This short blog post has been prepared for commercial tenants who might be new to commercial leasing 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 dilapidation claims made by landlords and the action you can take before, during and after your lease.
What are Dilapidations?
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.
If you do not comply with your repairing obligations as set out in the wording of your lease, then the landlord can issue what is known as a “Schedule of Dilapidations” setting out a list of items of damage and repair and what it considers their associated costs to be. Given the nature of repairing obligations under most commercial leases, non-compliance in some form is very likely (even by the most diligent tenants).
The landlord can serve this schedule 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 should you care about potential dilapidation claims?
When you enter into your commercial lease, you will be signing up to various obligations for repair, maintenance, and decorations during the term. Some of these can be extremely onerous and many tenants will overlook these obligations during the term and only start to think about them once the lease is coming to an end or if they are thinking of leaving at a break point. By this time the liabilities could have grown and leave you having to deal with a large, unexpected amount to pay at the end of your lease.
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 Tenants dealing with Dilapidations at each stage of your lease
Before Signing your Lease
Understand what you are signing up for by seeking legal advice on the terms of your 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 something 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.
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 your obligations and cost 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 repairing obligations 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.
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 often overstate their dilapidation claims but if you keep an early and open dialogue with your landlord, matters can hopefully be agreed and you can ensure a smooth exit to your lease.
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 dilapidations 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 and can enter negotiations with the landlord over the value and merits of its claim.
Summary: Our Top 3 Tips for dealing with Dilapidations:
Understand what you are agreeing to at the start of the lease, get advice and negotiate your repairing obligations. Agree a Schedule of Condition.
Be pro-active during the term of your lease when managing repairs. Deal with any repairs that arise at the time and set aside a dilapidations fund to pay for repairs at the end.
Start early dialogue with your landlord as the lease is approaching its end. Be aware of any key dates or deadlines in your lease and instruct a building surveyor to understand your obligations and likely exposure. Take early advice from a solicitor and building surveyor when you receive a Schedule of Dilapidations from your landlord.
How we can assist
We can help ensure that you know and understand your repairing obligations before entering into your lease;
Negotiate your lease terms and repairing obligations;
Advise on your repairing obligations in advance of your lease expiring and help you develop a proactive approach to dealing with the repairs;
Help you to start an early dialogue with your landlord and put you in touch with recommended Building Surveyors who can guide you;
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.
** The content of this blog is intended for information only and should not be construed as legal advice**