Increasingly, reinstatement is a hot potato and can be a thorny issue in dilapidation claims. Government policy, the green agenda, market forces, planning and the re-purposing of obsolete space has brought reinstatement to the fore. In our experience, reinstatement, and the accompanying obligations or liabilities, is now fundamental to many dilapidation claims.
This guide explains the requirements for reinstatement in dilapidation claims and highlights the key issues to consider during the process.
Generally, the obligation, or otherwise, for a tenant to reinstate will arise in the lease, a licence, and sometimes in correspondence. It is important to ensure that a full suite of documentation and evidence is assembled and reviewed comprehensively at the outset. This can often be a problem with longer leases; in a matter we recently advised on, the tenant’s obligation was to reinstate to the original design and layout, but the lease plans were lacking and historic documentary records lost.
This can also be a problem where the leasehold, or reversionary interest, has been assigned in consequence of which historic and key documents are no longer readily and immediately available. Ordinarily, the reinstatement obligation will be found in the tenant’s leasehold alterations or yield up covenants, or any contemporaneous or subsequent and, sometimes prior, licence for alterations.
When the relevant documents have all been assembled, there will usually be five things to consider and be aware of:
It will be necessary to understand the extent and interpretation of the tenant’s covenant to reinstate. Is it an absolute obligation that requires reinstatement in any event, or is the tenant’s obligation notice dependent? Is ‘reasonableness’ a requirement? Where applicable, can the landlord’s notice to reinstate be given orally or, as is usually the case, does it have to be written and therefore served in line with any notice and service provisions that the lease contains?
When serving any property notice, landlords and tenants alike will need to be wary of the so-called ‘registration gap’. With the current unrelenting backlog of many applications at the Land Registry, it is vital to understand where the legal title of the leasehold interest vests, and consequently where the legal entitlement to give, and receive, notice of reinstatement lies. Landlords in particular will need to be mindful of this pitfall where the freehold interest is transferred just prior to the lease expiry.
It’s essential to understand the form that the landlord’s notice to reinstate must take. In turn, this is dependent on the proper construction, and interpretation of the reinstatement obligation. Is the lease prescriptive in this regard? If it is then the prescriptive terms of the lease must be adhered to and strictly complied with.
In our experience, preparation is everything. Does the notice to reinstate need to be accompanied by plans? The courts have held that the appropriately drafted notice to reinstate can be given and contained in a dilapidation schedule. Usually, however, it is best practice and safest for landlords to serve a separate notice to reinstate.
The parties must fully understand the relevant timeline, and prepare in advance. Does the lease specify a deadline by when the notice to reinstate must be served? If so, generally time will be of the essence. Complications can arise with tenant breaks, depending on the wording of the lease.
Where the lease provides that the landlord can serve notice to reinstate just prior to the contractual term date, thereby giving the tenant insufficient time to reinstate, tenants have on occasions been able to successfully argue that an implied licence arises in this situation. In such a scenario, the tenant can be entitled to reinstate after the contractual term date. The parties will, however, need to be clear as to the basis of any ongoing occupation e.g. has an implied licence arisen or alternatively has this inadvertently created a statutory continuation business tenancy under the Landlord and Tenant Act 1954? In the case of an implied licence, tenants must appreciate that their occupation will not necessarily be exclusive, and that a claim for ongoing loss of rent can be an issue.
Properly advised, and in a strong letting market, many landlords will therefore serve the notice to reinstate well in advance, long before any deadline contained in the lease. This can then promote a negotiated settlement. By the same token, properly advised tenants should try and flush out their landlords’ intentions, and also the likely market for the property and any future lettings in advance and in order to try and manage and minimise the risks and their potential liabilities. Both parties also need to understand whether listed building, or any other consent, might be an issue and required before any reinstatement works are embarked on and completed.
Finally, where a tenant is in breach of its covenant to reinstate, damages will be an issue. Evidentially the landlord’s actual loss, rather than potential loss, will be key. Unlike damages for a tenant’s breach of a covenant to repair, where a tenant fails to reinstate, diminution in value and s.18(1) Landlord and Tenant Act 1927 type arguments, are irrelevant. If the tenant is able to argue that notwithstanding its failure to reinstate there has been no diminution in value, s.18(1) will not provide the tenant with a defence.
In summary, with good lease and licence drafting and the right advice and strategy, the tenant’s reinstatement obligation is not necessarily contentious. However, in our experience, a full understanding of the reinstatement obligation, thorough preparation, and the right strategy are all key.
For more information, please contact the property litigation team.
