Terminal Dilapidations UK — Schedule of Dilapidations, the Section 18 Cap, and Jervis v Harris Clauses

The Schedule of Dilapidations — Interim and Terminal Schedules

A schedule of dilapidations is a document prepared by a building surveyor on behalf of a landlord, identifying the alleged breaches of the tenant's repairing, decorating, and reinstatement covenants under the lease and quantifying the cost of remedying each item. There are two types of dilapidations schedule: (a) Interim schedule: served during the last 3 years of the lease term (a landlord can serve an interim schedule during the term if there are breaches of the repairing covenant that they want the tenant to remedy before lease expiry — this is permitted regardless of whether the lease contains a specific right of entry for inspection; the landlord's right to require repairs during the term is a matter of construction of the repair covenant; for residential properties, s.11 LTA 1985 applies); (b) Terminal (exit) schedule: served at or after lease expiry, claiming damages for all unremedied breaches of the repairing, decorating, and reinstatement covenants. Typical items in a terminal dilapidations schedule: repair of the fabric (roof; walls; windows; floors; M&E systems; fixtures and fittings); external and internal redecoration; reinstatement of alterations (where the lease requires reinstatement at the end of the term); making good damage caused by the removal of fixtures and fittings. The Scott Schedule: it is standard practice in dilapidations proceedings for the tenant to respond to the landlord's schedule with a Scott Schedule (also called a response schedule) — a document that takes each item in the landlord's schedule and sets out the tenant's position (agreed; disputed at quantum; disputed in principle; not a landlord's repairing responsibility; etc.). The Scott Schedule is the primary working document in dilapidations mediation and litigation.

• Interim schedule: served during the last 3 years of the lease to require the tenant to carry out repairs during the term; the tenant has a right of self-help (to carry out repairs and avoid a schedule) but must give the landlord notice; the landlord can bring a s.146 forfeiture notice if the tenant refuses to remedy
• Terminal schedule: served at or after lease expiry; quantifies the cost of remedying all unremedied breaches; the landlord's damages claim is then subject to the LTA 1927 s.18(1) cap (cost of works or diminution in value of reversion — whichever is lower)
• Scott Schedule response: the tenant responds item by item — agreed; disputed in principle (e.g. not a tenant's repairing obligation); disputed on quantum (e.g. the landlord's cost estimate is too high); or awaiting diminution in value assessment; the Scott Schedule drives the negotiations and any tribunal proceedings
• Diminution in value surveyor's report: both parties typically commission a diminution in value report from a chartered surveyor — this is the critical document for the s.18(1) cap analysis; the diminution in value is the difference between the value of the reversion in repair and the value in its actual disrepair state at the end of the lease
• RICS Dilapidations Protocol (2002, revised 2012): the protocol provides a framework for the dilapidations process including timing of the terminal schedule; the tenant's response within 56 days; a without-prejudice meeting of surveyors; and the use of the Scott Schedule format; failure to comply with the protocol can result in adverse costs orders in proceedings

The Section 18(1) LTA 1927 Cap — Diminution in Value of the Reversion

The most important rule in dilapidations law is the statutory cap in s.18(1) of the Landlord and Tenant Act 1927: 'Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether the breach occurs before or after the termination of the lease, shall in no case exceed the amount (if any) by which the value of the reversion in the premises is diminished owing to the breach of such covenant or agreement.' The s.18(1) cap has two limbs: (a) First limb: the damages for dilapidations (whether interim or terminal) cannot exceed the diminution in the value of the reversion at the time of the breach (or, for terminal breaches, at the end of the lease). This means: if the cost of repairing the roof is £50,000, but the roof disrepair only reduces the value of the freehold (the reversion) by £20,000 (e.g. because the market rent is unaffected and the valuer considers the disrepair would be remedied by any purchaser within 2 years), the landlord can only recover £20,000 (not £50,000). In practice, the diminution in value is almost always less than the face value of the schedule — often significantly so — particularly where the property is sold shortly after lease expiry, where the new tenant will bring it back into repair, or where the disrepair is of a type that sophisticated buyers discount heavily; (b) Second limb (supercession): 'as also, in the case of a lease of a house, shop, or other building, the amount of damages shall not exceed the cost of the works required to make the premises comply with the covenant'. Where it is shown that the landlord intends at or after the termination of the tenancy to pull down, or to make structural alterations in the premises, which would render valueless the repairs covered by the covenant, the damages shall not exceed the cost of such repairs as would not be rendered valueless. In practice: where the landlord plans to demolish the building at lease end (or carry out substantial redevelopment), the disrepair has caused no loss to the landlord — the landlord would never have benefited from the repairs; the diminution in value of the reversion is nil or negligible; the landlord's recovery is therefore nil (Salisbury v Gilmore [1942] 2 KB 38 CA). This is the 'supercession' argument. The landlord cannot avoid supercession by abandoning their demolition/redevelopment plans after the fact.

