Author; Ciara Fairley, Falcon Chambers, 27th February 2013
- The Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (“the Dilapidations Protocol”) has now been in force for just over a year, having been formally adopted on 1 January 2012. It is now one of 12 pre-action protocols under the Civil Procedure Rules.
- The aim of such protocols is well-known: they are intended to encourage the parties to a potential dispute to engage in meaningful negotiation at an early stage so that they can either settle their dispute without the need for litigation or, failing that, go forward with an appreciation of the case they will be asked to meet and the possible risks of proceeding: see para. 2.1 of the Dilapidations Protocol, which also draws attention to the objective of supporting the efficient management of proceedings once they have been commenced.
- That may seem especially sensible in the case of terminal dilapidations disputes which often land up being very costly and where the parties may benefit from an early exchange of information. It was, perhaps, partly in recognition of this fact that the Property Litigation Association was prompted to introduce its own (rather fuller) version of the protocol as long ago as 2002. The PLA’s Dilapidations Protocol was endorsed by RICS in its Dilapidations Guidance Note of the same year where it was said to represent “best practice” and was subsequently followed in many cases.
- The draftsmen of the current protocol therefore had available to them over a decade’s worth of experience and comment from the landed professions. One would hope that the Dilapidations Protocol builds on that experience and irons out difficulties with the informal regime as well as adding some improvements. Is that hope borne out and what, in any event, should we make of the new Dilapidations Protocol?
An Outline of the Protocol’s Provisions
- We imagine that most of you will already be familiar with the detailed provisions of the Dilapidations Protocol and do not intend to go through it line by line. What follows is a brief summary, only.
- In broad outline, the landlord is required to send the tenant a Schedule of Dilapidations (usually) within 56 days after the termination of the tenancy. The Schedule should set out (i) what the landlord considers to be the breaches; (ii) the works required to be done to remedy those breaches; and, if relevant (iii) the landlord’s costings.
- Importantly, the Schedule should then be “endorsed” by the person who prepared it (whether that is the landlord or the landlord’s surveyor) confirming that it contains his “true view” in relation to certain specified matters. Specifically, (i) that all the works set out in the Schedule are reasonably required to remedy breaches; (ii) that full account has been taken of the landlord’s intentions for the property (or, in the case of surveyors, that full account has been taken of those intentions as advised by the landlord); and (iii) that any costings are reasonable: see para. 3.6.
- The landlord is also required to send the tenant a copy of what the Protocol refers to as a “Quantified Demand”. This should set out “all aspects of the dispute” and substantiate the sum which the landlord seeks in damages in respect of the breaches, as well as any other items of loss for which damages are sought: para. 4.1.2. It is specifically provided that the figures set out in the Quantified Demand should be restricted to the landlord’s “likely loss” (which the landlord is reminded is not necessarily the same as the cost of works to remedy the breaches, though no further guidance is given): para. 4.5. Further, the Quantified Demand should not include items of work that are likely to be “superceded” by the landlord’s intentions for the property: para. 4.6.
- The tenant is then given a further 56 days (typically) in which send a Response setting out its own position in relation to each item on the landlord’s Schedule. This must also be endorsed by the person making it – variously, the tenant or the tenant’s surveyor – to certify that (i) the works detailed in the Response are all that is reasonably required for the tenant to remedy the alleged breaches; (ii) any costs set out in the Response are reasonably payable for such works; and (iii) full account has been taken of what the tenant (or tenant’s surveyor) reasonably believes to be the landlord’s intentions for the property.
- The final requirement worth touching on is set out in paragraph 9 which requires the landlord, prior to issuing proceedings, to 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, where it has carried out some but not all remedial action, a combination of both; unless in all the circumstances, it would be unreasonable to do so”.
- As part of this process the landlord must identify any works which it hasn’t yet carried out but does intend to carry out, and to specify when it is intended to do those works and any preparatory steps which have already been taken: para. 9.3. In such a case (or where the landlord hasn’t carried out all the works specified in the Schedule and does not intend to carry out some or all of them) the landlord must also provide a formal diminution valuation unless it would be reasonable not to.
