Dilapidations in Commercial Leases

Many tenants tend to consider dilapidation liability towards the end of their lease term, as the property will typically require some work by then. This is also the point at which the landlord usually serves a dilapidations schedule.

However, it is essential to understand that a tenant's treatment of the property during the term is only one part of the story. Dilapidations effectively breach the lease terms relating to the property's condition. Therefore, the lease, which governs the relationship between landlords and tenants, is the key reference point for a tenant's obligations. These terms are fixed at the beginning of the lease, not the end.

One of the most crucial clauses in a lease regarding dilapidations is the one relating to repair. Intuitively, a tenant may assume that they will have no dilapidation liability to the landlord for disrepair if they return the property in the same condition as they found it. Regrettably, this is not the case, and clear drafting is required to prevent the tenant from being responsible for improving the landlord's property.

The concept of dilapidations encompasses more than just basic repairs. If a tenant has undertaken fit-out works, they may be obligated at the end of the lease to restore the property to its original condition. This requirement can apply even if the tenant believes their alterations have improved the property. The landlord's perspective often focuses on ensuring the space is a "blank slate" for future tenants who may wish to use the property differently.

Landlords need to ensure their rights are clearly defined within the lease agreement. For example, the landlord may have initially consented to the tenant's fit-out works and included a provision for reinstatement. However, if a subsequent lease renewal has occurred, that right may be lost without careful drafting and documentation.

Sustainability has become a key consideration for landlords and tenants when drafting leases. This is particularly important as landlords could face fines and penalties for letting properties not meet the required energy efficiency standards. Although the legislation in this area aims to make landlords responsible for upgrading their properties, landlords can pass the cost of these works onto the tenant through the lease. These costs could form part of a dilapidations claim should the tenant fail to comply.

A tenant's liability for dilapidations is often limited by statute. However, the lease terms allow a landlord to claim dilapidations beyond that statutory limit. Tenants should be mindful of such provisions in the lease. It is common practice for a landlord to add professional costs to a dilapidations claim. The lease governs how much they can do so, and landlords will naturally want these provisions to be drafted as favorably as possible.

A well-drafted lease can significantly assist in the amicable resolution of dilapidation disagreements between landlords and tenants. If the clauses clearly outline the respective responsibilities, then as the lease end approaches, a landlord can engage a specialist surveyor to inspect the property and prepare a thoroughly referenced terminal schedule of dilapidations. This would cover any disrepair and reinstatement for which the tenant is accountable.

Equally, from the tenant's perspective, they can, too, make preparations as the lease end draws near. This allows them either to undertake the repairs and reinstatement for which they know they are responsible or to return the property to the landlord in its current condition, with a clear understanding of any liability they may face.

Whether you are taking on a lease of trading premises or letting properties as an investment, the dilapidation liability issue starts with the lease negotiation. At this stage, both parties have the opportunity to ensure the obligations relating to the condition of the property are clearly set out and mutually understood. Leases that accurately reflect the parties' true intentions are the best tool for minimizing the risk of later disputes.

As the end of the lease approaches, it is recommended to review the terms and conditions outlined in the rental agreement, often referred to as the "rulebook." A swift and amicable settlement can be more readily achieved after the tenancy by familiarizing oneself with the established guidelines. This approach, grounded in mutual understanding and adherence to the agreed-upon policies, can help facilitate a smooth and harmonious transition for all parties involved.