• Section 18(1) first limb: damages cannot exceed the diminution in the value of the reversion at lease end; the schedule face value is almost always higher than the actual diminution in value — the s.18(1) cap regularly reduces the landlord's recovery significantly
• Diminution in value assessment: the diminution in value is the difference between (i) the value of the property in its actual disrepair state as at lease end, and (ii) what the value would have been if the tenant had complied with their covenants; this requires a specialist RICS surveyor's opinion on market value
• Second limb — supercession: where the landlord plans to demolish or substantially alter the building after lease end, the diminution in value is nil (the disrepair has caused no loss because the landlord was going to demolish the building anyway); the landlord's damages claim is therefore nil — a complete defence to the schedule
• Salisbury v Gilmore [1942]: the Court of Appeal confirmed that where the landlord intends to demolish, no damages are recoverable; the tenant can rely on the landlord's own planning permission or demolition plans to establish supercession; the landlord cannot abandon the plans after the fact to avoid supercession
• Practical impact: landlords should always carry out a diminution in value assessment before proceeding with a dilapidations claim; a terminal schedule worth £500,000 on its face may be worth only £100,000 after the s.18(1) cap is applied — and zero if supercession applies

Jervis v Harris Clauses — Self-Help and Avoiding the Section 18(1) Cap

The leading case of Jervis v Harris [1996] Ch 195 (CA) established that where a lease contains a self-help clause (a Jervis v Harris clause), the landlord can: (1) serve a notice on the tenant requiring the tenant to carry out specified repairs within a defined period; (2) if the tenant fails to carry out the repairs within the notice period, the landlord can enter the property and carry out the works; (3) the landlord can recover the cost of the works from the tenant as a contractual debt (not as damages). The critical distinction: a claim under a Jervis v Harris clause is a claim for a contractual debt (the cost of works actually carried out by the landlord), not a claim for damages. The s.18(1) LTA 1927 cap only applies to damages — it does not apply to a contractual debt under a Jervis v Harris clause. This means that where the landlord has exercised the Jervis v Harris self-help mechanism and carried out the works, the s.18(1) cap is sidestepped entirely — the landlord can recover the full cost of the works (provided those works were reasonably required under the lease). However: (a) the landlord must actually carry out the works before bringing the debt claim — the landlord cannot serve the Jervis v Harris notice and then claim the cost without doing the works; (b) the works must fall within the scope of the tenant's repairing covenant as defined in the lease — the landlord cannot use the self-help mechanism to carry out works beyond the tenant's obligation; (c) the clause must be precisely complied with — the notice must be in the form required by the lease and the notice period must have expired before entry; (d) the tenant's insolvency before the landlord carries out the works may affect the landlord's ability to enforce the debt claim. Practical importance of Jervis v Harris clauses: landlords negotiating new commercial leases should insist on including a Jervis v Harris clause as a standard provision — it provides significant additional protection compared with a simple repairing covenant. Tenants should be cautious about agreeing to Jervis v Harris clauses and should negotiate limitations on the landlord's self-help rights (e.g. minimum notice period; dispute resolution before entry; senior surveyor approval).

