Planning For Dilapidations On A Commercial Lease

Planning For Dilapidations On A Commercial Lease

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Dilapidations are a complex area of property leasing, and getting this right from the start is essential to avoid costly disputes when the lease comes to an end. A poorly drafted lease can leave both tenants and landlords with a nasty shock in the future.

It can also lead to expensive and time consuming litigation, so knowing how to handle them can save you time and money. 

Here’s a guide to dilapidations, from what they are and why tenants and landlords could benefit from learning more about what’s involved and some of the issues to consider. 

What are dilapidations?

When budgeting for a lease, tenants tend to budget for the obvious expenses such as rent, business rates and utilities. But a less obvious cost, and one that’s often neglected, is the potential for dilapidations at the end of the lease.

It’s worth considering these expenses early on so that both the tenant and the landlord aren’t met with an unexpected cost to pay when the lease comes to an end. 

There are several factors which enter the equation of estimating liability for repairs, from the age and size of the property, to the length of the lease, who is responsible for different aspects of the property – for example, is the tenant only responsible for the interiors and who handles redecoration at the end of the lease? – and what materials the building is constructed from.

Can tenants alter a commercial property?

Any work that a tenant carries out on a property to alter needs to be permitted in their lease.

Some leases may require the tenant to seek permission from the landlord prior to beginning while some may state that, upon approval, they’ll need to restore the property back to its original state when their lease comes to an end.

While a tenant might think they’re adding value to the property through their alterations, a landlord may not agree, and neglecting to remove or repair them could result in them being part of a dilapidation claim.

What happens at the end of a commercial lease?

Your lease is a contract, so at the end of a lease, each party has their own set of obligations to adhere to in relation to what’s been outlined in said contract.

A lease typically allows the landlord to serve a Schedule of Dilapidations – a document set out to outline the tenant’s lease liabilities with regards to the state of the property. 

A Schedule of Dilapidations is provided towards the end of the lease, or once it’s been terminated, and is prepared by a surveyor. There are several payment options once this has been created. The tenant can complete the works required at their own expense, the landlord can complete the works at the expense of the tenant, or the tenant can pay the landlord the equivalent sum of putting the property back to the correct condition.

In the case of the latter, the law states that the landlord can claim this sum whether they intend to carry out the works or not, but the wording of the lease is critical for this to be the case. 

What are the most common areas of dispute in a commercial lease?

There are several areas of dispute between commercial landlords and tenants, including:

  • Whether the areas identified by the landlord’s surveyor is a breach of the lease
  • What is considered an ‘appropriate’ repair
  • Which areas need to be cleaned or redecorated
  • Whether any or all of the tenant’s changes to the property need to be restored to their original state
  • How much value has been deemed to be lost through it being in disrepair
  • The estimates for the remedial works required
  • Which circumstances can result in the tenant exercising a break clause and whether they have complied with the clause conditions

With so many factors to consider, having professionals on your side can really help both parties reach a mutual agreement as quickly as possible. 

Issues for tenants to consider

Tenants always need to check the validity of any notices they’ve been served with regards to dilapidations or accusations that they’re in breach of their repair and maintenance obligations. Not only might they be incorrect but they may also not be outlined as the tenant’s responsibility in the lease itself.

Remedying the breach might also go beyond what the tenant is required to do as part of their contractual obligations, such as technical issues that require the consideration of a professional. 

There are also tactical considerations that tenants should be aware of, such as in the case of requirements to reinstate the property on notice.

The tenant might have the right to remain in occupation of the property after the lease term has ended to complete the works needed, if the landlord hasn’t given sufficient notice to the tenant. Many dilapidation claims begin at a high level and are resolved at a lower level once the parties have sought advice from specialists. 

Handling dilapidations in a commercial lease

Dilapidations in a commercial lease are a complex area of law and the rules are constantly changing. Issues at the end of a lease should always be handled with care, but really they should be considered when the lease begins rather than just being handled at the end.

Getting the clauses right at the start can prevent a nasty shock at the end of the term and protects both landlords and tenants equally, ensuring that everyone knows what’s required of them and what they’re responsible for.