REAL ESTATE

Dilapidations in Commercial Leases

Many consider dilapidations liability towards the end of the term of their leases, as the property will by then normally need some work, and this is also the point at which a dilapidations schedule is typically served by the Landlord.

However, a tenant’s treatment of the property during the term is only half of the story, as dilapidations are effectively breaches of the lease terms relating to condition. Therefore, as the “rulebook” that governs the relationship between landlords and tenants, the lease is the reference point for a tenant’s obligations, and these terms of the reference are fixed at the beginning and not the end of the term. It is the initial negotiation between landlord and tenant that is key.

One of the most important clauses of a lease when it comes to dilapidations is the ones relating to repair. Intuitively, a tenant may consider they will have no dilapidations liability to the landlord for disrepair if they return the property in the same condition as they found it. However, that is not the case and clear drafting is required to avoid paying to improve the Landlord’s property.

Dilapidations includes more than just repair. If a tenant has carried out fit out works for instance, they will often be obliged at the end of the lease to put the property back to the way it was or incur a dilapidations liability if they fail to do so. This can be the case even if the tenant considers their alterations to have improved the property, as the landlord will be mindful of future tenants who might want to use the property differently and would expect a “blank slate” on which to make their own mark. Landlords too will need to take care that their rights are clearly defined through the lease drafting. For example, they may have provided for reinstatement when originally consenting to the tenant’s fit out works, but if there has been a subsequent renewal of the lease, that right may be lost without careful drafting.

 

Nowadays, sustainability is a key consideration for landlords and tenants alike when drafting leases. This is even more so since landlords could become subject to fines and other penalties for letting properties that are substandard in terms of energy efficiency. Although the legislation in this area is intended to make landlords liable for the cost of upgrading properties, it is possible to pass the cost of those works to a tenant through the lease and these costs could potentially form part of a dilapidations claim should the tenant fail to comply.

More generally, a Tenant’s liability for dilapidations will often be limited by statute, but the lease terms can allow a Landlord to claim dilapidations beyond that. Tenants will need to be mindful of such provisions. It is also common practice for a landlord to add its professional costs to a dilapidations claim, but the extent to which they are able to do so is also governed by the lease and the Landlord will clearly want these provisions to be drafted as widely as possible.

A well drafted lease can ease the settlement of dilapidations disagreements between landlord and tenants. If the clauses clearly set out where the respective responsibilities lie, then when the lease end is on the horizon, a landlord can engage a specialist surveyor to inspect the property and draw up a clearly referenced terminal schedule of dilapidations, covering any disrepair and reinstatement for which the tenant is responsible.
Equally from the tenant’s perspective, they too can put in place a plan when the end of the lease is in sight, to either give themselves time to carry out those repairs and reinstatement for which they know they are responsible, or hand the property back to the landlord in an “as is” condition, knowing what, if any, liability they will face.
Whether you are taking a lease of trading premises, or letting properties as an investment, dilapidations liability starts with the negotiation of the Lease. It is at that point both parties have the opportunity to ensure that the obligations relating to condition are clearly set out and understood. Leases which reflect the true intentions of the parties are the best tool to minimising the risk of later disputes. When it then comes to the end of the lease, armed with the “rulebook”, a swift and amicable settlement can be more readily achieved.

About the authors


about the author img

Ben Price

Partner

Commercial property expert advising owners, occupiers and lenders on disposals and acquisitions, and landlord and tenant matters.
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Emily Wood

Partner

Expert in property contracts, rights to light, telecoms code issues, and business rates appeals for private and public sector clients.

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