Updated – February 2020
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 isn’t maintained properly;
- obligations to decorate are not complied with;
- alterations are undertaken during the leasing term;
- mechanical plant is not serviced or maintained.d
A landlord can make a dilapidations claim against the tenant at any time during or at the end of a lease. A dilapidations matter is usually settled by the tenant either undertaking the required works or paying a cash sum of damages to the landlord. Dilapidations claims carry a number of risks to a tenant’s business:
- Cost: the cost of settling a claim can be substantial. 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 fail to budget accordingly for 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 expensive 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 the majority of dilapidations claims are settled at lease end, the potential cost needs to be considered at lease commencement. The obligations on the tenant are set out in the repair, redecoration and reinstatement sections of the lease. If you are signing a full repairing and insuring lease (i.e. all the obligation for repairs is on the tenant) then it is often wise to take advice from a chartered building surveyor before signing a lease and when dealing with the dilapidations process at lease end. At lease end it is also common for tenants to have to pay for both their advisor and for the landlord’s costs in having the dilapidations schedule drawn up and the claim negotiated.
It should also be noted that although the risk of a dilapidations claim can be reduced by complying with repairing obligations during the lease term, issues often arise at lease end over issues such as the following:
- 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
Most commercial leases require the tenant to ‘put and keep’ the property in repair, which effectively means keeping it in good condition at all times. Unless the landlord and tenant specifically agree otherwise, the fact that the premises may have been in a poor condition when the tenant move in is largely irrelevant. The tenant is still obligated to put them right and return them to the landlord at the end of the lease in good condition.
This particular risk can be mitigated by the landlord and tenant agreeing a ‘schedule of condition’ at the start of the lease, which documents (using detailed photos and notes) the repair and condition of the property. The Schedule of Condition then serves as a benchmark for how the tenant is required to return the property to the landlord at the end of the lease. This can materially reduce the landlords claim to damages at lease end if the property was in a poor condition at the start of the lease.
It is also important to note that companies taking a lease are required under accounting regulation IFRS16 (or equivalent FRS standard) to make a provision in their accounts for the estimated dilapidations cost at lease expiry. This is to ensue that companies are making suitable provisions for the future liability of dilapidations. It is important to remember then this may have a negative impact on your company balance sheet when you sign your lease, and cannot only be accounted for when the cost arises.
With the Industrials Smart Lease we offer a lease which is inclusive of all external repairs, maintenance and dilapidations. This means that all you need to worry about is keeping the inside of your unit in reasonable condition whilst you are using it and we’ll do the rest. Better still, at the end of the lease you can simply pack up your stuff and walk away – we’ll take care of everything else. There is no need for a schedule of condition, building surveyors, dilapidations, accounting provisions, big bills or the need to do works on a property you no longer occupy.
No problem. No constraints. No surprises.
* https://www.ibblaw.co.uk/insights/blog/dilapidations-uncovered