- The tenant, for its part, is in a rather different position since it must provide a diminution valuation in any case in which it proposes to rely on a defence based on diminution – there being no saving provision that such a valuation need not be obtained where it would not be reasonable to do so: para 9.5.
- It is difficult to fathom the rationale for the different treatment as between landlord and tenant in this context. It is not hard to imagine circumstances in which the works proposed by a landlord are so manifestly unnecessary that a section 18 valuation would be nothing more than an expensive waste of the tenant’s time and money. They landlord is not obliged to obtain a valuation where it would not be reasonable to do so; why should the tenant not be given the same latitude?
- It has also been argued that obtaining valuations is too expensive an opening step in many claims. Although the landlord’s diminution valuation is still required at the end of the pre-action process (being required immediately before proceedings are issued) there are still those who think that this front loads the cost of litigation. If the parties do settle, the expense is wasted. I return to this point below.
- Having set out the overall scheme of the Dilapidations Protocol, and some of the more obvious objections, we turn to consider in more detail some of the issues it throws up. These are intended to be talking points and we welcome your views.
The Landlord’s Intentions
- One area that has already attracted a fair amount of critical comment is the requirement for the landlord to disclose its intentions for the property. The relevance of the landlord’s intentions to any dilapidations claim will be obvious and will be discussed in greater detail in the later parts of our presentation. It is not that the Dilapidations Protocol makes those intentions relevant in a way that they weren’t previously (or so it may be said); nor is it the case that a surveyor preparing a Schedule of Dilapidations in the past would necessarily have done so in complete ignorance of their client’s intentions for the property.
- But there are important differences concealed here – of both theory and practice. One is that the surveyor is now required to certify that “full account” has been taken of the landlord’s intentions in the preparation of the Schedule of Dilapidations. That will necessarily require the surveyor to ask the landlord what its plans for the property are, if they are not voluntarily disclosed, in a way which was not previously the case. The landlord will, of course, be under the same obligation in the event that it prepares the Schedule personally and must otherwise (one presumes) answer any questions which are put it concerning its intentions truthfully.
- This is to say nothing of disclosure. The Dilapidations Protocol makes specific provision for the disclosure of certain documents and also draws express attention to the parties’ ability to apply for pre-action disclosure under CPR Part 31. The landlord’s intentions in relation to the property, of which full account has been said to have been taken, are likely to be recorded somewhere and it may be that the Protocol lands up encouraging more such applications as a result.
- In any event, the combined effect of the new provisions is that a landlord’s actual intentions for the property are likely to become clearer at a much earlier stage under the Dilapidations Protocol than they may have done in the past. Since those intentions often effect whether it makes any sense to pursue a claim (or to resist one) many claims which would previously have dragged on before finally settling may do earlier and on rather different terms.
The Significance of Endorsement
- In the preceding paragraphs we considered the consequences of the fact that surveyors will often be called upon to certify that full account has been taken of the landlord’s intentions, as advised by the landlord or as reasonably believed to be by the surveyor. This is just one of the matters which surveyors are called upon to confirm under the Dilapidations Protocol. The other matters relate to the necessity for the works and the costs reasonably payable in respect of those works, both of which must now be declared to represent the “true views” of the surveyor preparing the report.
- That, in our opinion, would seem to settle finally the debate about the extent to which surveyors can be “economical with the truth” in preparing reports or dealing with the other stages in the pre-action stages of litigation (to the extent that debate still remains a live one). A surveyor preparing a Schedule of Dilapidations before proceedings have been commenced is now expressly obliged, as a matter of law, to limit his schedule to only those works which he believes are reasonably necessary, and whose costs are reasonable, irrespective of any other duty of good faith or professional code which he may be acting under.
- I began this discussion by saying that it was obvious why a landlord’s intentions were relevant in the context of terminal dilapidations. But is that correct? The Dilapidations Protocol encourages the parties to focus on the actual landlord’s actual intentions for the property. But why are those intentions relevant?
