Dilapidations claims

The Risk of Exaggerating Claims: Business Environment Bow Lane Ltd v Deanwater Estates Ltd

The case of Business Environment Bow Lane Ltd v Deanwater Estates Ltd (2008) EWHC 2003 (TCC) shows that the courts will not accept the practice of exaggerating dilapidations claims.

Surveyors should be aware of the risks of pursuing an exaggerated claim and must balance the often conflicting requirement of the client’s instructions and professional guidance as to how to pursue such claims.

1. Dilapidations Claims
Commercial leases require tenants to covenant that they will keep the premises in an adequate state of repair.

If such a covenant is breached, the landlord can make a dilapidations claim against the tenant, usually following the tenant’s departure from the premises, to recover the cost of the necessary repairs.

1.1. Damages in dilapidations claims

S18(1) of the Landlord and Tenant Act 1927 places a statutory cap on the quantum of damages that can be recovered in a dilapidations claim. There are two limitations on an award:

• Damages cannot exceed the amount by which the value of the property has been diminished due to the tenant’s breach
• No damages are recoverable if it can be established that the property would have been, or indeed has been, either pulled down or structurally altered following termination of the tenancy.

However, in practice, landlords often seek to exaggerate their losses at the outset of a claim, including every possible element of disrepair and ignoring the statutory cap. The claim is then served on the tenant in an attempt to commence negotiations for settlement. The risks of such a strategy are that if the claim is too high, it is worth while for the tenant to fight rather than settle. 

1.2. Pre-action conduct
The Civil Procedure Rules contain several Pre-Action Protocols which govern the conduct of parties prior to court proceedings commencing.

The Property Litigation Association has produced a similar Protocol for dilapidations claims, the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of a Commercial Property at the Termination of the Tenancy, known as the Dilapidations Protocol.

Although not yet formally part of the Civil Procedure Rules, in practice the Dilapidations Protocol is treated as if it is part of the rules and it should therefore be followed when dealing with dilapidations claims.

The Protocol states that a landlord should serve a Schedule of Dilapidations on its tenant at the outset of a potential claim.

This Schedule should be endorsed by a surveyor, confirming that all works set out in the Schedule are reasonably required to restore the property to its correct physical state, that full account has been taken of the landlord’s future intentions for the property, and that any quoted costs for works are reasonable.

The aim of this endorsement is to help ensure that landlords do not make exaggerated claims, which in turn will help aid early settlement of the claim.

The RICS has similarly produced a Dilapidations Guidance Note for professionals, which reiterates the Protocol’s endorsement requirements. It additionally states that a surveyor, whilst complying with his or her client’s instructions, must ensure that any document produced does not contain assertions which the surveyor knows or ought to know are not true or properly sustainable.

The surveyor should not allow such a document to be sent bearing his or her name, or the name of his or her firm. This guidance conflicts with the traditional practice of landlords overestimating claims in Schedules of Dilapidations.

2. The Facts in Business Environment v Deanwater Estates
The Defendant was the tenant of 734 Watling Street, London EC4 (“the Property”) under a lease granted in 2002 by the Claimant’s predecessor in title. This lease included a tenant’s covenant to pay terminal dilapidations.

The Defendant vacated the Property on 25 December 2004. A long lease of the Property was subsequently acquired by the Claimant on 6 April 2005, with an express assignment of the right to sue the Defendant for terminal dilapidations.

Following an inspection undertaken by the Claimant’s surveyors in March 2005, a Schedule of Dilapidations was served on the Defendant, setting out a claim totalling £557,483.97. It was further confirmed that the Claimant intended to undertake the works listed in the Schedule, and had sent out tenders to this effect.

The Defendant argued that its previous landlord had agreed that there would be no dilapidation liability at the end of its term, and submitted that it had a defence of collateral contract, or in the alternative promissory estoppel, to the claim. It further asserted that the claim had been “inflated and exaggerated”.

The Defendant’s surveyor contacted the Claimant’s surveyor in September 2005, informing him that the Property was in fact being fully refurbished and not restored, which nullified the entirety of the claim. Additionally, there was no evidence that the external works listed in the Schedule were being carried out.

No settlement was reached and proceedings were issued on 12 February 2006, albeit with a much lower claim for damages of £414,932.56. A defence was filed, raising the issues of promissory estoppel and collateral contract.

It was ordered that this defence be tried as a preliminary issue, and the Defendant was successful on this point at first instance. However, on appeal the Court of Appeal overturned this ruling and the case then proceeded in the Technology and Construction Court.

