Dilaps/MH/13/10/2010. Copyright of 1stAssociated.co.uk, not to be used in any format without express written permission

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1 Dilaps/MH/13/10/2010 1

2 Contents Dilaps One Site Notes and Schedules of Conditions Page 6 Dilaps Two - Property Reports and the 4 R s Page 25 Dilaps Three - RICS Guidance Notes, Protocol and Scott Schedule Page 42 Dilaps Four - Legal Framework Page 60 Dilaps Five - Limitations - commercial valuations and Section 18 valuations Page 89 Dilaps Six - Review, lease information and setting goals Page 98 Dilaps Seven Alternative Dispute Resolution Page 115 Dilaps Eight - Presentations digestible format Page 124 2

3 Dilaps Help This book is the starting point for your Dilapidations knowledge This book offers nothing more than an overview of the basics of Dilapidations. Remember Dilaps is a live subject and as such will alter over time. Remember Dilapidations is both a science and art All the best with your studies Mark G Hurst MSc BSc FBEng MCIOB MRICS 3

4 Sources of Information RICS Guidance Notes and PLA Protocol Dilapidations Books Dilapidations Case in Point Published RICS Books Dilapidations Handbook Published Estates Gazette Commercial Leases A Surveyor s Guide Published RICS Books Dilaps Help Web sites Articles within the RICS magazines (Commercial) 4

5 Your Resources Where will you look for Dilaps Help? 5

6 Dilapidations One - Review Site Notes and Schedules of Conditions 6

7 Dilapidations Process 1. Client rings for advice / quote 2. Talk to client 3. Confirm instruction 4. Gather available information 5. View property 6. Prepare Schedule of Condition or Dilapidations report 7. Advise and agree way forward with your client 8. Meet other surveyor 9. Negotiate and agree 10. Negotiate and disagree and go to court 7

8 Types of Property Freehold and Leasehold 8

9 Landlords 1. Landlords own property for income (rent) and as an asset (defined as something that typically increases in value over the years) 2. Leases make the property a controllable asset 3. Why else do landlords own property and who are they? 9

10 Leasehold property Leases are Contracts between a Landlord and a Tenant The Landlord and Tenant Act gives contractual obligations Breaking these contractual obligations give dilapidations claims Schedules of Conditions can protect the tenants against the dilapidations claims. 10

11 Dilapidations are about Leasehold Properties A Schedule of Condition creates a record of what the property is like at the time the lease is taken out. 11

12 Tenants Usually make an offer based on the heads of terms, they have not usually seen the lease 12

13 Address of Property to be leased Landlord s name and address details Landlord s solicitor s name and address details Tenant s name and address details Tenant s Solicitor s name and address details. 13

14 Address of Property Solicitor 14

15 Schedule of Condition Example of a few External Pages from a Schedule of Condition FRONT ELEVATION 15

16 DESCRIPTION FRONT ELEVATION CONDITION ACTION REQUIRED Chimneys: Two chimneys (stone clad one to right hand side and brickwork one to left hand side) Roof: Shallow pitched roof We can also see the flat roof. Gutters and Downpipes: Box guttering, downpipes and Fascias and soffits Walls: Cavity brickwork Vertical tiling External Joinery: Front entrance door Casement windows Paved Area: Hexagonal concrete paved area with smokers tent Signage and Lighting: Average condition Some tiles missing and also from our investigations there is rotten timber beneath. Leak to left hand side Marks and old fixing works Some tiles missing Marked and sill worn Damaged and dirty Copyright Average, of 1stAssociated.co.uk, some marks. Re-apply reflective paint and check for ad-hoc repairs. Repair Clean and repair Replace Repair and redecorate Clean, repair and redecorate In need of repair, replacement and cleaning 16 General clean and touch up.

