Terminal Dilapidations Disputes

• Interim dilapidations - breaches of repair or decoration covenants during the lease term. 
• Terminal dilapidations - breaches of repair or decoration covenants assessed at or after the expiry of the lease.

Liability can cover more than repair. Many leases include covenants to decorate, reinstate alterations, comply with statutory requirements, and “yield up” in a specified state. Schedules of Condition, licences to alter, or deeds of variation can all affect who pays for what and why.

Since interim remedies such as forfeiture and Jervis v Harris rights are only available during the term of the tenancy, the landlord’s only remedy for Terminal Dilapidations lies in damages. 

Common-law starting point 

The starting point for assessing the damages in Terminal Dilapidations claims is based upon the common law measure of damage. This means calculating the reasonable cost of the works plus any loss of rent while those works are completed. 

When a lease comes to an end, landlords often seek to recover the cost of repairs through a terminal dilapidations claim. However, their entitlement to damages is not unlimited. One of the most important statutory protections for tenants in this context is Section 18(1) of the Landlord and Tenant Act 1927. This provision operates to limit (or even extinguish) a landlord’s claim for dilapidations in certain circumstances. 

Section 18(1) Landlord & Tenant Act 1927 – the two 'limbs' 

Section 18(1) is divided into two key legal tests, commonly referred to as the two “limbs”. The table below explains how each limb works and when it may apply: 

Many terminal dilapidations disputes arise not just from disagreement over the cost of works, but from procedural or strategic errors particularly where parties fail to consider the statutory limits imposed by Section 18(1) of the Landlord and Tenant Act 1927 or overlook guidance set out in the Dilapidations Protocol. Common landlord mistakes can include:

• Inflated cost estimates that bear little relation to the property's actual loss in value (in breach of the first limb of Section 18). 
• Ignoring the Section 18 cap when commissioning remedial works, leading to claims that exceed the recoverable amount. 
• Overlooking planned redevelopment and its impact on recoverability particularly where the second limb extinguishes the claim entirely. 
• Late service of the terminal schedule, leaving certain costs irrecoverably, insufficient time for negotiation and/or increasing the risk of adverse costs if litigation follows. 

Common Tenant Defences 

Upon receipt of a terminal Schedule of Dilapidations, the tenant can respond by:

• Challenging the claimed loss by producing expert evidence on diminution in value, often showing the landlord’s loss is significantly lower than the cost of repairs. 
• Demonstrating the landlord’s genuine intention to redevelop the premises rendering the alleged dilapidations irrelevant under the second limb of Section 18(1). 
• Highlighting procedural delays, such as late service of the schedule or delay in re-letting, that have artificially increased the landlord’s claim for loss of rent. 
• Arguing that the works were unnecessary because a new tenant intended to carry out their own fit-out, thereby negating any alleged loss (a concept commonly referred to as “supercession”). 

The first step in a terminal dilapidations claim is for the landlord to prepare and serve a Schedule of Dilapidations. This document, usually prepared by a surveyor, outlines: 

• The alleged breaches of lease obligations by the tenant 
• The works the landlord believes are needed to put things right 
• An estimate of the cost to carry out those works 

The pre-action protocol for claims for damages in relation to the physical state of commercial property at termination of a tenancy applies to all terminal dilapidations disputes. It sets out the steps the court expects both parties to follow before starting legal proceedings. 

The Protocol provides guidance on timing, the format and content of the Schedule, and how information should be exchanged. It also encourages both sides to consider alternative ways of resolving the dispute - such as mediation - before going to court. 

As these claims can become complex and costly, it’s essential to take professional advice early. Getting the process wrong can lead to higher financial liabilities, including damages and legal fees. 

Our expert team of real estate disputes lawyers are specialists in both bringing and defending dilapidations claims. Together, our team can assist with the initial service of the Schedule (in line with the Protocol), negotiating and documenting settlements, preparing and responding to claims, and representing you in court or in ADR processes. Our team has extensive experience in this area of law, and will carefully listen to your objectives to provide the most practical and cost-effective solution. 

To find out how our expert team of real estate disputes lawyers can help you, contact us today on  0330 123 1229, send us an email via  info@smithpartnership.co.uk or complete our  contact form.