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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
The dilapidations pre-action protocol – the new regime
Article Type: Corporate law outlook From: Strategic Direction, Volume 28, Issue 3
The Dilapidations Protocol (to give its abbreviated name) is a code of practice to which all commercial landlords and tenants must have regard prior to issuing court proceedings for damages for items of disrepair existing at the premises at the end of a commercial tenancy. Given their exposure to costly reinstatement, multiple retailers may welcome the introduction of the Protocol and the clarity it could bring.
This article briefly examines the main provisions of the Protocol, the recent changes to it, and highlights some of the considerations for landlords and tenants.
Since the first version of the Dilapidations Protocol was published in Spring 2002, it has evolved through a number of consultations and re-drafts. Now in its third version, the primary objectives of the Protocol are to:
try to reduce the number of dilapidations claims going to Court by encouraging early discussion and the sharing of information and evidence between the parties; and
discourage landlords from making grossly exaggerated monetary claims and/or using dilapidations as a means of dissuading a tenant from quitting the premises.
As property professionals will know, the Protocol has historically been used as a code of good practice for dealing with a dilapidations claim made by a landlord against his exiting tenant. However, from 1 January 2012, the Protocol will become law and will form part of a group of pre-action protocols falling under the Civil Procedure Rules.
From that date, all commercial landlords, tenants, and property professionals (particularly surveyors and lawyers) will need to ensure material observance of the Protocol's provisions, with the possibility of adverse costs consequences for non-compliance should a dilapidations claim get to Court.
1. Changes to the Protocol
The latest version of the Protocol (published last month) has been made shorter than previous versions, as well as incorporating a few changes. So, what are these changes?
Landlord/Surveyor's endorsement – the landlord (or his surveyor's) endorsement of a terminal dilapidations schedule will need to carry an additional affirmation that account has been taken of the landlord's intention for the premises at the end of the Term of the lease. It follows that this includes whether or not the landlord intends to demolish the premises upon the expiry of the Term, or if there are any other supercession issues.
By way of example, if a landlord (or his surveyor) includes in a terminal schedule a claim for items of disrepair which he (or his surveyor) knows will not require repair or replacement or are rendered obsolete because the landlord intends to demolish or reconfigure the premises, then he (or his surveyor) should now be extremely careful about signing the endorsement when he knows that he is giving possibly misleading information and/or if he has a another purpose in bringing the dilapidations claim in the first place.
Tenant endorsement – whilst previously there was no requirement upon a tenant (or his surveyor) to endorse his own response to the landlord's terminal schedule, the new version of the Protocol expressly requires such an endorsement. The effect will be to encourage tenants and their surveyor not to assert a lower cost for specified works than they really think is the case. It will also mean that tenants should avoid taking out of the terminal schedule certain works which they know or think really ought to be done.
Wording of the Protocol – this has been tightened and certain terms brought into line with the terminology already used in the CPR.
2. Time limits and ADR
The time limits for a landlord to serve a terminal schedule, and for the tenant's response to it, remain the same; as does the requirement for the parties to actively consider and engage where appropriate in alternative dispute resolution (such as a without prejudice meeting) both before the time limit for the tenant's response and again prior to proceedings being taken.
3. What impact will the new Protocol have both generally and for retailers?
So what will be the main effect of the implementation of the Protocol into law and what will this mean for the parties involved? Primarily, it will mean that landlords, tenants, and their professional advisers will be placed under a greater burden to ensure the accuracy of their respective claims and responses, as well as encouraging genuine and early participation in ADR. Further, whilst minor non-observance is unlikely to bring about any significant penalties, the emphasis on the Protocol has changed. Parties to a dilapidations claim will now have to take the Protocol more seriously than was previously the case. Similarly, non-compliance could lead to a party having to field difficult questions by the trial judge (and a possible costs order against them).
Whilst the Protocol will affect all landlords and tenants in a number of sectors, multiple retailers should in view of potential cost have greater regard to their lease covenants regarding alterations and yield up. The protocol should strike a fairer balance between landlords and tenants with tenants now having an enforceable code of practice, which they can use to their advantage in lease negotiations.
It is common for both the alterations and yielding up clauses in a lease to require the tenant at the end of the Term to strip out its fixtures and fittings (racking, signage etc) and reinstate any alterations made. Tenants in the retail sector should revisit their standard form of wording of these clauses to reflect the changes in law and to limit their exposure at the end of the Term. Tenants should benefit from savings in terms of both reinstatement works and professional fees.
Landlords (and their professional advisers) should be careful not to commence dilapidations claims without due regard to both the Protocol and lease terms. This is particularly the case given the emphasis now placed by the Protocol upon the importance of the endorsement and each party's honest belief in the contents of a dilapidations schedule and the tenant's response.
Whilst the practical effect of the Protocol remains to be seen over time if adhered to properly by both landlords and tenants it is hoped it will help to bring clarity to a much debated area of law.
Geraint Pinches is a solicitor in Gordons' Commercial Litigation team with specific expertise in all forms of property and commercial landlord and tenant disputes. If you have any queries or would like further information on the issues covered in this article please contact Geraint on 0113 227 0228 or at: email@example.com
Geraint PinchesCommercial Litigation Solicitor, at the Yorkshire law firm Gordons.
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