17 Property Report The Property Report identifies the key issues the property has and looks specifically at issues relating to how your client wishes to use the property and anything else your client is interested in; it allows negotiation A property report is a name we have given to the report that is carried out under various different names, including pre-lease report, building survey or structural survey. 17

18 Questions you should be asking when Preparing an SofC and a Property Report 1. Major defects in the Lease term in the next 10, 20, or possibly 50 years? 2. Defects requiring immediate repair? 3. High level issues, such as roof repairs, gutter repairs, parapet wall repairs, as these are likely to be costly? 4. Any Roof Structural work? 5. Any structural work, such as cracks? All recorded onto your site notes 18

19 Site Notes 1. Develop a clear consistent way of recording your findings 2. Use sketches for floor plans, roof plans and any details that are important 3. Also have a photographic record 19

20 Legal Frame work for Commercial Property 1. Law of Property Act Landlord and Tenant Act Leasehold Property (Repairs) Act Occupiers Liability Acts (1957 and 1984) 20

21 Tenants Negotiate can and do negotiate using a Schedule of Condition and Property Report Typically the Business Owner / Lessor / Tenant only sees the Heads of Terms of the property briefly before making an offer on the property. The Heads of Terms (sometimes known as the Heads of Lease) will cover things like the demise area, the lease term and type, i.e. full repairing and insuring, and any break clauses and, of course, rent. 21

22 Question Sheet 1 1. Why do we have leases? 2. Why don t all wealthy businesses own the properties? 3. Does your client/tenant understand the obligations of a Full repairing lease? 22

23 Things To Do 1. Search the internet for good web sites that will Help you with Dilapidations 2. Dilapidations web sites can be a good up to date source of information 23

24 Your Resources Where will you look for Dilaps Help? 24

25 Dilapidations Two - Review Property Reports And The 4 R s 25

26 Property Reports 1. Looking at the key problems 2. Gives a summary of your findings 3. Relates them to the lease 4. Relates them to the clients needs Remember it is property issues in relation to the lease What type of Lease is it? Most leases are full repairing and insuring (FRI). 26

27 Get to Know your Client; 1. Accountants 2. Bakery 3. Restaurant 4. Bank 5. Building society 6. Children s Nursery 7. Dental Practice 8. Doctors Surgery 9. Dry cleaners Example clients 10. Fast Food 11. Financial Advisers 12. Garden Centre 13. Hair dressers 14. Internet Café 15. Out door activities 16. Phone shop 17. Wine Merchants 18. If the dice lands on 18. you can choose any client you wish 27

28 Types of Client 1. Informed client addicted to buying property 2. Informed client regularly buys property 3. Property professional 4. DIYer 5. Experience of buying property but not property knowledge 6. No property knowledge and no previous experience 28

29 Reading Leases Fast! Ask the solicitor to only send you the relevant parts! 29

30 Reading Leases Fast You are looking for the Four Rs covenants and a Yield up Clause 1. Repair Covenant 2. Redecoration Covenant 3. Reinstatement Covenant 4. Statutory Requirements covenant 5. Yield up clause Or, better still Ask the solicitor to give you the relevant clauses (it s a lot easier) 30

31 The 4Rs If we had the lease we would have looked for 4Rs and yield up 31

32 The 4Rs Repair Covenant Redecoration Covenant Reinstatement Covenant Statutory Requirements covenant Yield up clause 32

33 (1) Repairs Throughout the said term well and substantially to repair and keep in good and substantial repair and condition the Demised Premises including all appurtenances thereto belonging and the sanitary water heating cooling and ventilating apparatus the sewers drains conduits gutters watercourses boundary walls and fences pipes cables wires ducts and mains and apparatus associated therewith and any equipment and fittings ancillary thereto forming part of the Demised Premises or solely serving the same and to renew and replace from time to time all Landlord fixtures and fittings being part of the Demises Premises which may become beyond repair 33