• Jervis v Harris [1996] Ch 195: a self-help clause in a lease allows the landlord to carry out repairs that the tenant has failed to do and recover the cost as a contractual debt (not damages) — sidestepping the LTA 1927 s.18(1) cap
• Debt vs damages: the s.18(1) cap applies only to damages for breach of a repairing covenant — it does not apply to a contractual debt for works actually carried out under a self-help clause; this is the key advantage of the Jervis v Harris mechanism for landlords
• Landlord must actually carry out the works: the self-help mechanism only works if the landlord actually enters and carries out the works before bringing the debt claim; a landlord cannot serve the notice and then claim the notional cost without doing the works
• Procedural compliance: the Jervis v Harris notice must strictly comply with the lease terms; the notice period must fully expire before the landlord enters; any procedural failure invalidates the mechanism and leaves the landlord with only a damages claim (subject to s.18(1))
• Negotiating the clause: landlords should always insist on a Jervis v Harris clause in commercial leases; tenants should negotiate minimum notice periods (56 days or more), a dispute resolution mechanism before entry, and restrictions on the scope of works the landlord can carry out

Reinstatement of Alterations and the RICS Dilapidations Protocol

Reinstatement of alterations: where the tenant has made alterations to the premises during the term (with or without the landlord's consent), the lease typically contains a reinstatement covenant — an obligation on the tenant to remove the alterations and reinstate the premises to their original condition at the end of the lease. Key points: (a) the landlord must have specifically required reinstatement — either at the time of granting consent to the alterations (by including a reinstatement condition in the licence to alter) or by giving notice at or before lease expiry requiring the tenant to reinstate; if the landlord does not require reinstatement within the timescales specified in the lease, the right to require reinstatement is waived; (b) where reinstatement is required, the cost of reinstatement is treated differently from repair — it is a specific contractual obligation (not subject to the s.18(1) cap in the same way, because the obligation is to remove the alterations rather than to repair disrepair); (c) the reinstatement obligation must be reasonable — courts have held that a landlord cannot require reinstatement where the original condition no longer exists (Ruxley Electronics v Forsyth [1996] AC 344 HL); (d) the cost of reinstatement can be very significant (strip-out of tenant fit-out in a large commercial unit can cost hundreds of thousands of pounds); tenants should seek to agree a financial contribution from the landlord in lieu of actual reinstatement at the time of granting consent (a 'payment in lieu' settlement). RICS Dilapidations Protocol: the RICS Guidance Note on Dilapidations (2012) provides a best practice framework for all parties. Key requirements: (i) the landlord must serve the terminal schedule within a reasonable time of lease expiry (a long delay may limit recovery); (ii) the tenant must respond with a Scott Schedule within 56 days; (iii) both parties' surveyors should attend a without-prejudice meeting; (iv) both parties should commission diminution in value reports; (v) mediation should be considered before litigation; (vi) the protocol applies in England and Wales (slightly different guidance applies in Scotland under RICS Scotland). Costs: the general rule is that costs follow the event in dilapidations litigation — the losing party pays the winner's costs; a claimant who recovers less than the Part 36 offer made by the defendant typically pays the defendant's costs from the date of the offer; this makes accurate valuation of the diminution in value cap critically important for landlords framing their claim.

• Reinstatement obligation: the landlord must specifically require reinstatement — by a condition in the licence to alter or by a notice at or before lease expiry; failure to require reinstatement waives the right; the timing of the reinstatement notice in the lease must be strictly observed
• Ruxley Electronics v Forsyth [1996] AC 344: the House of Lords confirmed that courts will not order reinstatement where the cost is wholly disproportionate to the benefit; where the premises cannot be reinstated to their original condition, a financial assessment of loss is appropriate
• RICS Dilapidations Protocol (2012): the protocol requires the landlord to serve the terminal schedule promptly; the tenant to respond within 56 days; a without-prejudice surveyor meeting; and consideration of mediation; non-compliance risks adverse costs orders in proceedings
• Payment in lieu of reinstatement: it is common for landlords and tenants to negotiate a lump-sum payment in lieu of actual reinstatement at the time of granting consent for alterations; this gives certainty to both parties and avoids the practical difficulties of strip-out works
• Part 36 offers: making and accepting or beating Part 36 settlement offers is critically important in dilapidations litigation — a landlord who recovers less than the tenant's Part 36 offer pays the tenant's costs from the date of the offer, even if the landlord wins overall; specialist costs advice is essential

Frequently asked questions