Key Takeaways:
- Dilapidations are breaches of the repair and maintenance covenants in a commercial lease, typically assessed at or near the end of the tenancy.
- Landlords must serve a schedule of dilapidations setting out the works required. Tenants have the right to challenge the items included and the costs claimed.
- The Leasehold Property (Repairs) Act 1938 can limit a landlord’s ability to claim during the term of a lease – but does not apply to terminal dilapidations at the end of a lease.
- A schedule of condition agreed at the start of the lease significantly limits the scope of a dilapidations claim at the end.
Dilapidations disputes are one of the most common sources of conflict between commercial landlords and tenants at the end of a lease. The sums involved can be substantial, and the legal framework is detailed enough that tenants who do not take specialist advice often end up paying significantly more than they should.
This article explains how dilapidations claims work, what tenants can challenge and how to reduce the risk of a large claim when a lease comes to an end. Our dilapidations and repair dispute solicitors at Osbourne Pinner offer a free 30-minute consultation and can advise on defending dilapidations claims and resolving lease-end disputes.
What Are Dilapidations?
Dilapidations are breaches of the repairing, decorating and reinstatement covenants in a commercial lease. Under a full repairing and insuring (FRI) lease, which is the standard form for most commercial lettings, the tenant takes on responsibility for keeping the premises in good repair throughout the term and for returning them in that condition at the end.
In practice, ‘good repair’ is measured against the standard the property should be in, not the standard it was in when the tenant took it on. This means a tenant can be required to remedy defects that existed before they moved in, unless the lease contains a schedule of condition limiting the obligation to the state of the property at commencement.
The Dilapidations Process
The dilapidations process is governed both by the lease covenants and by professional standards set by the Royal Institution of Chartered Surveyors (RICS). The landlord will typically instruct a building surveyor to carry out an inspection and produce a schedule of dilapidations: a document that lists every alleged breach of the repairing and decorating covenants along with the estimated cost of rectification.
Terminal dilapidations are assessed at or near the expiry of the lease. The landlord has up to 12 months after the lease ends to bring a claim, so a schedule served shortly before or after the end of the term is not unusual. Interim dilapidations can also be served during the lease term, though the Leasehold Property (Repairs) Act 1938 can limit the landlord’s remedies in those circumstances for leases with more than three years remaining.
What Tenants Can Challenge
A schedule of dilapidations is the landlord’s opening position. It does not have to be accepted as it stands. Tenants should obtain their own surveyor’s report and consider challenging both the items listed and the costs claimed.
Items can be challenged on several grounds. The alleged breach may not actually be a breach of the tenant’s repairing covenant. The works specified may be more extensive than the covenant requires. The tenant is obliged to repair, not to improve. The costs claimed may be inflated or may include elements the landlord would need to spend regardless of the tenant’s breach.
The Section 18 Cap
Section 18 of the Landlord and Tenant Act 1927 limits the damages a landlord can recover in a dilapidations claim to the diminution in value of the landlord’s reversion. In other words, it caps the claim at the reduction in the value of the landlord’s interest caused by the tenant’s breaches. This cap applies where the cost of the works would exceed that diminution.
The section 18 cap is a significant protection for tenants where the property is going to be redeveloped or substantially altered after the lease ends. In those circumstances, the cost of the alleged dilapidations may have no real impact on the value of the landlord’s interest. A valuation expert instructed by the tenant can assess the s.18 position and significantly reduce the landlord’s recoverable damages.
See also: Unfair Rent Review in a Commercial Lease
Reinstatement Obligations
Many commercial leases include a reinstatement obligation alongside the repair covenant. This requires the tenant to remove any alterations or additions made during the tenancy and restore the premises to their original condition at the end of the lease. Fit-out works, partitioning, additional cabling and even specialist flooring can all be caught by a reinstatement obligation.
Before carrying out any alterations, tenants should check whether landlord’s consent is required and, if so, what conditions the licence for alterations imposes. Some licences for alterations include a reinstatement schedule that specifies exactly what must be removed. Others may waive the requirement to reinstate. Getting clarity on reinstatement before works are carried out avoids disputes at lease end.
How to Reduce Dilapidations Risk
The most effective way to limit dilapidations liability is to negotiate a schedule of condition at the start of the lease. This is a photographic and written record of the property’s state at commencement, attached to the lease, with a provision that the tenant’s repairing obligation extends only to keeping the property in that condition and no better.
During the term, carrying out routine maintenance, keeping records of repairs done and taking photographs periodically all help establish what was dealt with during the tenancy. Tenants who can demonstrate a history of proper maintenance are better placed to challenge a schedule that overstates the position.
Engaging with the dilapidations process promptly, rather than ignoring the schedule and waiting for the landlord to sue, gives the best chance of negotiating a settlement that reflects the true position rather than the landlord’s opening claim.
Speak to a Commercial Property Solicitor about a Dilapidations Claim
Dilapidations claims can run to tens or hundreds of thousands of pounds on larger commercial properties. The landlord’s initial schedule often significantly overstates the position. Tenants who take specialist legal and surveying advice at the right time regularly reduce or eliminate claims that looked substantial when first presented.
At Osbourne Pinner, our commercial property solicitors advise commercial tenants on dilapidations claims, challenging schedules of dilapidations, reinstatement obligations and lease-end disputes. We work with building surveyors and valuers to give clients a complete picture of their exposure and the best route to settlement.
Please note that this article is for informational purposes only and does not constitute legal advice. We always recommend speaking to a qualified solicitor for advice tailored to your specific circumstances.
We offer a free 30-minute consultation to discuss your situation. You can speak with us via video call or visit our offices in Harrow, Canary Wharf, Piccadilly Circus or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below.