- It is true that they can be relevant to the second limb of section 18 – and directly so. If the actual landlord actually intends to demolish the property or carry out significant structural work then his damages claim will be extinguished. Evidence of what the actual landlord intends to do to the property may also be indirectly relevant to the first limb of section 18 – in the sense that it may suggest what a reasonable hypothetical purchaser of the landlord’s reversion would do and thus be probative of the diminution in value in the property by reason for the disrepair. But, then again, it may not: it will all depend on whether what the landlord wants to do to the property, or what he values, accords with what the market values.
- That assumption will be borne out in some cases, but not in others. Knowing what the actual landlord actually intends to do may be a useful heuristic (and often much easier and cheaper to find out than a full valuation) but it would be wrong to lose sight of the fact that it is diminution in value which is important. It operates as a statutory cap on all damages claims in the context of terminal dilapidations: to the extent that the landlord’s own intentions for the property do not keep pace with the value of his property (as assessed by the marked) they are surely irrelevant (as, for example, where what the actual landlord intends to do is to repair a valueless building).
- To the extent that the Dilapidations Protocol, instead, makes intentions centre-stage it may be accused of misrepresenting the legal position and, worse still, encouraging the parties to proceed on a false footing – spending time and money investigating matters that may well turn out to be completely irrelevant and settling and/or making important decisions about the case on the bases of such matters when their attention really ought to be directed elsewhere.
- Contrary, therefore, to what was said above, what is surprising is not how early the parties are required to produce evidence of diminution in value under the new Dilapidations Protocol, but how late.
What is the Significance of the fact that the Protocol is now part of the CPR?
- Another issue which has provoked some debate is the extent to which the formal adoption of the Dilapidations Protocol as part of the CPR makes any difference. One problem which it might be hoped that would address, or otherwise bear on, is the question of sanctions. There was always a risk of parties who didn’t follow previous versions of the protocol would be penalised (most obviously in terms of costs). But it might be thought that the fact the protocol is now part of the CPR would make such sanctions more likely or perhaps more serious.
- The question of sanctions is explicitly addressed at paragraph 1.5 of the Dilapidations Protocol, which provides as follows:
“Where the court considers non-compliance, and the sanctions to impose where it has occurred, it will, amongst other things, be concerned about whether the parties have complied in substance with the relevant principles and requirements and is not likely to be concerned with minor or technical shortcomings (see paragraphs 4.3 to 4.5 of the Practice Direction on Pre-Action Conduct).”
- Unfortunately, this statement is rather bland and open-ended and does not tell one much about the specific sorts of non-compliance with which the courts will be concerned or how likely they will be to impose sanctions in any given case, or of what kind. That impression is reinforced by paragraph 1.2 of the Protocol, amongst others, which makes it clear that the Dilapidations Protocol only sets out the conduct that the court “would normally expect” prospective parties to follow and that slavish adherence to the rules (sic.) is not to be expected.
- The reference to the Practice Direction on Pre-Action Conduct is arguably more helpful since the cited paragraphs do at least give somewhat more concrete guidance concerning the sorts of non-compliance with which the courts will be concerned. There is, in addition, already existing case-law on those parts of the CPR.
- Ultimately, however, it remains to be seen how, in practice, the courts will develop the law in this area and whether the formal adoption of the protocol does make a marked difference in this connection. In this connection, as in many others, decided cases are likely to be decisive.
- Either way, it will remain the case under the Dilapidations Protocol that the court has no power to sanction parties unless litigation is actually commenced (other than, indirectly, through the threat of later costs sanctions). While this is regrettable, and no doubt annoying to parties attempting to settle their disputes with others who refuse to behave reasonably, it is more difficult to see how the lack of sanctions for parties who do not land up litigating could, in practice, have been addressed in the new Dilapidations Protocol.
- These are just some of the issues raised by the Dilapidations Protocol. Furthermore, most of them have only been considered in the abstract; we look forward to hearing your view of the Protocol and your own experience of it in practice.
 In the latter part of this talk we look at PGF II SA and another v Sun Alliance Insurance plc and another  EWHC 1459 (TCC) and whether the decision in that case makes intentions relevant in a different way.