UPDATED – Dilapidations in Commercial Property

Dilapidations or disrepair often result in disputes between landlord and tenant. The only way to avoid that is to thoroughly document the condition of the property at the commencement and end of the tenancy.

Most commercial leases required the tenant to maintain the property and to undertake any necessary repairs. Under what’s known as a full repairing and insuring (FRI) lease, this normally includes interior and non-structural repairs and where the property is self contained, it may include structural repairs as well.

If the tenant fails to keep the property to its pre-let condition, usually referred to as “tenantable condition”, the landlord can make a claim by issuing a Schedule of Dilapidations to the tenant. This outlines the work required to return the property to its pre-let state.

Key Points

• Dilapidations claims can be substantial, so tenants should fully understand their obligations before entering into the lease.
• Tenants should have the building surveyed for pre-existing defects before signing a lease and these should be incorporated into a schedule of condition.
• Landlords should ensure that a schedule of condition is drawn up at commencement and incorporated into the lease so both parties can agree to this.
• Final schedules of dilapidations are usually prepared by a chartered surveyor at lease termination.

Dilapidations – Commercial Leases

Dilapidations is a term used when referring to the condition of a commercial property during the term of the tenancy or when the lease ends. It means the same as disrepair and is tied in with the repairing and decoration obligations in the lease agreement.

Dilapidations and schedules of dilapidations have serious financial implications for commercial (business) tenants and well as landlords, so they both should ensure that they fully understand these implications and take steps at the outset to minimise misunderstandings before signing a commercial lease.

Full Repairing and Insuring Lease

It is of particular relevance to landlords and tenants where the property has been let under the terms of a standard commercial Full Repairing and Insuring (FRI) lease where the tenant is responsible for repairs, both internal and external, sometimes including the structure of the building. The FRI lease is the norm rather than the exception in commercial property rentals particularly with longer lease, for example in excess of 5 years.

In the case of multi-occupied buildings external and structural repairs such as periodic painting and roof repairs are usually carried out by the landlord and charged to the tenant through the annual service charge.

Tenants, in their eagerness to start trading are often negligent when it comes to dilapidations and agree to leases, even short-term leases, which have full repairing and redecoration obligations, and they fail to record the ingoing condition of the property.

Landlords and tenants should always make sure that leases for commercial properties include a thorough schedule of condition, ideally supported by photographic evidence.

Initial Building Survey

Before taking on lease obligations tenants should consider commissioning an in-going building survey carried out by a chartered building surveyor. Through this exercise the surveyor will produce a schedule of condition to be incorporated into the lease document.

At the end of a lease the tenant is almost always obliged to leave the property in a good state of repair and decoration, and this would in most cases be a better state than it is actually in at the lease end.

Tenants often fail to appreciate this obligation and don’t allow for this extra cost. Even when they have recognised their obligations, their budgeting is often far from adequate.

Landlords and tenants with a dilapidations claim need to be aware that there are statutory limits to the amount that the landlord can claim from the tenant.

The provisions of the Landlord and Tenant Act 1954 can lead to certain tactics being employed in the dilapidations process and the time to analyse these tactics is several months (at least 6 months) before the lease comes to an end.

Thinking ahead in this way means that any necessary works can be planned or negotiations conducted which could considerably reduce the landlord’s claim.

Schedules & Tactics

The landlord may serve a Schedule of Dilapidations on the tenant at different stages of the tenancy:

1. A schedule served during the fixed term of a lease is known as an interim schedule.
2. A schedule served within the last three years of the term is a terminal schedule.
3. A schedule served at or after the end of a lease term is a final schedule of dilapidations.

An interim or terminal schedule will specify both the disrepair alleged by the landlord and the remedial works which the landlord requires the tenant to undertake. This gives the tenants the opportunity to arranged to have the necessary repairs completed itself, as opposed to having the landlord do this, and receiving a large bill.

The difference with a final schedule is that whilst it contains the same alleged breaches of covenant and details of remedial work required, here the tenant will not have an option to carry out the works itself since his right of occupation has ceased.

With final schedule therefore the remedy for the landlord is to claim for damages which will cover the cost of remedial works, AND loss of rent, service charges, rates, professional fees and VAT for any period during which the property is off the lettings market.

The Schedule of Dilapidations:

The Schedule of Dilapidations is simply a listing of all outstanding repair, maintenance and decoration items which a landlord (or more likely its surveyor) has determined have arisen under the terms of the lease being the tenant’s repair and maintenance obligations.

The tenant is obliged to carry out the remedial works listed in the schedule or pay to the landlord damages which equate to the cost to the landlord of carrying out the works.

Schedules of Dilapidations are often the cause of disputes between landlords and tenants, the result of which may mean court action. A court will ultimately decide upon what is relevant and what is not in the Schedule of Dilapidations but going to court increases the costs considerably, usually for both parties. It is far better to avoid litigation and reach a mutual settlement.

Statutory Relief for the Tenant

With an interim schedule, the tenant may obtain relief from forfeiture proceedings (eviction) under the Leasehold Property Repairs Act 1938. This is providing the original term of the lease exceeds 7 years, of which 3 or more years must remain un-expired.

In some situations the tenant may be entitled to relief. In the case of a final schedule and corresponding claim for damages, the tenant may be protected by Section 18(1) of the Landlord and Tenant Act 1927. This is with the proviso that:

1. The landlord cannot recover damages exceeding a sum by which the value of the landlord’s investment is reduced by the tenant’s breach of covenant.
2. Where a landlord intends to demolish the building or carry out structural alterations such that the tenant’s breaches of covenant to repair become irrelevant, then if the tenant can prove his case absolutely, no damages will be recoverable by the landlord.

How can the Tenant Limit his Dilapidations Liability?

There are some practical steps that tenants can take to limit dilapidations liability. For example, in initial negotiations for a new lease, particularly with short leases, the tenant may insist that the repairing liability be restricted to leaving the building in no worse condition than at the start of the lease, as an alternative to accepting full liability.

The word repair in a lease sometimes includes a liability to renew, for example, where a roof was so dilapidated that renewal was the only practical option. So, to limit any repairing liability a Chartered Building Surveyor should be instructed by the tenant to produce a Schedule of Condition, recording the state of decoration and any pre-existing items of disrepair.

These precautions as also very relevant on assignment where a new tenant takes on the obligations of an existing tenant. Here alterations and disrepair must also be considered carefully by the tenant considering the purchase (assignment) of another tenant’s lease.

If breaches and alterations are identified prior to the purchase of the lease, the tenant may be in a position to negotiate for a reverse premium from the outgoing tenant.

Professional Help in Dilapidations Matters

Landlords and Tenants will almost certainly need professional help, ideally from a chartered surveyor when dealing with these matters particularly if there is likely to be a dispute.

In the case of the landlord, schedules must be accurate and able to stand legal scrutiny.

In the case of the tenant, the advisor acting needs to determine:

1. Is the schedule of dilapidations accurate?

2. Is the standard of repair required by the schedule justified?

3. Are there any appropriate statutory reliefs which may be applied?

4. Should the tenant organise the repairs and if so under what times scales, or would it be preferable to pay damages?

Pre-Action Protocol

The Civil Procedure Rules – Pre-Action Protocol – covers all civil disputes including dilapidations claims and covers pre-action behaviour in cases not covered by a specific protocol.

The Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (the ‘Dilapidations Protocol’

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