Dilapidations Claims: tips for commercial tenants

Dilapidations Claims: tips for tenants

When a lease ends, the tenant’s financial liability to the landlord often continues. This is because commercial leases typically include provisions for dilapidations. Here are my tips for tenants regarding dilapidations claims.

What are dilapidations?

‘Dilapidations’ refers to a landlord’s claim against a tenant for the costs associated with restoring the leased property to a good state of repair and decoration upon the termination of the lease. Often, the initial condition of the property at the commencement of the lease is irrelevant. The claim also includes any loss of rent incurred during the restoration work.

Understandably, dilapidations are contentious. Landlords inevitably wish to maximise their claim:

• ensuring the premises are left in optimal condition to assist them in re-letting; or
• to secure the most favourable financial settlement.

On the other hand, tenants seek to minimise dilapidations claims, especially if they believe they have cared for the property and returned it in good condition.

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Tips for tenants in dealing with dilapidations claims

Before entering a lease

• Invest in a building survey before entering the lease, particularly for older premises. Identifying significant issues, including latent and inherent defects in the premises’ construction, allows them to be excluded from your repairing obligation under the lease. The surveyor prepares a Schedule of Condition, using both words and images to identify existing issues. The lease should then limit the repairing obligation by reference to the Schedule.
• Always engage a building surveyor experienced in dilapidations. Not every building surveyor possesses this expertise. If needed, seek a recommendation from us.
• If possible, exclude extraordinary repairs. You would not typically expect to be responsible for extraordinary repairs under a lease. They usually involve substantial work and high costs. A good example is replacing the roof.
• Check what the lease requires you to do. An obligation to ‘keep in repair’ includes putting the premises in repair. Very often, tenants who take on premises with pre-existing problems wrongly assume their obligation extends only to preventing these issues from worsening. Alternatively, they may simply accept an inaccurate assertion in a lease that the premises are in good condition and repair when they are not. This can lead to an obligation to rectify issues that existed before you entered into the lease.

During the lease

• Make provision—budget for dilapidations. Consult your building surveyor and ensure you set aside adequate funds. However, a word of caution for tenants—if a dispute arises, a landlord may review your accounts if they are in the public domain to ascertain whether they reveal the amount set aside for that purpose.
• Establish an ongoing maintenance programme. This is likely to be relatively inexpensive and can be budgeted for annually. In all likelihood, it will be necessary in any case to comply with your repairing obligations. Frequently, regular maintenance helps to avoid large dilapidation claims.
• Review your position before the lease expires. If you have a longer lease, consider doing this approximately three years before the end of the lease term. A review entails a further inspection by a building surveyor, who will offer advice on what they believe your dilapidations liability should be at the end of the lease. This process ensures you have ample time to adjust your provision accordingly.

At the end of the lease

• Alterations to the premises. Alterations to a premises are often necessary to accommodate the nature of your business. Sometimes, a lease or licence to alter imposes a timescale within which the landlord must notify the tenant of their intent to remove the alterations. If the landlord fails to do this, although you are obliged to return the alterations in good condition and repair, you are not required to remove them. However, you may not have the right to remove them either. Depending on the wording of the lease (and any licences to alter), they may be considered the property of the landlord.
• Diminution in value cap for larger claims. Section 18 (1) of the Landlord and Tenant Act 1927 provides a statutory dilapidations cap. Consequently, the cost of repairs should never exceed the impact of the dilapidations on the value of the landlord’s property. For example, if dilapidations total £100,000 and their effect is to reduce the capital value of the premises by £50,000, the tenant is only liable for £50,000. However, one should be cautious of clauses known as ‘payment obligations’. While they are not common, if your lease includes such a clause, the landlord can serve you with a notice requiring you to pay a sum equivalent to the total cost of the dilapidations, effectively bypassing the diminution argument. The courts have upheld these lease clauses, even when landlords have admitted they do not intend to spend the money on repairing the premises, creating a windfall.
• Supersession. This principle refers to dilapidation claims in which works that could be claimed by the landlord have been superseded. An example would be demonstrating that the landlord intends to redevelop the site. Such plans would nullify any work that you might undertake or pay for.

And finally…

• Consider undertaking the work yourself. This is always a risk-benefit analysis conducted in consultation with a building surveyor. Depending on the nature and extent of the dilapidations, you might determine that completing the work yourself before the lease expires provides you with greater control over costs. However, the opposing viewpoint is that reaching a financial settlement with the landlord (typically following negotiations between the parties’ surveyors) offers certainty, especially regarding any unforeseen work. Additionally, there is a tactical consideration here. Indicating a willingness to carry out the work yourself can reveal a landlord’s true intentions for the premises, aiding you in settlement discussions.