Commercial property dilapidations

A landlord can make a dilapidations claim against the tenant at any time during or at the end of a lease. A dilapidations matter is usually settled by the tenant either undertaking the required works or paying a cash sum of damages to the landlord. Dilapidations claims carry a number of risks to a tenant’s business:

Cost: the cost of settling a claim can be substantial. The Royal Institute of Chartered Surveyors (RICS) estimate that the average cost of settling a claim for an industrial tenant is £7.27 per square foot. Many tenants fail to budget accordingly for what can be a large capital outlay at the end of their lease.
Time: managing a claim can take up significant time and effort, and expensive legal and professional assistance is often required.
Business risk: poor planning can lead to break options being missed/frustrated, landlords forfeiting leases early or landlords entering the property to undertake overdue works at the tenants cost.
Reputational risk: dilapidations claims can end in court.

Although the majority of dilapidations claims are settled at lease end, the potential cost needs to be considered at lease commencement. The obligations on the tenant are set out in the repair, redecoration and reinstatement sections of the lease. If you are signing a full repairing and insuring lease (i.e. all the obligation for repairs is on the tenant) then it is often wise to take advice from a chartered building surveyor before signing a lease and when dealing with the dilapidations process at lease end. At lease end it is also common for tenants to have to pay for both their advisor and for the landlord’s costs in having the dilapidations schedule drawn up and the claim negotiated.

It should also be noted that although the risk of a dilapidations claim can be reduced by complying with repairing obligations during the lease term, issues often arise at lease end over issues such as the following:

– Whether the items identified by the landlord’s surveyor are really a breach of the lease

– What repairs and other works will need to be undertaken

– What constitutes an appropriate repair

– Whether tenants must repair or renew elements which were in disrepair at lease commencement

– Whether any or all of the tenant’s alterations to the building have to be reinstated

– What needs to be redecorated or cleaned, with what materials and in what colours

– The circumstances under which a tenant can exercise a break clause and whether a tenant has complied with the break clause conditions

– The landlord’s estimate of the cost of the remedial works in the schedule

– The reduction in value of a property as a result of it being in disrepair

• The impact of any future redevelopment of the premises on the tenant’s dilapidations liabilities

Most commercial leases require the tenant to ‘put and keep’ the property in repair, which effectively means keeping it in good condition at all times. Unless the landlord and tenant specifically agree otherwise, the fact that the premises may have been in a poor condition when the tenant move in is largely irrelevant. The tenant is still obligated to put them right and return them to the landlord at the end of the lease in good condition.