Dilapidations

“Dilapidations” is a term used when referring to the condition of a commercial property during the term of the tenancy or when the Lease ends. It means the same as disrepair and is linked to the repairing and decoration obligations in the Lease agreement you signed.

Dilapidations and Schedules of Dilapidations have serious financial implications for business tenants, so you need to fully understand what is involved and take advice at the outset to minimise your liabilities before signing a commercial Lease. You also need to plan for them well in advance of them being served as they may have serious implications for your cash flow.

Key Points to Note

  • Dilapidations claims can be substantial so you should fully understand your obligations before signing a Lease
  • Tenants should take steps to limit their dilapidations liabilities at the commencement of a Lease
  • Tenants should have the building checked for pre-existing defects at commencement and these should be incorporated into a Schedule of Condition


Have you signed a Full Repairing and Insuring Lease?

A Full Repairing and Insuring (FRI) Lease is where you are responsible for repairs, both internal and external, including the structure of the building. A FRI Lease is the norm rather than the exception in Commercial Property rentals.

Tenants often agree to Leases, even short term Leases, which have full repairing and redecoration obligations and fail to record the ingoing condition of the property.
We always recommend that Clients only sign a Lease which includes a thorough Schedule of Condition ideally supported by photographic evidence.


Initial Building Survey

Before you enter into a Lease you should consider commissioning a Building Survey carried out by a Chartered Building Surveyor. We would be happy to recommend Surveyors for this purpose.

At the end of a Lease a tenant is almost always obliged to leave the property in a good state of repair and decoration, and this would in most cases be a better state than it is actually in at the end of the Lease.

These costs need to be budgeted for during the term of the Lease especially if you have made alterations to the Property which will have to be reversed at the end of the term. Landlords and tenants with a dilapidations claim need to be aware that there are statutory limits to the amount that the landlord can claim from you.
Negotiations on Dilapidations should begin at least 6 months before the Lease comes to an end.

Thinking ahead in this way means that any necessary works can be planned or negotiations conducted which could considerably reduce the Landlord’s claim.


Schedules & Tactics

The landlord may serve a Schedule of Dilapidations on you at different times during the Lease:

A Schedule served during the fixed term of a Lease is known as an Interim Schedule
A Schedule served within the last three years of the term is a Terminal Schedule
A Schedule served at or after the end of a Lease term is a Final Schedule of Dilapidation’s.
An Interim or Terminal Schedule will specify both the disrepair alleged by the Landlord and the remedial works which the Landlord requires you to undertake.

A Final Schedule is different to the extent that while it contains the same alleged breaches of covenant and details of remedial work required, you will not have an option to carry out the works yourself since your right of occupation has ended.

If you receive a Final Schedule the Landlord will claim for damages which will cover

the cost of remedial works
loss of rent
loss of service charges
Rates
Professional Fees and VAT for any period during which the property is off the lettings market.


The Schedule of Dilapidation’s

The Schedule of Dilapidations is simply a list of all outstanding repair, maintenance and decoration items which a Landlord (or more likely his Surveyor) believes have arisen under the terms of the Lease and are on that basis your responsibility.

You are obliged to carry out the remedial works listed in the Schedule or pay the Landlord damages which equate to the cost to the Landlord of carrying out the works.

Schedules of Dilapidations are often the cause of disputes between Landlords and tenants, which can result in Court Proceedings A Judge will then be asked to decide what is correctly stated as being your responsibility as a Tenant.


Statutory Relief for You

If you receive an interim Schedule, you may obtain relief from Forfeiture Proceedings (eviction) under the Leasehold Property Repairs Act 1938 if the original term of the Lease exceeds 7 years, of which 3 or more years must remain un-expired.

In some situations you may be entitled to relief In the case of a Final Schedule and corresponding claim for damages. This is subject to the proviso that:

  • The Landlord cannot recover damages exceeding a sum by which the value of the Landlord’s investment is reduced by your breach of covenant
  • Where a Landlord intends to demolish the building or carry out structural alterations making your breaches of covenant to repair irrelevant, then no damages may be recoverable by the Landlord

How you can Limit your Dilapidation’s Liability

There are some practical steps that Tenants can take to limit dilapidations liability. For example:

  • When you are involved in initial negotiations for a new Lease, particularly with short Leases, you could insist that the repairing liability be restricted to leaving the building in no worse condition than at the start of the Lease, as opposed to accepting full liability
  • The word repair in a Lease can includes a liability to renew e.g. where a roof is so dilapidated that its renewal is the only practical option. To limit any repairing liability a Chartered Building Surveyor should be instructed by you to produce a Schedule of Condition, recording the state of decoration and any pre-existing items of disrepair before you sign the Lease
  • You could ask for a Reverse Premium from the Landlord if your Survey identifies defects in the Property before you sign the Lease