It was at this point, in November 2007, that the Defendant’s surveyor reinspected the Property. He was of the opinion that the whole of the Schedule had been superseded by the conversion of the Property into a furnished office centre.

A revised Schedule was subsequently ordered by the court, and this time the costs of the remedial work had fallen again, to £107,506.34.

The case continued towards trial and in January 2008 a meeting took place between the respective surveyors. Following this, the Claimant made a without prejudice Part 36 offer to settle the claim for £1,073.50, provided that its costs were paid. This offer was rejected.

Judgment was entered against the Defendant by consent for this sum at the pre-trial review, however no agreement as to costs could be reached. It was agreed that this would be heard as a separate issue.

3. The costs position
Both parties made submissions regarding costs:

3.1. The Claimant’s argument
The Claimant contended that the costs position was extremely straightforward – it had won the case, and thus it was entitled to its costs. It submitted that it had not misled the Defendant – the Defendant’s surveyor had realised at an early stage that the value of the claim was significantly lower than stated, and it should have made a Part 36 offer to safeguard its position.

Further, the Claimant argued that it had recovered more than a de minimis sum which again entitled it to its costs.

3.2. The Defendant’s argument
The Defendant similarly argued that it was the successful party in the proceedings, as the end figure obtained by the Claimant was considerably less than the original sum claimed. It further submitted that costs should be awarded on an indemnity basis.

The Claimant had acted in a wholly misleading and unreasonable manner, and its conduct in knowingly pursuing an unsustainable claim and persisting in it was so outside the normal boundaries that such an award was justified.

4. The Decision
In his judgment, HH Judge Toulmin CMG QC referred to CPR 44.3. This gives the court discretion when determining costs in proceedings, although the general rule is that the loser pays the winner’s costs.

However, in deciding what costs order to make, the court must consider all of the circumstances, including the conduct of the parties and whether a party has succeeded on part of his case, even if he has not been wholly successful.

CPR 44.3(5) states that “conduct” includes the manner in which a party has pursued or defended its case, and whether a successful claimant has exaggerated its claim.

Based on these provisions, the Judge ordered that the Claimant pay the Defendant’s costs. The Claimant had conceded that the works were not dilapidations works, but were a wholesale refurbishment of the Property.

It had also claimed for substantial external works that were never carried out: its Schedule bore no relation to the true position. The Judge therefore found that the Claimant was the clear loser in the proceedings.

The Judge went one step further and ordered that costs should be paid on an indemnity basis. He held that, both before and after proceedings were issued, the Claimant had acted in a way which took the case out of the norm by representing that it had a substantial dilapidations claim, when in fact it barely had a claim at all.

Any proper investigation of the claim would have revealed that the external works had not been carried out and that there was no genuine claim for dilapidations.

The Judge was opposed to exaggerated claims being made, stating that they not only hinder successful negotiations and settlements, but they also stop the Defendant from being able realistically to assess the value of a claim against it, which in turn prevents it from being able to properly defend itself. Thus costs were ordered against the Claimant on an indemnity basis.

The Judge also highlighted the fact that the particulars of claim had been signed by the solicitor acting on behalf of the Claimant and he was critical of the claimant in authorising the solicitor to sign a statement of case which it knew or should have known to be inaccurate.

5. Comment
This case principally highlights the need for any potential claimant to consider its case carefully before commencing litigation and to put forward a realistic and sensible claim. Otherwise, the claimant runs the risk of being penalised by the court in costs.

A landlord Claimant is likely to be in a much stronger position than a tenant Defendant, with more resources and finances available to pursue a claim. However, this case shows that the courts will not allow landlords to bully tenants through making inflated and exaggerated claims.

The case is also an important warning to surveyors when signing off Schedules. Surveyors often find themselves trapped between acting within their client’s instructions, who may ask for a claim to be inflated, and the requirements of the Protocol and the RICS Guidance Note, which reiterate the need to prevent such claims.

There may also be contradiction in the role that a surveyor plays throughout a case. Initially, a surveyor produces a figure for their client to use in negotiations, but once proceedings have been issued, the surveyor may become an expert, and thus their primary duty is to the court.

Although it is difficult to balance these conflicting interests, a surveyor will ultimately be helping his or her client by correctly endorsing a claim and ensuring that it is genuine.

This will prevent the client from continuing toward trial with an exaggerated claim which will eventually be reduced and could even lead to a cumbersome costs order being made against them.

Jane Hughes is partner and head of construction and Katherine French is trainee solicitor at Collyer Bristow LLP