A Guide to Dilapidations in Commercial Leases

Dilapidations in commercial leases are a common source of dispute between landlords and tenants. The commercial landlord may be seeking to recover losses from a tenant’s breach in obligations via a dilapidations claim, or a tenant may be aiming to minimise liability at lease end.

This guide explains what dilapidations are in a commercial property solicitor’s words, how claims arise, what happens at the end of a lease, and how section 18 of the Landlord and Tenant Act 1927 can limit recovery.

What are dilapidations?

A claim for dilapidations is a claim by a landlord against a tenantwhen a tenant hasn’t complied with its obligations contained in a lease, usually regarding:

• Repair
• Decoration
• Reinstatement of a property

These claims are more commonly made after a lease has ended.

Schedule of Condition

In most commercial leases, there are conditions that a tenant will repair, decorate and ensure a property is kept in good repair and condition until the end of the lease.  In some cases, a tenant can even be obliged to put a property into a better state of repair and condition than it was in when they first began to occupy it.

A schedule of condition is often used in to limit a tenant’s repairing obligations under a lease. For example, a lease may express that the tenant is only required to maintain the property in a condition no worse than evidenced in the schedule of condition. This can restrict the scope of the tenant’s liability.

A schedule of condition is usually prepared at the outset of the term, and should include a written report with photographic evidence.

Licences for Alterations

In addition to the lease itself, the landlord and tenant may have also entered into further agreements to allow a tenant to undertake works to fit out a property for its purposes. These are usually called licences for alterations. These agreements sometimes allow a landlord to require a tenant to strip out those alterations – known as reinstatement – at the end of a lease.

Where a tenant breaches these conditions, the landlord will seek to bring a claim against the tenant for dilapidations claims:

• The costs of restoring the property into the condition it should have been in, had the tenant complied with its obligations in the lease (and any licences)
• Loss of rent
• Professional fees, including legal and surveyors costs
• Other associated losses

What about repairs required while a lease is still running?

If a tenant is in breach of its repairing obligations whilst the tenant is still in occupation, then this is known as an interim dilapidation. A landlord has certain remedies available to it.

A commercial lease will often include one or more of the following enforcement methods:

Forfeiture

The landlord may seek to evict the tenant for a breach and terminate the lease.

Self-Help

In the tenant’s breach of lease, some leases allow the landlord to seek to re-enter the property, complete necessary works and then claim reimbursement of its costs from the tenant.

Injunction or order for specific performance

These are orders from the court which compel a person to do something. This could require a tenant to allow a landlord access to undertake works, or, alternatively, compel a tenant to undertake works.

Each remedy has risks and procedural requirements. Early legal advice is essential before undertaking enforcement action.

What happens at the end of a commercial lease?

Normally, shortly before or after a lease has ended, a landlord will instruct an expert dilapidations surveyor to inspect the property and draw up a schedule of dilapidations. This is essentially a schedule of:

• The tenant’s breaches of repairing obligations
• An estimate of the expected costs of repair
• Normally, any further associated losses such as loss of rent and project management fees

This schedule will form the initial basis of a landlord’s claim against a tenant and will be served on the tenant. Claims raised at the end of a lease or shortly after are known as terminal dilapidations.

Claims for dilapidations are also subject to the Dilapidations Protocol, officially known under procedure rules as ‘Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of Tenancy’. This sets out the procedure that parties are expected to follow before court proceedings are issued. The protocol encourages early engagement between parties to resolve disputes and requires the landlord to supply the schedule of dilapidations, any demands, and supporting evidence.

The risks of not acting swiftly

Once a lease has ended, a tenant will have no rights to re-enter to do works. It is therefore advisable for a tenant to instruct its own dilapidations surveyor some months (usually 12 months) before the end of the lease.

That surveyor will guide a tenant on what works should be done before the end of the lease in order to avoid or minimise a dilapidations claim. A tenant’s surveyor can:

• Review the lease obligations
• Inspect the property
• Advise on works that should be undertaken before expiry
• Help mitigate risks of a dilapidations claim

Napthens’ commercial property disputes solicitors work closely with specialist local surveyors to offer advice on the requirements of your situation.

Landlord’s options after serving a schedule of dilapidations

Once a schedule of dilapidations has been served on a tenant, the landlord may then elect to either:

• Complete the necessary repair works themselves and seek recovery of the actual costs of doing so from the tenant.
• Make a claim against the tenant before or instead of undertaking works based in the decrease in value to the property as a result of the tenant’s breaches (known as ‘diminution in value’ which is discussed further below).
• Deal with the need for repair another way for example, by agreeing with an incoming tenant that they will complete the works, usually in return for a rent free period, or by selling the property at a reduced price.

What does section 18 of the Landlord and Tenant Act 1927 do?

Section 18 of the Landlord and Tenant Act 1927 sets a statutory cap on how much a landlord can recover in dilapidations claims.

What is diminution in value?

Diminution in value is the difference between:

• The value of a property in the condition it should have been returned under the lease
• The value of the property in the actual condition it was returned

A landlord cannot recover from a tenant an amount greater than the ‘diminution in value’ of the landlord’s interest in the property. For example:

• If a property given back in the condition it should have been in accordance with a lease was worth £100,000
• But in the condition that the tenant handed it back in, it was worth £80,000
• The diminution in value is £20,000

Strictly speaking, this means that a landlord cannot recover more than £20,000 even if the cost of works is more.

If a landlord has actually completed the works before making a claim, the court may, in some cases, award an amount in excess of the diminution in value.

However, where works have not been undertaken before issuing a claim, a Judge is most likely to limit the sum claimed by reference to the diminution in value.

Section 18 therefore can significantly reduce the level of damages recoverable in a commercial lease dilapidations claim.

The Importance of Early Advice in Dilapidations Claims

Dilapidations claims are notoriously expensive and complex. It is important for a landlord or a tenant to get early advice and to consider whether it is possible to agree a settlement before issuing court proceedings.

Visit our commercial property disputes service page to explore how our specialist commercial property litigation solicitors can support, and contact us today via our form to speak with an expert.

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