Scottish Landlords Prepare For Changing Face of Dilapidations

September 18, 2015
Photograph of Jim Johnstone

For many years the presumption has been that lease agreements for commercial property give Scottish landlords the right to demand the cost of repairs from departing tenants. This can seem unfair to some, especially when a percentage of landlords do not actually follow through on their word and make the repairs.

During an economic downturn when tenants are harder to find, landlords often turn to dilapidations as a quick, additional revenue stream, focusing on repairs in soon to be empty properties. In some cases money recovered from tenants is put towards improvements, however, the additional cash can also be saved by the landlord who may then market the premises on similar terms.

Interestingly, times are changing in the commercial property market after Scotland’s highest appeal court, the Court of Sessions, ruled that tenants should only be obliged to pay for dilapidations if the landlord proves they will carry out repairs.

According to one of Scotland’s leading property consultants, the recent court cases heard in Edinburgh could potentially limit landlords’ attempts to recover large amounts of money for the cost of repairing damage to their buildings.

“Landlords and tenants have been in disagreement over dilapidations for years,” Jim Johnstone, director and head of building consultancy at FG Burnett in Aberdeen explains. “Landlords usually give full responsibility for repairs of a property during the life of the lease to the tenant, and this can be a huge obligation for them as leases often outrun the life of building elements, once beyond repair items such as roofs, windows, boilers or lifts can be extremely costly to replace.

“Landlords usually have the right to ask for necessary repairs to be done at any time, assuming the tenant has not complied with their lease obligations, but often wait until the end of the lease for fear of perhaps upsetting a tenant. If at this stage negotiations between the parties breaks down then the landlord usually raises an action based on breach of contract, calculating its loss on the estimated cost of repairs it considers are required.

“What is new within the industry however, is this string of recent cases affirming the principle that dilapidation claims are being treated as damages claims that must be proved. It’s no longer enough for landlords to rely on a schedule of dilapidations and demand payment. In all but the very clearest cases landlords will require to carry out the works – or prove that they intend to – before they are entitled to recover costs from the tenant.”

In one of the recent court cases landlord Grove Investments, was seeking £10m in dilapidation costs from the tenant, Cape Building Products, at the end of a 25 year lease of an industrial unit.

Jim continues, “In the past it has been typical that the party claiming the damages needs to have incurred the loss but in this particular case the landlord believed its lease agreement had a provision allowing it to recover “the total value of the schedule of dilapidations”, whether or not the work was done.

“At the appeal before the Inner House, a bench of three judges disagreed, saying that the tenant was obliged to pay only the landlord’s actual loss. It seems they were keen to avoid the landlord receiving a windfall payment for works which were not in fact to be done.”

In a second case between @Sipp and Insight Travel Services the appeal court was asked to consider if the payment obligation written within the landlord’s lease entitled it to the exact cost of repairing premises, regardless of whether it intended to carry out the work to the property.

Jim says, “Again with this case, the court agreed with the tenant and ruled the landlord was entitled only to recover a loss, highlighting that a property owners intentions are related to the amount it can claim. Especially in cases where the ultimate intention is to demolish the property, the owner would have no loss to recover from the tenants.

“For the moment it seems that landlords who try to impose an obligation within a lease agreement, which states that the tenant will be liable for the repairing costs – irrespective of their intentions – are likely to face an uphill battle. We expect to see more tenants resisting dilapidation claims and insisting on proof that the work has been completed or is about to be done. This could certainly make life a little challenging for landlords as time progresses”.

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