Dilapidations claims are complex and often highly contentious. The sums involved can be considerable, underlining the importance of ensuring a carefully drafted lease.
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The end of a tenancy is always a stressful time for a landlord. They face an array of repairs, redecoration and other work before the property is suitable for re-letting. This financial and time pressure is never more keenly felt than when poor economic and trading conditions result in a glut of commercial property.
What are dilapidations?
Dilapidations, or dilapidations claims, are terms commonly used to represent the ‘exit costs’ for a tenant when their lease ends. Typically, these costs are attributable to returning the property to a good standard of repair and decoration, irrespective of its actual condition at the start of the lease. That includes removing any aesthetic alterations made by the tenant. In addition, landlords claim for loss of rent while undertaking those works.
Many tenants fail to appreciate the importance of lease wording. In particular, they may not be aware of what they have accepted in terms of the condition of the premises when it’s returned. Tenants will budget for more immediate and regular outgoings such as rent, business rates, fit-out costs, utility bills, and service charges. But their dilapidations liability at the end of the lease is very likely far from their minds.
What happens at the end of a lease?
At the end of the lease, the parties’ obligations to each other cease, except for any claims for breaches of the lease.
Schedule of dilapidations
A commercial lease inevitably allows the landlord to serve a schedule of dilapidations at any time. The schedule specifies any repairs required to the property during the lease term and within a reasonable time afterwards.
At the end of the lease, an experienced dilapidations surveyor should prepare the schedule of dilapidations (referred to as ‘terminal dilapidations’). We can recommend a dilapidations surveyor to you. Alternatively, the Royal Institution of Chartered Surveyors (RICS) has a handy search facility on its website.
The surveyor should prepare the schedule of dilapidations with the benefit of legal advice on interpreting the repairing obligations in the lease. Once the schedule is complete, we recommend that we serve it on your behalf to ensure:
- it includes all potential heads of claim under the lease; and
- compliance with the notice provisions in the lease.
Who carries out the work?
A commercial lease generally provides:
- for the tenant to undertake the work at their expense, but if they fail to do so, for the landlord to complete the work at the tenant’s expense; or
- for the landlord to complete the works at the tenant’s expense; or
- for the tenant to pay the landlord a sum equivalent to the cost of returning the property to its condition had the tenant complied with their repairing obligations.
Regarding the final option above, the court has interpreted such provisions as meaning the landlord can claim this sum even if they do not intend to carry out the work. But that depends on the specific lease wording. Without it, a dilapidations claim is one for damages for breach of contract. As such, the landlord must prove their loss.
After many years of discussion, in 2012, the Dilapidation Pre-Action Protocol was formally adopted into the Civil Procedure Rules in England and Wales. The Dilapidations Protocol aims to encourage the settlement of dilapidations claims before issuing court proceedings. To that end, the parties are encouraged to exchange all information relevant to the dispute at an early stage. Where settlement is not possible, the Dilapidations Protocol manages the early stages of the litigation process.
It’s not surprising that dilapidations claims are complex and often highly contentious. The sums involved can be considerable, underlining the importance of ensuring a carefully drafted lease. Poorly drafted leases create uncertainty, increasing the prospect of expensive and time-consuming litigation. As a landlord, they also reduce the value of your investment.