A Guide to Dilapidations for Tenants

What is Dilapidation? 

Dilapidations (dilap survey or delap survey) typically occurs at the end of the lease and relates to where a tenant is in breach of their lease obligations, in relation to the repair, reinstatement and decoration of their commercial premises. The purpose of dilapidations is to ensure that a landlord’s loss in relation to these breaches is recovered from a tenant either by way of the works being undertaken or agreement of a financial settlement in lieu of the works. 

The production of a Schedule of Dilapidations is specialist and should be undertaken by a commercial building surveyor.

What is a tenant liable for? 

Leases contain covenants that tenants have to comply with. The lease covenants which normally relate to Dilapidations are in reference to the repair, decoration, reinstatement and statutory compliance. The precise wording of these covenants can differ, which will have implications of the extent of tenants liability. Therefore it is important to employ a professional commercial building surveyor to interpret these covenants to order to advise on the extent of liability.  

Various legal documents can be appended to the lease either at the commencement or during the lease term. These will have implications on a tenant’s liability. The legal documentation that is most often appended to a lease and relate to dilapidations are Schedule of Condition, Licence for Alterations and previous Leases. 

Tenant’s can sometimes have lost these documents or filed them to an unknown location which will mean they a new copy will nee to be requested from the landlord. A tenant should ensure that they keep an original set of the legal documentation relevant to a lease in a safe manner so that they can be reviewed and referred to when required. 

A landlord’s approach to dilapidation will vary and be subject to what their intentions for the building is and the local market conditions. The landlord may be looking to complete the dilapidation works and agree a new letting, or they may be looking a developing the site, or to try and agree a cash settlement in order to upgrade or improve a building. Whatever the landlord’s intentions, what is planned to be undertaken to the premises will have an impact on any dilapidations claim, as there is various protection for tenant if a landlord is looking at developing or improving a building. 

The process for a tenant regarding dilapidation? 

A tenant will often not consider dilapidations until they are in receipt of a Schedule of Dilapidations that has been produced for and issued by a landlord. The receipt of a Schedule of Dilapidations can sometimes be unexpected, especially if a tenant hasn’t dealt with a dilapidations matter previously. A Schedule of Dilapidations is often issued within the last 12 months of the lease term, although is sometimes issued once a tenant has vacated the premises.

Tenant’s must be aware that a landlord does not have a legal obligation to issue a Schedule of Dilapidations during the lease term and is therefore within their rights to issue once the lease has expired. The Schedule of Dilapidations will contain a summary of the relevant lease obligations and a table of works, outlining the various breaches, remedies and budget costs.

Once a tenant has received a Schedule of Dilapidation, they will often appoint a Commercial Building Surveyor to act on their behalf to review the Schedule of Dilapidations provided by the landlord to assess whether the items and costs included are reasonable and are in accordance with their lease obligations. The Commercial Building Surveyor will also use case law and request landlord intentions etc. in order to assist with negotiating the claim. A tenant may look to complete some or all of the dilapidation works prior to lease expiry in order to mitigate the claim, although there are various approaches that a tenant can take to Dilapidations. 

How can a tenant plan for a claim and mitigate their liability? 

Any approach to planning and mitigating for Dilapidations liability will be dependent upon the tenant’s specific circumstances, although there are some common approaches to dealing with dilapidations and potentially mitigating claims, which are as follows: 

Schedule of Condition: If a tenant is agreeing a new lease on premises which is in some degree of disrepair then it may be beneficial to agree a Schedule of Condition which is referred to and appended to the lease. A Schedule of Condition can limit a tenants liability as will record the condition of the premises at the date of lease expiry and subject to the wording within the lease, a tenant will not have to put the premises back to any back state of repair than referenced within the Schedule of Condition. 

Early engagement with the landlord: When a tenant is nearing lease expiry (within 12 months of lease expiry) it is recommended that the tenant try to have early dialogue with the landlord regarding their intentions for the property and whether they would agree to a lease renewal and on what terms. If the tenant is looking to vacant the premises then discussions should be had regarding an appropriate level of Dilapidation works. Landlord’s can sometimes be difficult to reach as a tenant may had been dealing with an agent or property manager. In addition, landlord’s may not want to enter discussion and will leave it to a tenant to assess their liability. In this circumstance it may be beneficial for a tenant to complete a Dilapidations Liability Assessment, will is produced on the basis of what a likely dilapidations claim may be. 

Complete a dilapidation liability assessment: A Commercial Building Surveyor can prepare a Dilapidation Liability Assessment. This assessment is based upon what a reasonably minded building surveyor would include in a Schedule of Dilapidations if completed on the behalf of a landlord. It will detail the works which are required for the tenant to comply with the lease obligations, the appropriate remedies with associated budget costs, and recommendations on next steps in order to mitigate the dilapidations risk. 

Complete works: Following completion of a dilapidations liability assessment and/or discussions with the landlord the tenant may deem it to be more cost effective to undertake all or some of the potential dilapidation work. A tenant may be able to undertake the works for a lower cost than a landlord proposes and can control also control the timings for the works. This can reduce the opportunity for a landlord to claim for consequential losses, such as loss of rent, rates, and service charge. There are risks associated with this approach as the tenant will have capital outlay for works which could have potentially been superseded by a landlord refurbishment or redevelopment. There also may be a residual dilapidations claim. 

Set aside funds to cover the claim: Following completion of a dilapidations liability assessment, a tenant may set aside suitable financial provision to cover an anticipated financial settlement. This approach may be preferable as completing dilapidation works ahead of lease expiry can have an impact on a tenant’s operations. Also, a tenant may be agreeable to a financial settlement over and above undertaking works. As outlined previously, the landlord’s intentions for the premises in question can impact a dilapidations claim and this route can put the burden of responsibility onto the landlord to demonstrate that a loss has occurred, and may assist with demonstrating supersession or dilution of a claim. 

At Bower Surveyors, we offer Dilapidation Surveys throughout UK: Dilapidation Survey Bristol, Dilapidation Survey Bath, Dilapidation Survey Exeter, Dilapidation Survey Cardiff.

Or you can head straight here for more information about: Schedule of Dilapidation