Dilapidations

What are Dilapidations?

Dilapidations represent exit costs for a tenant at the end of their lease. In a commercial lease, ‘dilapidations’ are damages or defects to a property which a tenant is legally obliged to put right under the terms of their lease.

These costs are typically attributed to putting the property back into its original, pre-let state, i.e. repairs or reinstating any cosmetic alterations. For example, if you have put in a new kitchen, your landlord could insist that you pay to take it out, even if you think that the kitchen enhances the property.

At the end of the lease, a schedule of dilapidations is presented to the tenant by the landlord which can often come as a surprise, and it is not uncommon for disputes to arise.  This can be avoided by planning ahead.

When do dilapidations come into play?

If applicable, a landlord can make a claim for dilapidations against the tenant either during or at the end of the term of the lease. The dilapidations claim should set out the repairs required to the property and then usually the tenant would rectify the damages themselves.  If the tenant fails or refuses to have the repairs carried out, the landlord has the right to make the repairs and re-charge the tenant for their costs.  This can include loss of rent for any period when the property was unusable because the repairs were being carried out.  Alternatively, the landlord could claim for damages, forfeiture or specific performance, if the lease allows.

When considering the cost of repairs to commercial properties a dilapidations claim can often become one of the largest expenses when taking on commercial property.  In some worst case scenarios, up to 12 -18 months’ worth of rent. Due to the large costs involved it is important for both tenants and landlords to have potential dilapidations at the forefront of their mind when considering entering into a lease.

Things to consider when entering into a lease:

• Before entering into a lease

Ensure you are aware of the terms of the proposed lease that are relevant to dilapidations.  These include terms relating to decorating, repairs and covenants to comply with statute. These terms can often be negotiated so they are more favourable to a particular party, and it is worth considering dilapidations when discussing heads of terms so that everyone is on the same page from the beginning.

You should inspect the property and make sure that any descriptions as to the condition of the property are accurate. The lease should not say the property is in good condition if it is actually run down! If you do not understand the terms of the proposed lease and the potential dilapidations liabilities, then make sure you take legal advice and your conveyancer helps explain the terms to you.

If you are letting to a new limited company which doesn’t have any assets or an individual then you may consider requesting a guarantor to be in place to ensure any repair bills can be paid.

• Schedule of condition 

This is a description of the property supported by photos which can be annexed to the lease. Usually prepared by a surveyor, the schedule of condition provides very useful evidence regarding the condition of the property before the lease is entered into, which you will need at the end of the lease to show what works need to be done. However, the schedule of condition will not cover every aspect of the property as certain aspects of property disrepair will not show up on photographs such as some structural defects.

In order to save money, you could prepare a schedule of condition yourself, particularly if the property is of low rental value.  You can list every aspect of the property you can see, and taking photographs of the state of the carpet, dents in the walls etc.

A surveyor will charge to prepare the schedule, but if the condition of the property is of particular concern, then this can be invaluable when trying to negotiate the dilapidations claim later down the line, so doing it yourself could be a false economy.

• Know the terms of the lease

It is important to understand the meaning of the terms of the lease and the clauses it contains so that you can comply with them and avoid any future dilapidations issues. For example, commercial leases often contain provisions for the interior of the property to be decorated every 3 years, and the exterior every 5 years. If this has not been done throughout the term of the lease, then the costs of decorating everything at the end of the term could be significant.

There is also usually a ‘yield up’ clause in the lease. This clause means that the tenant has to leave the property in the state of repair as set out in the lease, which could be a much better condition than the property was in when the lease was entered into. This has the potential to require some substantial works- but this depends on the condition specified.

• Doing any work to the property? 

Dilapidations claim can also include tenants having to restore the property to the condition before the lease was entered into as well as remove any works they have carried out.

As a tenant, before any works begin you should ensure your lease allows for this, and whether you may need your landlord’s consent. Make sure you obtain permission in writing or through a formal licence to alter. It may be that permission is granted on the condition that the property has to be reinstated before the end of the term of the lease- make sure you have made allowances for money and time to be set aside to do the works.

Just because you think that the works carried out to improve the value of the property, it does not mean you are immune from a claim for dilapidations! The yield up clause in the lease will be what determines what condition the property should be handed back in.

• Think you should be making a claim for dilapidations?

If you have recently received a claim for dilapidations from your landlord, then you should act relatively quickly. A surveyor with experience in dilapidations can help you to prepare a reply to the claim and negotiate a reduction in the amount claimed.

If you are a landlord and think your property is not in the condition it should be under the terms of the lease, then you should consider whether you should be making a dilapidations claim against your tenant. You should firstly check the conditions within the lease.

Finances

It is crucial for tenants to obtain dilapidations advice at pre-lease stage if the financial implications of term-end disputes are to be minimised. A building survey is an ideal tool for understanding the condition of the property and risks from the outset.

During a lease, you would be well advised to commission a Dilapidations Liability Assessment (DLA) to enable you to budget ahead of lease end, implement any works whilst in occupation and to ensure compliance. In addition, regular planned maintenance during the term should help minimise lease and expenditure.

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.  If anything in this article may affect you, please contact us for advice that is specific to your circumstances.