Commercial Dilapidations And Fixed Recoverable Costs
Author: Alun Edmunds
Key Contact: Jennifer Butcher
On 1 October 2023, new rules were implemented that mean straight forward, low-value commercial dilapidations claims are now likely to be subject to Fixed Recoverable Costs (FRCs).
The new rules have introduced an intermediate track for more simple cases valued up to £100,000. This means that successful landlords and tenants in terminal dilapidations claims suitably dealt with on the intermediate track are unlikely to recover their costs above the applicable FRCs.
What’s changed?
Following the introduction of the new rules on 1 October 2023, there are now four ‘tracks’ (as opposed to three) to which terminal dilapidations claims issued at court will be allocated. These are the:
· Small Claims Track – Up to £10,000;
· Fast Track – Claims between £10,000 – £25,000;
· Intermediate Track – Claims between £25,000 – £100,000; and
· Multi Track – Claims over £100,000.
Before 1 October 2023, a dilapidations claim valued over £25,000 would likely have been allocated to the Multi Track where costs recovery is not restricted to FRCs. The addition of the Intermediate Track means that FRCs have been extended to claims that are issued on or after 1 October 2023 and valued at no more than £100,000.
The costs of pursuing and defending dilapidations claims through the courts are often disproportionate to the sums claimed. This has always been a significant consideration for any party to a dilapidations claim, not least given the substantial costs involved in preparing the necessary surveying and engineering evidence.
There had however always been a degree of comfort for commercial landlords and tenants with strong claims worth more than £25,000 in knowing that if they were successful, the time and expense incurred could, to a certain extent, be justified in recovering a substantial portion of their costs from the losing party.
Whilst 100% recovery has always been a rarity, and successful parties on average would usually expect recovery of around 60 – 70% of their costs, the result of the new rules is that the successful landlord or tenant is now likely to find a further shortfall in what it is able to recover from the losing party, even when fully successful with their claim / defence.
It begs the questions:
- What are the alternatives for a landlord?; and
- When is it worth it for a landlord to pursue a low-value commercial dilapidations claim?
The answers will of course depend on a multitude of considerations based on the circumstances of the landlord and the tenant.
Alternatives
Firstly, FRCs make it all the more important for landlords to pay close attention to the condition of the property during their tenant’s tenure. Regular periodic inspections can reveal whether a tenant is complying with its repairing obligations and the likely value of any remedial works required. This in turn can give the landlord an opportunity to consider potentially more effective alternatives during the tenant’s tenure.
Interim dilapidations claim
Landlords can in certain circumstances bring a claim for damages during the term of the lease (an interim dilapidations claims). The obvious advantage of this is that where there is a claim relating mainly to repairs, the landlord does not need to wait until lease end to bring its claim for damages.
There are however some potential drawbacks and hurdles to overcome in order to bring an interim dilapidations claim. For example, the Leasehold Property (Repairs) Act 1938 provides that where a lease is for a term of more than seven years and is not in the last three years of its term, and the tenant serves on the landlord a counter notice, the landlord will have to apply to the court for leave to issue proceedings. There are only limited grounds on which the landlord may be given leave and even if one of those grounds are satisfied, the court still has discretion and so there is never any guarantee that the landlord will be able to start proceedings.
As with terminal dilapidations claims, damages in interim dilapidations claims are also capped by section 18 of the Landlord and Tenant Act 1927. This means that the repair costs claimed shall not exceed the amount (if any) by which the value of the reversion in the premises is diminished. Another potential drawback to consider is that reinstatement of lawful alterations will likely be excluded from recovery as the obligation to reinstate does not normally kick in until lease end.
Repair notices
Repair notices, or Jervis v Harris clauses as they are commonly known, allow the landlord to serve a notice on the tenant during its tenure which details breaches of the lease relating to the condition of the property. More often than not, modern leases will contain an express right for the landlord to serve such a notice and therefore this option is often available to landlords. The notice will provide that if the tenant does not remedy the specified breaches within a certain timeframe (usually around two months), the landlord will be able to enter the property to complete the repairs.
The main advantage of a Jervis v Harris clause, as opposed to an interim dilapidations claim, is that if successful, the works will be completed and the landlord will be able to recover the full costs from the tenant. The cap on recovery imposed by Section 18 of the 1927 act does not apply to Jervis v Harris clauses.
However, Jervis v Harris clauses are not always straight forward and carry with them some substantial risks. The notice has to be validly served or the tenant may refuse access. If the landlord enters the property in reliance on an invalid notice, the landlord will be open to a claim of trespass and / or business interruption. Even if the notice is valid, the tenant could still refuse access, in which case the landlord may be left with no alternative but to pursue costly injunction proceedings in order to enter the property.
In any case, the landlord will also have to be in a position to fund the works up front, and be confident that the tenant has the means to pay the landlord’s costs post work, or meet a money judgment if the landlord is required to pursue the costs through the courts.
When to pursue low-value commercial dilapidations claims
The new FRCs make it even more difficult for landlords to justify issuing a claim for terminal dilapidations where the value of the works is below £100,000. There is a significant risk of irrecoverable costs potentially outweighing the sum being pursued.
However, there could be one important reason for justifying the claim which may be available to landlords. If there is provision within the lease that the landlord will be indemnified by the tenant for breaches of the lease, the landlord may be able to rely upon this contractual right to recover its costs within the dilapidations claim. The FRCs ought not to interfere with this contractual right, if properly drafted, and therefore recoverability pursuant to the lease ought to be considered during the decision-making process.
Summary
The FRCs bring into focus the importance of checking the terms of the lease, particularly those relating to repairing obligations and indemnity in respect of breaches. From a landlord’s perspective, there ought to be an emphasis on ensuring regular consideration is given throughout the term of the lease as to the condition of the property and the tenant’s compliance with repair covenants. That way, if necessary, a landlord can seek to protect its position during the term, instead of placing its reliance on a terminal dilapidations claim at lease end.