34 (2) Redecoration In a proper and workmanlike manner to paint with three coats of good quality paint all the wood metal and other parts of the Demised Premises heretofore or usually painted as to the external work in the third year and as to the internal work in the third year of the said term and in each case the painting to be done as well in the last three months of the term (howsoever determined) provided that there is an interval of two years between the works with good quality materials 34

35 (3) Works required by statute local and other authorities To observe and perform all requirements of and to do and execute or cause to be done and executed all such works and things as under or by virtue of any Acts of Parliament local Acts Building Regulations or bye-laws already or hereafter to be passed and rules and regulations hereunder now are or shall or may be directed or required to be done or executed upon or in respect of the Demised Premises or any part thereof or in respect of the user thereof whether by the owner Landlord Tenant or occupier thereof and at all times during the term hereby granted to indemnify and keep indemnified the Landlord against all claims demands expenses and liabilities in respect thereof 35

36 (5) Yielding up To yield up the Demised Premises (but not with trade and other tenant s fixtures) with vacant possession (subject to the provisions of the Landlord and Tenant Act 1954) at the determination of the said term in good and substantial repair and condition in accordance with the covenants hereinbefore contained 36

37 The 4Rs Which of the 4Rs is missing 37

38 The 4Rs Repair Covenant Redecoration Covenant Reinstatement Covenant Statutory Requirements covenant Yield up clause 38

39 If a tenant does not have a Schedule of Condition what happens? Towards the end of the lease a Schedule of Dilapidations is served by the Landlord s representative. 39

40 Questions Sheet 2 1. What are the important clauses in a lease that the surveyor must read and understand? 2. Why are the lease clauses so important? 3. How can a Tenant protect themselves from a Dilaps claim? 40

41 Read the RICS Guidance Note Things to Do It s very readable and Downloadable 41

42 Dilapidations Three - Review RICS Guidance Notes and Protocol and Scott Schedules 42

43 The Dilapidations Battle Looking at it from a Landlord s perspective Serving Schedules of Dilapidations help protect your controllable asset. 43

44 What is a Schedule of Dilapidations 1. It s a list of breaches the Landlord believes the tenant has made in the lease 2. Dilaps are served under section 146 of the1925 Law of Property Act. 3. Limited by Section18 of the Landlord and Tenant Act (1927) 44

45 Read the RICS Guidance Note RICS Guidance It s very readable And downloadable 45

46 A Schedule of Dilapidations can be Served at Different Times 1. Repair notice (served any time) 2. Interim notice (three years plus) 3. Terminal schedule (last three years) 4. Final schedule (after the lease has ended) 46

47 Example of a Schedule of Dilapidations 47

48 1. Must include a list of breaches the surveyors Landlord believes the tenant has made in the lease 2. The clauses should be numbered (but left blank in the example) relating to the lease 3. So you need to read the lease! 48

49 49

50 You must read the lease When you are working for the landlord, look for 4Rs covenants and yield up 50

51 Read Leases You are looking for the Four Rs and a Yield up Clause 1. Repair Covenant 2. Redecoration Covenant 3. Reinstatement Covenant 4. Statutory Requirement covenant 5. Yield up clause Or, better still Ask the solicitor to give you the relevant clauses (it s a lot easier) 51

52 No Limits As things stand today there is no limit to the number of Schedules of Dilapidations that can be served during the life of a lease and up to six years (possibly twelve years) after determination. 52

53 Landlord Remedy to a tenant defaulting on the lease Claim for Damages most common Where the landlord seeks monetary compensation after the tenant has left the property without carrying out the repairs. Landlords re entry to repair - rare Forfeiture - rare Where the landlord exercises his right to take back the property Specific Performance very rare Where the landlord exercises the right to have specific work carried out 53

54 Agreement between Surveyors 1. Usually the Landlord s and Tenant s Surveyors agree the work required 2. A Scott schedule is the usual way to do this, it sets out the landlords and the tenants claim and is also used in court if necessary 54

