Dilapidations are damages or defects to a property which a tenant is legally obliged to put right under the terms of their lease. They include where:
- a property falls into disrepair
- obligations to decorate are not complied with
- alterations are undertaken
- M&E is not serviced or maintained
A landlord can make a dilapidations claim against the tenant either during or at the end of the term of the lease. A dilapidations matter is usually settled by the tenant either undertaking the required works or paying a sum of damages to the landlord for those works.
Dilapidations claims carry a number of risks to a tenant’s business:
- Cost: the cost of settling a claim can be substantial and should be budgeted for. The Royal Institute of Chartered Surveyors (RICS) estimate that the average cost of settling a claim for an industrial tenant is £7.27 per square foot*. Many tenants overlook what can be a large capital outlay at the end of their lease.
- Time: managing a claim can take up significant time and effort, and legal and professional assistance is often required.
- Business risk: poor planning can lead to break options being missed/frustrated, landlords forfeiting leases early or landlords entering the property to undertake overdue works at the tenants cost.
- Reputational risk: dilapidations claims can end in court.
Although a terminal (terminal schedules are served at the end of a lease and interim schedules can be served any time before lease expiry) dilapidations claim is key at lease expiry/break, it should also be considered at lease commencement, as the tenant’s obligations in respect of repair, redecoration, reinstatement etc are fixed when the lease is signed. It is recommended that tenants take advice from a chartered building surveyor before taking a lease and appoint one to deal with the dilapidations process at termination. Tenants often have to pay for their own advice and for the landlord’s costs in having the dilapidations schedule drawn up.
Although tenants may avoid claims by complying with their obligations during their lease term, issues often arise over the interpretation of lease requirements or with the appropriate standard of works to be carried out.
Most commercial leases require the tenant to ‘put and keep’ the property in repair. Unless the landlord and tenant specifically agree otherwise, the fact that the premises were in a poor condition when the tenant took them on is largely irrelevant. The tenant is still obligated to put them right. An agreement between landlord and tenant on the condition at lease commencement is sometimes documented by a schedule of condition, which is attached to the lease.
Disputes can arise over:
- Whether the items identified by the landlord’s surveyor are really a breach of the lease
- What repairs and other works will need to be undertaken
- What constitutes an appropriate repair
- Whether tenants must repair or renew elements which were in disrepair at lease commencement
- Whether any or all of the tenant’s alterations to the building have to be reinstated
- What needs to be redecorated or cleaned, with what materials and in what colours
- The circumstances under which a tenant can exercise a break clause and whether a tenant has complied with the break clause conditions
- The landlord’s estimate of the cost of the remedial works in the schedule
- The reduction in value of a property as a result of it being in disrepair
- The impact of any future redevelopment of the premises on the tenant’s dilapidations liabilities