Dilapidations

Most modern commercial leases will describe in detail the obligations placed on a tenant to keep its premises in good repair and decorative condition throughout the term of the lease.  They will also normally contain provisions for handing back the premises when the tenant vacates.

Tenants should be fully aware of their repair and decoration obligations before taking or renewing a lease and should try to limit their obligations at that stage. If it can be agreed between the parties, one way of doing this is to record the condition of the property prior to entering into the lease in a “schedule of condition” so that the tenant is not required to put or keep the premises in any better state of repair and condition than is shown or described in the schedule which should be annexed to the lease.

It is most commonly towards the end of the term that a dilapidations claim arises.  If the tenant has a statutory right to a new lease, the landlord probably will not serve a dilapidations claim unless or until the tenant indicates that it is unlikely to renew the lease. The landlord will normally serve on the tenant a “schedule of dilapidations” before or shortly after the end of the lease term setting out a list of defects and items of disrepair or redecoration to be remedied.  The schedule of dilapidations will normally include an estimate of the cost for each item. The schedule may also refer to obligations on the tenant to reinstate any alteration works which may have been carried out by the tenant under a licence for alterations. 

Negotiating a dilapidations claim ought to be a relatively simple process but in practice it can be complicated and require legal, valuation and surveyor’s expertise. Tactical advice may also be needed depending on the circumstances of the case. Our Property Dispute Group can assist in negotiating a settlement, whether acting for a landlord or a tenant. Usually a settlement is agreed between the parties but if an agreement cannot be reached the landlord has recourse to the court. Litigation can be a slow process and expensive for both sides, so landlords will generally try to avoid court proceedings if they can.

Dilapidations claims are limited by legislation so that the landlord cannot claim for amounts that exceed the extent to which the value of the landlord’s interest in the property is diminished by the disrepair.   For example, if there are dilapidations at the end of an outgoing tenant’s lease, but the landlord is able to let the premises again for the full market rent to a new tenant, with no rent free period, then this shows that the landlord’s interest in the premises has not been diminished by the dilapidations, and accordingly will not be able to claim anything for them from the outgoing tenant.

Matters for the tenant to consider:

• Before taking or renewing a lease which contains repairing obligations arrange for the premises to be surveyed and limit the effect of the obligations in the lease.
• There are measures that can be taken to significantly reduce the landlords’ opportunities to claim during, or at the end of, a lease term if dilapidations are addressed in good time.
• Are you hoping to assign or operate a conditional break clause? If so, be aware that the landlord may be able to thwart your plans if you have not complied with your repairing obligations under the lease.

Matters for the landlord to consider:

• What are the tenant’s obligations? Any shortcomings in the tenant’s obligations at the lease drafting stage or when a new term is granted, could be exploited. Arrange for the provisions of the lease to be checked and the proposed claim to be evaluated.
• There may be time constraints to comply with in accordance with the provisions of the lease.
• The tenant may seek to assign the lease or operate a break clause, providing an opportunity for the landlord to make it conditional upon bringing the premises into a good state of repair and condition.