55 Scott Schedule 55

56 Heads of Claim This is a summary of all the costs when they have been agreed between the Landlord and the Tenant 56

57 Once agreement has been made many surveyors use what is known as a Heads of Claim'. This sets out the costings, which we would recommend. 57

58 Things to do Read a Dilapidations book, for example: 1. Dilapidations Case in Point Published RICS Books 2. Dilapidations Handbook Published Estates Gazette 3. Commercial Leases A Surveyor s Guide Published RICS Books 58

59 Things to do Read a Dilapidations web site, or two for example: 1. DilapsHelp.com 2. DilapsHell.com 59

60 Dilaps Four Review Legal Framework 60

61 Legal Framework 1. The vast majority of Dilaps claims are resolved without legal action and are agreed within the legal framework by Chartered Surveyors. 2. Remember to read the Lease 3. Remember to read the RICS Guidance Notes and Protocol 4. Establish the requirements/covenants of the Lease 4.1 Repair 4.2 Redecoration 4.3 Reinstatement 4.4 Statutory Regulation 4.5 Yield up 61

62 Some classic Case law Only by reading about the case law will you understand them Case Proudfoot v Hart Calthorpe v McOscar Belcher v McIntosh Hatfield v Moss Dobson v Canterbury CC Maddoc v Davis Perry v Chotzner Regis v Dudley Brown v Davis In a few words Repair Meaning Better than All included Future use Actual cost No tiny defects Consequential loss Fair wear tenant to prove Date Norwich Union v BR Board Beyond Repair

63 Further Case law Only by reading the cases in full will you understand them Case Cornish v Cleife Brew Bro v Snaz Low v Innes PO v Aquarius Quick v Taff Ely BC In a few words New Buildings Design or inherent defect Rebuilt Attend to damage done Future use Date

64 Repair Proudfoot v Hart

65 Meaning of Words Calthorpe v McOscar (1924) 65

66 Better than the Original Belcher v McIntosh (1839). 66

67 All Included Hatfield v Moss

68 Likely Fate of the Property Must be Taken into Account Dodd Properties v Canterbury City Council (1980) 68

69 You will find many cases are very similar, and specific to the case in question Ultimately expert advice will be needed 69

70 Fair Wear & Tear Regis Property Co Ltd v Dudley (1979). 70

71 Fair Wear and Tear Onus of proof lies with the tenant on fair wear and tear Brown v Davies (1958). 71

72 Beyond Repair Norwich Union v BR Board (1987) 72

73 New Buildings Cornish v Cleife (1864). 73

74 Design or Inherent Defects Brew Bros v Snaz (Ross) (1970) 74

75 Rebuild Lowe v Innes (1864) 75

76 Causation Post Office v Aquarius Properties (1978) 76

77 Good Sense Quick v Taff-Ely B.C. (1985) 77

78 Minimum and Maximum Plough Investments v Manchester CC. 78

79 Good Habits Keep up to date with case law Get to know a few other people to talk to about dilapidations 79

80 A Few More Classic Cases 80

81 Old does not mean Disrepair Reger International Ltd v Tiree Ltd

82 Patch Repair Carmel Southend Ltd v Henshaw Ltd

83 Court has Final Say Johnsey Estates Ltd v Secretary of Environment Transport and Regions

84 Landlords - Interesting Facts Before 1 st January 1996 the head / original tenant is ultimately responsible for the term of the lease and any breaches 84

85 Why can t a Tenant Walk Away Because they usually have a guarantee or a guarantor. 85

86 Tenants Interesting Facts 1. A tenant s surveyor when preparing a Schedule of Condition should be general. 2. It is difficult for a Landlord s surveyor to argue against the quality of repair carried out by a tenant unless it is poor. 86

87 Site Notes Take good notes that will be readable in years to come (or days to come). 87

88 Things to do 1. Know where to find Dilapidations case law 2. Read a selection of the case laws 88

89 Dilaps Five Review Limitations Commercial Valuations and Section 18 Valuations 89

90 We value a residential property using comparable methods. We value a HMO (House of Multiple Occupancy) based on rental income. We value a Commercial Property based upon rental income. 90

