Dilapidations Claims: tips for commercial tenants

Dilapidations Claims: tips for tenants

When a lease ends, in most cases, the tenant’s financial liability to the landlord does not end. That’s because commercial leases inevitably allow for dilapidations. Here are my dilapidations claims tips for tenants.

What are dilapidations?

‘Dilapidations’ is the term for a landlord’s claim against a tenant for the cost of putting the leased property back into a good state of repair and decoration when the lease ends. Often it makes no difference what condition the property was in at the start of the lease. It also includes the loss of rent while undertaking these works.

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

• ensuring the premises are left in the best possible condition to assist them in re-letting; or
• to achieve the best financial settlement.

On the other hand, tenants want to minimise dilapidations claims, particularly if they believe they have looked after 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 you enter the lease, particularly for older premises. Identifying significant issues, including latent and inherent defects in the premises’ construction, means they can be excluded from your repairing obligation under the lease. The surveyor prepares a Schedule of Condition, using both words and pictures to identify existing issues. The lease should then limit the repairing obligation by reference to the Schedule.
• Always use a building surveyor with dilapidations experience. Not all building surveyors have such experience. If necessary, ask your solicitor for a recommendation.
• If at all possible, exclude extraordinary repairs. You would not normally expect to be responsible for extraordinary repairs under a lease. Typically, they involve substantial work and high cost. 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 taking premises with pre-existing problems wrongly assume their obligation extends only to preventing them from getting worse. Or they simply accept an inaccurate assertion in a lease that the premises are in good condition and repair when they are not. That can result in an obligation to rectify issues existing before you entered into the lease.

During the lease

• Make provision—budget for dilapidations. Take advice from your building surveyor and ensure you set aside sufficient funds. But a word of caution for tenants—if a dispute arises, a landlord may review your accounts if they are in the public domain to see whether they reveal the amount set aside for that purpose.
• Put in place an ongoing maintenance programme. This is likely to be relatively inexpensive and budgeted for annually. In all likelihood, it will be required in any event to comply with your repairing obligations. Very often, regular maintenance helps avoid large dilapidations claims.
• Review your position before the lease expires. If you have a longer lease, consider doing this around three years before the end of the lease term. A review involves a further inspection by a building surveyor. They will advise what they consider your dilapidations liability should be at the end of the lease. Doing this ensures you have time to adjust your provision accordingly.

At the end of the lease

• Alterations to the premises. Very often, alterations to a premises are necessary to accommodate the nature of your business. Sometimes, a lease or licence to alter imposes a timescale within which the landlord must give notice to the tenant of their wish for the removal of the alterations. If the landlord fails to do that, while you are obliged to return the alterations in good condition and repair, you are not obliged to remove them. However, you may not have a right to remove them either. Depending on the wording of the lease (and any licences to alter), they may be deemed 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. So, the cost of the repairs should never be more than the effect 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, beware of clauses known as ‘payment obligations’. They are not common, but if your lease includes one, the landlord can serve you with a notice obliging 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 dilapidations claims in which works that could be claimed for by the landlord have been superseded. An example would be proving that the landlord plans to redevelop the site. Such plans would sweep away any work that you would 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 may decide that undertaking the work yourself before the lease expires gives you greater control over the cost. Of course, the contrary argument is that reaching a financial settlement with the landlord (usually after negotiation between the parties’ surveyors) creates certainty, particularly concerning any unforeseen work. There is also a tactical consideration here. Indicating a willingness to undertake the work yourself can flush out a landlord’s true intentions for the premises, helping you in settlement discussions.