Dilapidations payment clauses and certification by surveyors: bombproof or booby-traps?

Are surveyors at risk when ‘certifying’ dilapidations sums? Or, if the lease clause is tightly drafted, are they beyond challenge?

The ‘payment clause’ case of Coal Pension Properties Limited v Technip UK Limited casts a spotlight on questions which were raised in our recent blog on certification (see below).

The issue of whether ‘payment’ clauses work as a concept was first raised in dilapidations cases in Scotland by our property litigation team in the case of Grove v Cape. That aspect is now settled law: they do (if clearly drafted).

In the Coal Pension case just issued, the landlord had the option of requiring the tenant to “pay to the Landlord the reasonable sum certified by the Landlord’s surveyor as being equal to the cost of carrying out such work”.

This let them claim for the cost of repairs without having to either carry out the works or show that they had suffered a loss.

The lease also went on to allow the landlord to claim for loss of rent if the tenant did not pay after 20 working days, although if the tenant did pay it would draw a line under their dilapidations liability.

The landlord was successful here, but the presiding Commercial judge, Lord Tyre, considered a few challenges by the tenant:

• Whether the landlord actually made a valid demand for payment;
• Whether the surveyor could certify both the scope and cost of the works;
• Whether the surveyor’s certification was binding on both parties; and
• Whether the landlord could still make a damages claim.

Did the landlord actually make a valid demand for payment?

The landlord started off by serving a schedule of dilapidations on the tenant.

After some discussions between surveyors (using a Scott Schedule) to narrow the issues in dispute, the landlord sent a formal demand for payment to the tenant along with their surveyor’s certificate of the sums due.

That demand was for both the cost of repairs (as put forward for the landlord in the Scott Schedule) and the loss of rent.

The drafting of the demand notice by the solicitor was criticised by the court as being wrong. The loss of rent they claimed was not actually due until 20 working days had passed without payment.  That part of the demand was ineffective.

Fortunately for the landlord, the court said that the rest of the demand was good, and that cost of repairs claim could proceed.

Another of those regular reminders from the courts that formal notices and demands should be carefully drafted, and that any slips can potentially be fatal.

Could the surveyor certify both the scope and cost of the works?

The parties disagreed on both the scope and cost of the works required under the lease. The certification clause was, presumably, intended to avoid (at least some of) that dispute.

However, the tenant still argued that the surveyor could not certify the scope of the works (which was to be determined by some other means), and that the sum certified was still open to challenge.

The court thought this was a tenable position when looking at the wording of the lease. However, the judge said that the purpose of the clause (with its 20-day payment period and discharge of tenant liability) was to bring about a speedy end to disputes.

Preferring the landlord’s position, the court found that the quid pro quo of the tenant being able to get that quick discharge was that they could not challenge the “reasonable sum”.

That does not mean the landlord’s surveyor could have certified any sum at all. The sum still had to be within the reasonable range.

In looking at that, the court thought it was noteworthy that the parties had, in fact, been in negotiations, and that sum certified was less than originally sought in the schedule of dilapidations. That all fed into the court finding that the sum certified was actually reasonable.

So if you’re certifying, negotiate first?

Was the surveyor’s certification binding on both parties?

Related to the previous point, the tenant also argued that the certification by the landlord’s surveyor was not binding on them.

Subject to the overarching “reasonableness” requirement, Lord Tyre said that the parties had contractually agreed to be bound by the sum certified; and so they were.

Importantly, the certification was the key step to create the payment obligation. Without the certification, there was no obligation to pay.

Compare that with, for example, an architect certifying a payment under a construction contract. The payment obligation there exists without the certification, and the certification only confirms the amount due.

Here, the certification actually created the payment obligation, and even if that sum was factually incorrect in some way, if it was a reasonable sum it was binding on the parties.

That does not put the certification beyond challenge. If the sum was objectively unreasonable, it would not be a valid demand for payment.

That is also what gives the tenant contractual protection from the landlord’s surveyor certifying an unreasonable sum (not to mention professional duties and the risks to surveyors – see our previous post on duties of care when certifying).

Could the landlord still introduce a damages claim?

As a back-up to their payment clause claim, the landlord argued that they had a contractual damages claim instead.

That is the “usual” and more typical type of dilapidations claim, which is the only option when there is no payment clause.

The judge here decided that because the lease expressly contained the certification process – which would not have been available otherwise – the landlord could not claim damages instead. The common law damages claim was excluded by the express wording of the lease.

Therefore, had the contractual claim failed in some way, the landlord would have just had to live with it.

Next steps?

For lawyers (drafting leases, and demand notices) and surveyors (certifying dilapidations sums), there are useful pointers in this case.

The clause here worked well for the landlord. The tenant has not (yet) mounted a successful challenge on the ‘reasonableness’ of the sums.

If the case is appealed, we may yet see a further teasing out of how a tenant might go about challenging the ‘reasonableness’ of a landlord’s dilapidations sum in the teeth of a supposedly ‘binding’ certification process.

As ever with dilapidations, formulating a strategy is key.