91 Valuing for Section 18 Valuations The difference between a property in good condition compared with the property that you have got at the end of a lease. 91

92 Industrial Building Look at similar property and establish returns: ,000 OMV 30K MR ,000 OMV 10K MR ,000 OMV 40K MR ,000 OMV 15K MR 92

93 1. 150,000 OMV 30K MR ,000 OMV 10K MR ,000 OMV 40K MR ,000 OMV 15K MR If we average them and then multiply by the rent of the property that we are looking at we get the market value. 93

94 Used for the Purposes of your Building in: Presentation 1. POOR market condition a multiplier of 6 2. BELOW AVERAGE market condition a multiplier of 8 3. AVERAGE market condition a multiplier of 9 4. GOOD market condition a multiplier of 10 94

95 Estimating Building Costs Use the Labour cost plus Materials cost plus an adjustment for the type of work, access and buildability. Or Get a quote from a builder Or Get an estimate from a Quantity Surveyor Or Use a pricing book 95

96 Question sheet 1. How do both parts of section 18 protect a tenant? 2. Which covenant does section 18 relate to? 96

97 Things to do 1. Talk to a commercial agent about property they have sold recently and find out typical yields 2. Price a Schedule of Dilapidations 97

98 Dilaps Six Review, Lease Information and Goals 98

99 Sources of Information RICS Guidance Notes and PLA Protocol Dilapidations Books 1. Dilapidations Case in Point Published RICS Books 2. Dilapidations Handbook Published Estates Gazette 3. Commercial Leases A Surveyor s Guide Published RICS Books Dilapidations Help Web sites Articles within the RICS magazines (Commercial) 99

100 Dilapidations Process 1. Client rings for advice / quote 2. Talk to client 3. Confirm instruction 4. Gather available information 5. View property 6. Prepare Schedule of Condition or Dilapidations report 7. Advise and agree way forward with your client 8. Meet other surveyor 9. Negotiate and agree 10. Negotiate and disagree and go to court 100

101 Site Visits Remember to take photographs, make sketches, walk around the area, talk to anyone and everyone, take your time and record everything you see. 101

102 Information needed 1. Lease! 2. Drawings of the demise 3. Schedule of Condition if there is one 4. Side letters - check it s legally binding 5. Licences and any approved alterations, drawings & spec 6. Original photos 7. Original sale details 8. Anything the tenant / landlord feels is useful 102

103 Example of an External Section of a Schedule of Condition Name the ELEVATION DESCRIPTION Chimneys: CONDITION ACTION REQUIRED Roofs: Gutters and Downpipes: Walls: External Joinery: General Comments: 103

104 Example of an Internal Section of a Schedule of Condition Room DESCRIPTION Ceilings: CONDITION ACTION REQUIRED Walls: Floors: Joinery: Services: 104

105 DESCRIPTION FRONT ELEVATION CONDITION ACTION REQUIRED Chimneys: Two chimneys (stone clad one to right hand side and brickwork one to left hand side) Roof: Shallow pitched roof We can also see the flat roof. Gutters and Downpipes: Box guttering, downpipes and Fascias and soffits Walls: Cavity brickwork Vertical tiling External Joinery: Front entrance door Casement windows Paved Area: Hexagonal concrete paved area with smokers tent Signage and Lighting: Average condition Some tiles missing and also from our investigations there is rotten timber beneath. Leak to left hand side Marks and old fixing works Some tiles missing Marked and sill worn Damaged and dirty Copyright Average, of 1stAssociated.co.uk, some marks. Re-apply reflective paint and check for ad-hoc repairs. Repair Clean and repair Replace Repair and redecorate Clean, repair and redecorate In need of repair, replacement and cleaning 105 General clean and touch up.

