Dilapidations can be one of the most significant issues facing commercial landlords as a lease is coming to an end. Understanding a tenant’s obligations and taking the right steps before lease expiry can help landlords protect the value of their property and help reduce any void period between tenants.
What are dilapidations claims?
Dilapidations arise where a tenant has breached its lease obligations relating to the condition of a commercial property. This commonly includes failures to comply with repairing, decorating, maintenance or reinstatement obligations contained within the lease. In simple terms, dilapidations are breaches of a tenant's lease obligations relating to the condition of the property and the remedial works or compensation required to address those breaches.
Not all tenants have the same obligations, and it largely depends on the terms of the lease. For example, under a full repairing and insuring (FRI) lease, tenants are generally responsible for the full repair and maintenance of the property, together with any reinstatement obligations. Whereas under an internal repairing lease, the tenant's responsibility is usually limited to the interior of the property, with the landlord typically remaining responsible for the structure and common parts, although the scope of responsibility will depend on the specific lease wording.
Why are dilapidations important to landlords?
If a landlord fails to identify and address dilapidations upon the tenant vacating the property, it can have a significant financial impact, particularly as the landlord may experience delays in re-letting the property and incur additional expenditure to bring it back into a lettable condition.
Early preparation can help landlords identify and quantify any losses. Landlords should review the lease well before the end of the term to understand the tenant's repairing, decorating and reinstatement obligations.
Where appropriate, landlords may wish to raise dilapidations issues before lease expiry and consider whether the tenant should be given an opportunity to undertake remedial works.
The terminal schedule of dilapidations
Prior to or following lease expiry, landlords often instruct a specialist building surveyor to prepare a schedule of dilapidations, with a terminal schedule commonly being served towards the end of the term or shortly after lease expiry. This identifies the outstanding repairs, damage to the property, reinstatement works, decoration requirements and the estimated costs of the required works.
Any subsequent claim should be supported by appropriate evidence, which may include photographs, costings, invoices, expert reports and details of any diminution in value..
If the tenant does not undertake the required works, the landlord may pursue a monetary claim, commonly referred to as a quantified demand.
Commercial landlords should also be aware of the Dilapidations Protocol, which encourages parties to exchange information and engage in early settlement discussions. A quantified demand is usually served after the schedule of dilapidations and sets out the landlord's monetary claim.
The impact of section 18 on landlord’s claims
Landlords should be aware that they cannot automatically recover the full cost of all remedial works.
Section 18(1) of the Landlord and Tenant Act 1927 limits damages for disrepair to the amount by which the landlord’s interest in the property has been diminished as a result of the breaches.
This means that where a landlord intends to redevelop, substantially refurbish or materially alter the property, some repair costs may not be recoverable if those works would have been rendered unnecessary by the future redevelopment plans.
Accordingly, a landlord's claim may be limited where the reduction in the property's value is less than the cost of the remedial works.
Landlords should also be aware that section 18 applies only to claims for disrepair. Separate claims for breaches of reinstatement, decoration or other lease covenants may not always be subject to the same statutory cap.
Interim dilapidations
Landlords do not always need to wait until the lease is ending to address breaches. During the term, it may be possible to serve an interim schedule of dilapidations requiring the tenant to remedy disrepair. Early action can prevent deterioration from worsening and may reduce the scale of any terminal claim.
Quick tips
1. One effective way to avoid a dilapidations dispute is to ensure that the property’s condition at the start of the lease is properly documented. Where a lease incorporates a schedule of condition, landlords should ensure it accurately records the property's condition at the outset. An inaccurate schedule may significantly restrict the scope of a future dilapidations claim. Landlords should therefore ensure that any schedule of condition is accurate.
2. Do not wait until the lease has ended to review the tenant’s obligations. Reviewing the lease ahead of its expiry can help identify potential issues and allows the landlord sufficient time to instruct an expert building surveyor (if necessary).
3. Before pursuing dilapidations claims, landlords should consider their future intentions for the property (i.e., whether they intend to redevelop or refurbish the property). Such plans may affect the recoverability of certain losses.
If you are a commercial landlord and you require assistance with potential dilapidations, please contact our specialist commercial landlord and tenant team on 0161 696 6170 or fill in our enquiry form.
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