Rebecca Davidson from Burnetts Solicitors shares her top 5 tips for avoiding costly dilapidation’s claims in commercial leases. MD Business Interiors are office fit out and refurbishment contractors based in Exeter, Devon. We often assist with these issues on site. Good advice at the start often avoids bigger more costly problems down the line.

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.

If applicable, a landlord can make a dilapidations claim 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 damage themselves, or if not, the landlord will make the repairs and re-charge the tenant for their costs (which can include loss of rent). Alternatively, the landlord could claims 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! Because of 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.

  1. 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. The repairing covenant can be particularly important when considering dilapidations as there is a big difference in the potential repair bill if the tenant is liable for structural repairs as opposed to purely interior decoration. 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 everyone is on the same page from the beginning.

    Inspect the property and make sure that any descriptions as to the condition of the property are accurate – the lease shouldn’t say the property is in good condition if it is actually run down!  If you don’t understand the terms of the proposed lease and the potential dilapidations liabilities then make sure you take legal advice and your legal advisor will explain the terms to you.

    From a landlord’s point of view, if the dilapidations covenants mean the tenant could be liable for significant expenses then you want to be sure the tenant will be able to pay for these. If you are letting to a new limited company which doesn’t yet 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.

  2. 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. However, in light of a dilapidations claim it does not show the complete picture as certain aspects of property disrepair will not show up on photographs, e.g. some structural defects.

    Whilst a surveyor will charge to prepare the schedule, if the condition of the property is of a particular concern, then this can be invaluable when trying to negotiate a dilapidations claim later down the line. For properties with a low rent value, you could alternatively prepare a schedule yourself and whilst it is unlikely to be as detailed as one prepared by a surveyor, it could still be useful in a dilapidations context.

  3. Know the terms of the lease – during the term of the lease make sure you know what the clauses mean 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 what is known as 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 what the property was in when the lease was entered into. This has potential to require some substantial works (depending on the condition specified).

  4. Doing any works to the property? – a dilapidations claim can also include tenants having to restore the property (to the condition before the lease was entered into) and remove any works they have carried out.

    As a tenant, before commencing any works ensure you know whether your lease allows this, and if you need your landlord’s permission, make sure that you obtain this 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 improve the value of the property, it sadly does not mean you are immune from a dilapidations claim! The yield up clause in the lease will be what determines what condition the property should be handed back in.

  5. Received a dilapidations claim or think you should be making a dilapidations claim? – if you have recently received a dilapidations claim 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. The first port of call should be to check (or have your legal advisor review) the terms of the lease that relate to dilapidations and then consider instructing a surveyor to assess the state of the property in line with the lease.

Dilapidations issues can be complicated and they have only been summarised in this blog.