Getting ahead of commercial dilapidations
Dilapidations is a very specific area of law that relates to the state of a property at the point of exit and is a matter between a landlord and tenant.
In simple terms, dilapidations represent the costs for a tenant at the end of their lease; these are typically attributed to restoring the property back to its original or pre-tenancy state. This is often called bringing the property into repair. It’s a particularly important area that every landlord and tenant should understand as disagreements at the point of exit can be costly for all concerned.
Understanding the definition of ‘repair’ in relation to Dilapidations
When a landlord is made aware that a tenant is exiting their tenancy, they will prepare a Schedule of Dilapidations. This is a document that lists any outstanding works needed to bring a property back into repair; this can include reinstatement, compliance and decoration work. The Schedule will often include suggested remedial works and in some cases, an estimate of the expected associated costs.
Before any works are agreed to, it’s critical to refer back to the lease as this sets out the expectations of how a property will be treated during and at the end of a commercial tenancy. Even if a property was in a poor state at the start of a lease agreement, a tenant may have signed up to keep it in repair which may mean investing significantly more than expected in exit costs.
The landlord perspective on Dilapidations
As a landlord, its important to ensure the appropriate covenants in the lease to guard against a costly restoration once a tenant has left. It’s also helpful to schedule regular inspections so that any issues can be identified and dealt with in a timely manner. If at any point from the beginning of the lease up to 18 months before the end of the lease, a tenant is not fulfilling their obligations under repair and redecoration clauses, an interim schedule of dilapidations can be issued to outline the expected work to be completed. Within 18-months of the lease end-date, a terminal Schedule will be issued.
Dilapidations Schedule
If a tenant accepts the Schedule, it is their responsibility to facilitate the works needed unless agreed otherwise with the landlord. It is possible, for example, that both parties could agree to a financial settlement in lieu of restoration works; in this case, legal representation should be sought to document the terms of such an agreement. If works are carried out, the tenant is free to select whomever they wish to complete these but all works must be completed within the period of the lease and in line with the covenants set out within it.
If a tenant exits the property and works are not completed, or a settlement figure cannot be agreed upon, then there is an option to take the case to court to reclaim the cost of remediation and potentially any loss in rent due whilst the work is being undertaken.
There is a statutory limit on the amount a landlord can claim for dilapidations, which can be based on the reduction in the value of the property resulting from the dilapidations. This means that if a landlord is looking to demolish the building, for example, the dilapidations will have no effect on the value of the property, meaning there is no right to claim.
Dilapidations – The tenant perspective
As a tenant, it’s important to keep records of everything related to the lease arrangements to help resolve any issues or disputes that arise. It’s also important to take good care of the property to minimise end-of-lease liabilities. If works are planned during the lease that will alter the space significantly, documented permission may be needed; it’s also possible that the lease may require any fit-out or alteration work to be removed prior to exit.
When a Schedule of Dilapidations is issued, there are 56-days in which a response can be given. Professional advice from a building surveyor or solicitor can help a tenant understand the true extent of works and liability. It’s possible that some repairs identified are not, in fact, the tenant’s responsibility on a professional interpretation of the lease, or it could be the case that the degree of work has been overstated.
If an agreement can’t be reached, there are a range of dispute resolution options available to assist in reaching an acceptable outcome. This may be a requirement of a lease and is a helpful step to avoid a case escalating to court.
IT’S GOOD TO TALK
Like any legally binding matter, it is in the interests of the tenant and the landlord to work together to avoid any future lease-related issues. Good communication is key to understand future plans and to manage expectations. It is reasonable to expect that a property will be kept in repair during the course of a tenancy and proactive measures on both sides during the course of a lease period should help ensure any obligations are fulfilled.
Guide to Dilapidations: Returning properties to their agreed condition and meeting legal obligations
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