106 Legal Contract - The Lease 1. The lease is a legal contract 2. Breaches of the contract are actionable 3. It s also governed by the CPR - Civil Procedure Rules 4. A Schedule of Dilaps is a list of the breaches (or should be) of the lease 5. It can end up in high court but in reality the chartered surveyors nearly always sort it out only about 3% of cases go to court 106

107 107

108 108

109 Once agreement has been made many surveyors use what is known as a Heads of Claim'. This sets out the costings, which we would recommend. 109

110 Goals and Presentation 110

111 Goal Plan Action! 111

112 Goals 1. Goal Make your goals specific 2. Plan Write down what you have to do 3. Action Time manage 112

113 SMART Specific Measurable Attainable Reasonable Time managed goals 113

114 Questions Can you explain these terms? 1. S of C 11. Types of damage claims 2. S of D 12. CPR 3. Scotts Schedules 13. Section 146 notices 4. RICS GN 14. T & C letter 5. Section 18 valuations 15/ Dilaps process 6. Costing Dilaps 16. Dilaps case law as listed 7. Licences 17. ADR 8. Break clauses 9. Side letters 10. Covenants types of 4 Rs & yield up 114

115 Dilaps Seven Review Alternative Dispute Resolution 115

116 ADR Alternative Dispute Resolution Alternative to a trial in summary Commonly: 1) Mediation An agreed way forward 2) Arbitration Based on evidence from the parties or by enquiry 3) Independent expert determination No rights to appeal 116

117 RICS Dilaps Guidance Notes RICS Guidance Notes and incorporate civil protocol. 117

118 Civil Procedure Rules 1. Legal profession encourages ADR 2. See this as Alarming drop in revenue 3. Interestingly used to be 95% success 4. But now CPR requirement 75% success 5. Why? 118

119 Mediation 1. Quicker and cheaper One day is possible if both parts wish 2. Flexibility think outside the box 3. Consensual agreement or carry on to court 4. You can keep the business relationship 119

120 Arbitration 1. Speed 2. Cost 3. Privacy 4. Same as mediation but 120

121 5. Advantages over litigation is that Judges have extensive legal knowledge but little technical knowledge 6. Appoint a single arbitrator with appropriate technical knowledge 7. Few cases are ultimately based on a point of law 121

122 Technical Expert 1. Using an appropriate technical expert but you hand over the decision making to a third party who focuses on the case in point only 2. Both parties provide evidence 122

123 Independent Expert Determination 1. As previously described but no right to appeal 2. It does mean you get a solution without going to court 123

124 Dilaps Eight Presentations Digestible Format 124

125 Make sure your presentation: States the BENEFITS for the audience PLAN: Explains the Presentation Structure PRESENT: in a DIGESTABLE FORMAT 125

126 Start Tell the audience what you re going to tell them: We will explain three important issues in the Dilaps process: The overview For example 1. Section Lease term put and keep in good repair 3. Benefits of ADR 126

127 Middle Tell them - in in a digestible format Explain at an appropriate level 1. Commercial property type, client 2. How S of C or S of D are served 3. And 4. Explain about the lease, 4 Rs & yield up etc etc 127

128 End Tell them what you ve told them To review our presentation, the main issues are: 1. Section 18 Dilaps only relate to repair issues 2. Lease clauses are best explained by reference to case law in this case??? 3. ADR or Alternative Dispute Resolution can take the following forms - We recommend X,Y & Z 128

129 Presentation Structure Start - Tell the audience what you re going to tell them Middle Must be Digestible End - Tell them what you ve told them. 129

130 Thank You John Maguire, Chartered Surveyor John Goddard, Chartered Surveyor Terry Davis, Chartered Surveyor Simon Deakin, Chartered Surveyor Jon Miller, Solicitor Steve Moore, Sheriff Tony Bains, Graduate Surveyor Julia Neill, Lead Secretary 130

131 131