The dilapidations protocol has been adopted as a pre-action protocol under the Civil Procedure Rules (CPR) with effect from 1 January 2012.
The protocol relates to claims for dilapidations against tenants at the termination of commercial leases (terminal dilapidation claims).
It is worth noting that the protocol does not, at the time of writing, appear on the Ministry of Justice (MOJ) website. However, we have been informed by the MOJ that the protocol has been adopted with effect from 1 January 2012 and will be appearing on their website shortly.
The adopted protocol is in substantially the same form as the one issued previously by the Property Litigation Association (PLA) and which has been used for a number of years by surveyors having been annexed to the RICS guidance note.
The protocol is available on the PLA website.
It is important to consider the adopted protocol when dealing with a dilapidations dispute and to bear in mind that any material non-compliance may now result in costs penalties for the defaulting party.
Summary of the main changes
- It is now quite a bit shorter and has been amended to bring it into line with the general criteria for protocols (to, for example, omit substantive law).
- Some of the terminology has changed (for example, the word "serve" has been replaced by "send" and "landlord's claim" has been replaced by "Quantified Demand" to differentiate it from a formal claim under the CPR).
- The landlord's endorsement has been amended slightly and a tenant's endorsement has been introduced (further detail below).
Summary of the protocol
Most commercial property surveyors will already be familiar with the draft protocol but it is worth reminding ourselves of the key elements (and highlight in further detail the amendments):
- The protocol's objectives are to encourage the early and full exchange of information about the dispute to enable the parties to avoid litigation by agreeing a settlement prior to court proceedings and to support the efficient management of proceedings where litigation cannot be avoided.
- The landlord is required to send the tenant a schedule in the form attached to the protocol setting out what the landlord considers to be breaches, the works required to be done to remedy those breaches and, if relevant, the landlord's costings. The schedule should be sent in a reasonable time which is generally considered to be 56 days after the termination of the tenancy (although it can be sent before the termination of the tenancy). The schedule should be endorsed either by the landlord, or where it is prepared by a surveyor, by the landlord's surveyor to confirm that all the works are reasonably required to remedy the breaches, full account has been taken of the landlord's intention for the property and that any costings provided are reasonable.
- In place of what was previously called the "landlord's claim" is a requirement on the landlord to detail the Quantified Demand. This is not intended to have the same status as a statement of case in court proceedings but should set out clearly all aspects of the dispute and substantiate the sum sought as damages. It should also confirm that the landlord will attend a meeting and a timescale for the tenant's response. The figures set out in the Quantified Demand should be restricted to the landlord's likely loss. This is not necessarily the same as the cost of the works to remedy the breaches. Furthermore, the Quantified Demand should not include items of work that are likely to be superseded by the landlord's intentions for the property.
- The Response is not intended to have the same status as a defence in court proceedings and should be provided within a reasonable time which is usually 56 days (and using the schedule originally provided by the landlord). An endorsement is now required from the tenant confirming that the works detailed in the Response are all that are reasonably required for the tenant to remedy the alleged breaches, the costings are reasonably payable and account has been taken of what the tenant or its surveyor reasonably believes to be the landlord's intentions for the property. The tenant must also detail what items it believes will be superseded by works to be carried out by the landlord.
- Disclosure will generally be limited to those documents required to be enclosed with the Quantified Demand and the Response. Reference is made however to the possibility of either party making an application for pre-action disclosure under CPR Part 31.
- The landlord and tenant and/or their respective surveyors are encouraged to meet before the tenant is required to respond and to meet within 28 days after the tenant sends the Response.
- The parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation and may be required by the court to provide evidence that alternative means of resolving the dispute were considered. The protocol specifically states that the courts take the view that litigation should be "a last resort" and that claims should not be issued prematurely when a settlement is still actively being explored. The parties are warned that the court will take into account the extent of the parties' compliance with the protocol when making orders about who should pay costs.
- Prior to any proceedings being issued, the landlord should then quantify its loss by providing to the tenant a detailed breakdown of the issues and consequential losses based on either a formal diminution valuation or an account of the actual expenditure or a combination of both unless it would be unreasonable to do so.
- It is worth noting that where the landlord has not carried out the works specified in the schedule and does not intend to do so, then the landlord should provide a formal diminution valuation unless, in all the circumstances, it would be reasonable not to. If the tenant relies on the defence on the basis of diminution, it must state its case for so doing and provide a diminution valuation to the landlord. Where the procedure set out as above has not resolved the dispute, the parties should undertake one final stock take of their positions with a view to avoiding proceedings and at least narrowing the issues between them.
Commentary
The most obvious consequence of the protocol being adopted is the likelihood of a Court now imposing costs sanctions in the event of a party failing to comply in substance with the protocol prior to issuing Court proceedings (although a Court is not likely to be concerned with minor or technical shortcomings). It was always possible that a Court would impose sanctions for breaches of the informal protocol, but its formal adoption means that they are more likely to follow.
An area that is likely to be of concern (particularly to tenants) is the requirement to endorse the schedule of dilapidations and the Response. The requirement on the landlord or its building surveyor includes the confirmation that full account has been taken of the landlord's intentions for the property. The tenant or its building surveyor must now endorse the Response to confirm that account has been taken of what the tenant, or tenant's surveyor, reasonably believes to be the landlord's intention for the property.
One can anticipate occasions when both parties, and especially the tenant, will be loath to provide these endorsements. Will the tenant always feel able to give a view on what it "reasonably believes" to be the landlord's intention for the property? At least, the tenant is not required to point out other items that may need to be done if they have not been specified by the landlord.
We look forward to seeing how the formally adopted protocol is now used in practice and, no doubt in due course, referred to in court.