed require to be carried to put the property into the condition it would have been had the tenant complied with his repairing obligations and listing the estimated costs of the repairs. The landlords contended that the tenants were bound to pay the value of estimated costs and that the intention or absence of intention to carry out the works was irrelevant.

The tenants’ position was that the tenants were liable only for any loss actually suffered by the landlords – they could only be found liable for the cost of the estimated repairs if it was proven that the repairs would be carried out. If, for example, the landlord elected to demolish the building or carry out complete renovation works and did not carry out the repairs then the landlord would have suffered no loss in respect of the dilapidation repairs and the tenant was not therefore liable for the estimated cost of same.

The Court considered that the relevant provisions in the leases could be interpreted to give effect to either the landlords or the tenants’ positions. In the absence of the lease being unambiguous one way or the other, the Court required to interpret the lease in the manner which best accorded with commercial common sense.

It was held by the Court that commercial common sense would not allow a landlord to acquire a windfall and be paid for repair works which would not be carried out. The Outer House of the Court of Session noted that the Court would “require very clear wording in order to conclude that a tenant had entered into an agreement which might have the consequence of it having to pay a sum which bore no relation to what was required to compensate the landlord for loss (if any) actually sustained as a result of the tenant’s breach of its repairing obligation”.

The estimated repair costs in these cases totalled up to £10m.

These cases will serve as a useful supplement to a tenant’s armoury in dilapidation scenarios and will give landlords cause for thought as to how they quantify their losses (dilapidations losses need not necessarily be valued with reference to repair costs) and claims against a tenant, if they have indeed suffered or have any at all. The cases do not absolutely rule out the possibility of a lease entitling a landlord to be paid estimated costs of repairs which are not carried out, but it is clear that very precise drafting would be required if that was the intention of the parties when a lease is entered into.

Last updated: 10.32am, Monday 8th December 2014

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