Learn how to manage dilapidations liability as a commercial tenant. Discover key advice for reducing repair costs, complying with the dilapidations protocol and navigating the dilapidations process effectively.
Introduction
This blog post has been prepared for commercial tenants who might be new to commercial leasing and the dilapidations protocol or those who want gain a better understanding of the basics of dilapidations and the potential financial implications of the repairing obligations under their leases.
We have set out our top 3 tips at the end of this blog for tenants to avoid the common pitfalls when dealing with potential claims for dilapidations liability made by landlords for commercial property repair costs and the action you can take before, during and after your lease term to effectively manage your tenant responsibilities under the lease.
FAQs
What is a Schedule of Dilapidations?
A formal document detailing the repairs a tenant must undertake to meet their lease obligations before vacating a commercial property or, if the schedule if served after the lease term, a list of the breaches and wants of repair at the premises with costings that the landlord is claiming the tenant is responsible to cover the cost of.
What is the Dilapidations Protocol?
The protocol sets out the conduct that a landlord and tenant are expected to follow so that disputes can be resolved to hopefully avoid the need for court including; the process, timeframes, standard of key documents such as a Schedule of Dilapidation and the conduct of the parties including pre-action negotiation that is expected of the parties.
Should the matter proceed to Court to be determined, a Court would expect the parties to have followed the protocol and can impose sanctions for failure to comply.
A copy of the protocol can be found here.
What are Dilapidations in Commercial Leases?
In its simplest form, dilapidations refer to the condition of the property either during the term of the lease or when it expires. Most commercial leases will include repairing covenants and often also include what is known as “yielding up” provisions that specify the state and condition that you as a tenant must leave the premises when you vacate at the end of your term.
The landlord can serve a Schedule of Dilapidations either before the end of the lease, in which case you would have the opportunity to carry out the repairs, or once the lease has ended at which point there is no possibility for you to go back in and do the works yourselves. In the latter case, a claim for dilapidations is, in essence, a claim by the landlord for damages for breach of contract.
Why Managing Dilapidations is Crucial for Tenants
In many instances dilapidation claims can be sorted out amicably between the parties or between building surveyors. Sometimes, however, disagreements over the value of the landlord’s claim can turn sour and there is the potential for such claims to end up in arbitration or the Court, taking up a huge amount of time, money and effort for both sides. Therefore, it is essential to understand the implications of dilapidations and have it in the back of your mind before, during and towards the end of your lease. Read below for our top tips at each of these stages.
Our Top Tips for Reducing Dilapidations Liability
1.
Before Signing your Lease
Understand what you are signing up for by seeking legal advice on the terms of your commercial lease before you agree to it. The principle of “buyer beware” applies just as much to leases as it does for any other purchase, and you do not want to find out further down the line you have signed up for property repair costs that you didn’t expect. Try to negotiate the obligations as much as you can to limit your exposure.
If there are elements of the property that are visibly in disrepair, then either ask the landlord to repair those parts and/or make sure you record the state of repair with a “Schedule of Condition” which can be appended to your lease. You should ensure that the Schedule of Condition is sufficiently detailed, including photographs and it must be agreed between both parties. If your lease includes the structure of the building and not just the internal part, you may also want to instruct a surveyor to carry out a full structural survey prior to entering into the lease because this can increase your liability for property repair costs.
2.
During your Lease
Even though you will be focused on running your business, it is always prudent to keep in mind your repairing obligations whilst you are still in the property, rather than leaving them until the end of your occupation. Addressing issues as they arise on an ongoing basis should help minimise any property repair costs and exposure at the end of the lease.
Some businesses decide that it is even worth setting aside amounts during the course of the lease so that there is a pot of money waiting to be used on repairs at termination. Being pro-active in relation to dilapidations liability is highly advisable.
When your lease is nearing its end, your landlord’s building surveyor will likely prepare a detailed Schedule of Dilapidations setting out the areas it considers are in need of repair. As you will still be in occupation at this point, this is an opportunity for you to carry out the works yourself. However, before proceeding with any works it is highly advisable to get your own surveyor to assess the building against the landlord’s claims so you can decide which works are necessary based on your tenant responsibilities under your lease.
Be aware of any key deadlines under your lease and always seek professional advice at an early stage. If there has been a licence to alter or a break notice for example, these can make matters much more complicated and early advice will be key. Often landlords can overstate their dilapidation claims but if you keep an early and open dialogue with your landlord, matters can hopefully be agreed to ensure a smooth exit to your lease.
3.
At the end of your Lease
Once you have vacated your premises the opportunity to carry out the works yourself will be lost. If there are repairs outstanding, it is likely that the landlord’s building surveyor will now update their Schedule of Dilapidations with a quantified demand for what it considers the costs of carrying out the works will be, together with any additional losses the landlord claims to have suffered as a result (e.g. loss of rent or diminution in the value of the property).
There is a property protocol for dealing with dilapidation called the Dilapidations Protocol that should be complied with and once the landlord serves its formal Schedule of Dilapidations you will only have 56 days to respond. Again, always seek early professional advice so that you are best prepared to deal with the Schedule of Dilapidation and can enter negotiations with the landlord over the value and merits of its claim.
Know that you can challenge and negotiate unreasonable claims beyond the scope of the tenant’s responsibilities and a good dilapidations surveyor will be well versed in this process and be able to conduct lease negotiations on your behalf.
Summary: Our Top 3 Tips for Dealing with Dilapidations:
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How we can assist
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We can help ensure that you know and understand your repairing obligations before entering into your lease;
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Negotiate your lease terms and tenant repairing responsibilities;
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Advise on your repairing obligations in advance of your lease expiring and help you develop a proactive approach to dealing with the repairs;
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Help you to start an early dialogue with your landlord and put you in touch with recommended Building Surveyors who can guide you;
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Assist you when a landlord has served a Schedule of Dilapidations and guide you through the Dilapidations Protocol with the aim to avoid litigation and agree a suitable settlement;
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Guide you on alternative Dispute Resolution options if you are unable to agree a settlement with your landlord, including mediation, which is a common and often cost-effective way to resolve property disputes under the Dilapidations Protocol.
** The content of this blog is intended for information only and should not be construed as legal advice**
