Dilapidations Guide as a Tenant

Dilapidations

When a commercial lease expires, landlords routinely pursue financial claims against tenants. Tenants who are unaware of this practice may be caught off-guard by the substantial sums involved. In contrast, more experienced tenants who have navigated similar situations understand the steps they can take to mitigate or reduce dilapidation claims. As a tenant, you must challenge the landlord's list of required repair work (the schedule of dilapidations). To be in a solid position to mount a successful challenge, you need to address the dilapidations issue right from the outset, with the assistance of your building surveyor, before signing the lease.

Tenants face substantial business premises occupancy costs, such as rents and rates. To make matters worse, they are often served with a schedule of dilapidations at the end of their occupational lease. Dilapidations are breaches of covenant for which a business tenant is liable under the terms of a lease. The liability typically includes an obligation to repair and decorate. However, tenants can take several decisive actions to minimize these costs.

As a Tenant, when do I start thinking about Dilapidations?

Before signing a lease, you must conduct a thorough survey to establish the condition of the premises. This survey will provide a clear indication of the work required immediately and in the future. It is crucial to meticulously record the condition and layout of the premises before occupancy. If the premises are already in a state of disrepair, special considerations must be considered.

Regular and planned maintenance during the lease term is essential to avoid costly expenses later on. Neglecting this could lead to significant financial consequences.

What can a Tenant do to safeguard against Dilapidations charges?

Tenants must seek professional advice to understand their liability when signing a lease. The best way to minimize liability is to agree on a detailed schedule of conditions that accurately documents the premises' state at the lease's start. The repair covenant should then be limited to restoring the property to no better condition than at the commencement of the lease. Tenants need to take this critical step to protect themselves as failing to do so could result in significant financial and legal consequences. Tenants must be proactive and ensure a schedule of conditions before signing any lease agreement.

What should the tenants do before the lease ends?

Tenants must request a schedule of dilapidations from their landlord at least 12 months before the end of their lease. Alternatively, tenants should arrange for their surveyor to prepare a detailed list of the required works to mitigate their dilapidation liability. Obtaining the landlord's schedule ensures that the tenant fully understands the landlord's expectations, allowing both parties to align their views from an early stage.

Once the landlord has provided the schedule of dilapidations, tenants must have their specialist dilapidations surveyor review it. The tenant's surveyor will assess the reasonableness of the works outlined in the schedule. If any aspects of the claim are unreasonable, the tenant's surveyor must explain why to the tenant. It is important to note that a breach of a lease clause does not automatically mean the landlord has suffered a loss.

Tenants must be proactive in managing their dilapidation exposure and not hesitate to seek professional advice, as failure to do so could result in significant financial consequences for the tenant at the end of the lease term.

What must the tenant do if Damage occurs to the leased property?

Dilapidations must be adequately considered well in advance of the lease expiry. This allows the tenant to appoint qualified advisors to assess the liability for any repairs. The advisors will promptly initiate discussions with the landlord to agree on a solution, whether it's undertaking the work or a cash settlement. We suggest that dealing with repairs annually prevents a backlog at the lease end, which can otherwise lead to unexpected cash flow problems.

What if the property was in a poor state from the start?

As a commercial tenant, you must ensure the property is in good repair, regardless of its initial condition. Unless you and the landlord explicitly agree otherwise, the poor state of the premises when you took occupancy is irrelevant. You are legally obligated to restore the property to proper working order. Negotiate a lower rent or premium to offset the costs you will incur.

Alternatively, persuade the landlord to agree that the property be returned at the end of the lease in the same condition as when you took possession. Insist on a detailed 'schedule of condition' that accurately documents the state of the premises. Instruct your solicitor to modify the lease clauses to reflect this reduced repair obligation. 

As a Tenant, am I liable if I alter the premises?

Tenants are liable for restoring the property to its original condition and layout at the start of the lease. If a tenant makes alterations, they must obtain a license. The license will include a reinstatement clause detailing the work the tenant must perform to reinstate the property before the lease expires. Dilapidations are limited to reducing the property's value upon its return to the landlord. However, the reinstatement clause is mandatory, and the landlord can demand payment instead of the reinstatement work, even if the alterations have improved the freehold property's value.

Negotiating a claim

When there is uncertainty about a building's future, negotiating a claim without completing any work can be the most cost-effective approach. This can arise when a tenant anticipates their landlord may redevelop or convert the property after the lease ends or due to changes in market conditions since the lease commenced.

The reason is that landlords often struggle to prove their financial loss if works are not completed. Skilled dilapidations negotiators can identify and remove aspects of a claim that have not led to a loss. They can also help tenants submit a well-reasoned settlement offer, which can be more cost-effective than completing the work.

Do I have to accept the landlord's dilapidations claim in full?

We suggest not accepting the landlord's claim without seeking professional legal advice. Your dilapidations legal team will thoroughly review the figures and rigorously challenge any items that should not have been claimed. If they cannot demonstrate that the landlord's claim is inflated or unjustified, then they will not hesitate to reject it outright. 

Furthermore, you must consider the possibility that the landlord may not even intend to repair the property and could instead be planning to demolish or substantially alter it. In such circumstances, the landlord would have no legitimate grounds to claim for the total cost of repairs, as they would not have incurred those losses. Your legal team will be prepared to mount a solid legal defense against any such spurious claims.

What if I cannot solve with the landlord?

Landlords and tenants must avoid court proceedings at all costs. The legal process is slow and costly for both parties. Your legal dilapidations team can represent you in court, but this should be a last resort. Disputes are best resolved through mediation, expert determination, or arbitration. These alternative methods are more efficient and cost-effective for all involved. Landlords and tenants must take proactive steps to reach an agreement and avoid the burden of lengthy and expensive legal battles. The priority should be finding a swift and mutually agreeable solution outside the courtroom.