Understanding Tenant Dilapidation Liabilities

What are 'Dilapidations'?

Dilapidations as a term generally refers to a claim brought by a commercial Landlord against a commercial Tenant due to breaches in certain covenants under the terms of a commercial lease.

These typically are formed around covenants for the following:

1. Repair, maintenance and cleaning
2. Decoration
3. Reinstatement of Alterations
4. Statutory Compliance
5. Landlord’s Costs

Dilapidation schedules and claims are usually seen towards or at the end of a lease term, known as ‘Terminal’ schedules, but can also be served in the middle of a lease term, known as ‘Interim’ schedules.

These claims are typically produced by Building Surveyors instructed by the Landlord and served by the Landlord’s solicitors.

How do Dilapidations impact me, as a commercial Tenant?

Put bluntly, they can provide a nasty shock at lease end in the form of a large dilapidations claim served by the Landlord.

As a commercial Tenant, you will typically be occupying your building or premises under the terms of a commercial lease. These leases are effectively an agreement for the Tenant’s occupation of the building and will be drafted in a way that places obligations on both Landlord and Tenant during the tenure.

As stated above, and in the context of dilapidations, modern leases are typically drafted which oblige the Tenant to keep the property or parts of the property they occupy in a good condition, well decorated and generally return the building in the same arrangement as it was provided to them at lease commencement.

Understanding your obligations as a commercial tenant under your commercial lease is crucial in order not to receive a nasty surprise at the end of the lease in the form of a substantial dilapidations claim from the Landlord.

It is recommended that the lease is reviewed to understand these obligations and these are usually found in the section of a lease named as ‘Tenant Covenants’.

How can I limit my dilapidation liabilities?

This starts with understanding of commercial leases and how they are constructed. Even though dilapidations typically occur towards the end of the lease you should be considering their impact when discussing a new lease with your potential landlord.

The most straightforward and commonly applied way to limit dilapidation liabilities is by having a schedule of condition drafted and agreed between both parties. This schedule will record the condition of the property you are leasing and be included and referenced in the lease terms, usually limiting repairing and sometimes decorative covenants. Without this schedule Tenant’s usually find themselves liable for repair items even if it was in disrepair before the lease started…!

Other ways to limit or reduce dilapidation liabilities is to specifically exclude elements of the property from the ‘demise’. For example if the roof covering of a property you are looking to lease is in a poor condition, you may request that this is excluded from your liability under the lease terms. Landlords are less likely to agree to this approach as it exposes them to more commercial risk but it is worth trying when negotiating lease terms at the outset.

If you are already in a lease term without having any due regard for dilapidations previously, then looking to understand your responsibilities for maintenance, repair, reinstatement etc, under the lease is your first port of call. Once you have a better idea of what you need to do you can look at the property and what condition it is in and then prepare a plan of maintenance works that need to be put into place before lease end.  Whilst this doesn’t reduce the liability per se it allows for a planned approach rather than  a reactive once which will likely reduce stress, time and cost associated with the process.

How do I quantify my dilapidation liabilities?

Again, understanding your liabilities as defined in the lease terms then reviewing the condition of the property and comparing the two to identify any breaches is the starting point.

Once this is known you could call in local contractors to provide quotes for the works to give an idea of price to rectify the breaches identified.

Appointing a commercial building surveyor is another alternative, they can do the leg work of reviewing the leases and other relevant documentation, inspecting the property and providing a professional report which will provide a clear explanation of your responsibilities under the lease, condition of the premises and anticipated costs associated with any required works.

Final Thought...

Understanding your dilapidation liabilities as a Tenant of a commercial property is a key part of business planning and in our experience is often overlooked. Commercial leases are typically written favourably towards the Landlord which can leave Tenant’s liable for large financial claims at lease end which may not have been budgeted for.

By understanding your obligations under the lease terms and analysing them in the context of a potential dilapidations claim is something that we recommend is carried out with 12 months left until lease end. This will allow for budgeting and crucially time to consider and implement any strategies that are decided upon.

At Bressummer A.R.K. Limited we have a real track record of working with Tenant’s of commercial properties to identify their dilapidation liabilities and providing accurate figures to account for potential claims. Are reports are tailored to each specific customer, property and lease. We provide pragmatic advice around not only the liabilities taken at face value from the lease but also considered recommendations around potential strategies to limit the claim.

Once any claim is submitted by the Landlord we also offer support to Tenant’s who require it in reviewing the initial claim and providing professional representation in negotiating claims.