Wake-up call: have you checked your dilapidations clause?

If you’re ending your lease, expect your landlord to lay down a list of requirements for redecoration before you do, says Lauren Fitzpatrick

 

The problem

 

As hospitality businesses emerge from the pandemic, many commercial tenants have been forced to re-structure and even close premises altogether in order to survive. With cash flow issues often a prevalent factor in not renewing a commercial lease or being forced to terminate or surrender a lease early, a dilapidations claim can often come as an unwanted and expensive surprise to outgoing tenants.

 

The law

 

Dilapidations is a general term used to reference items of disrepair or deterioration that a tenant is considered liable for in accordance with the repairing obligations within their lease.

 

Dilapidations can vary from damaged paintwork to removal of a tenant’s fit-out, entirely depending on a tenant’s specific obligations. When a commercial lease is nearing expiry, it is usual for a landlord or their agent to attend the premises to inspect and compile an itemised schedule of dilapidations. The schedule will list the various items of disrepair the landlord considers the premises has suffered during the tenant’s term and, in the landlord’s opinion, are the tenant’s liability to remedy.

 

A landlord, usually via their solicitor, will then formally serve the schedule of terminal dilapidations upon the tenant. This will set out the full costs the landlord considers are required to put the property back into repair to the standard required by the lease, in addition to any loss of rent the landlord may suffer as a result of having to carry out the proposed works.

 

Expert advice

 

The majority of commercial leases will contain a repairing covenant that compels a tenant to keep their premises in repair to a particular standard. This can vary significantly lease to lease and in some cases can be particularly onerous. While a tenant will usually have an obligation to keep the property in repair for the full term of the lease, dilapidations will usually be at the forefront of a landlord’s mind as the lease expiration date approaches.

 

Once served with a schedule of dilapidations, it is important for a tenant to consult their repairing and yielding up obligations under the lease. These set out what the tenant needs to do before handing back a property at the end of the tenancy, so it is important that they are interpreted correctly and a tenant understands exactly what is being imposed upon them.

 

Depending on the value of the landlord’s claim, it may be advisable to engage a specialist surveyor to advise and assess the landlord’s claim and thereafter negotiate on a tenant’s behalf to ensure they are not over-paying.

 

Alternatively, a tenant can choose to carry out the repair works themselves, which may prove more cost-effective. If this approach is preferred, it is advisable to clarify and agree with the landlord ahead of time what works will be carried out to ensure all are in agreement that the premises are being handed back in the condition required by the lease.

 

Finally, it is important to understand the landlord’s motives for the premises. If a landlord intends to redevelop the premises or make structural changes shortly after a tenant vacates, then they may have no ability to bring a dilapidations claim if any repair works to be carried out will ultimately be superseded once redevelopment begins.

 

To-do checklist

• Check the lease and any supplemental deeds to understand your repairing and yielding up obligations.
• If appropriate, engage a specialist surveyor to advise on the reasonableness of the landlord’s claim and negotiate on your behalf.
• Explore carrying out the works yourself rather than paying for the landlord to carry out the works.
• Check which, if any, of the landlord’s costs that you are liable to pay for under the lease. This can usually include the landlord’s costs of preparing and serving the schedule of dilapidations, but not always.
• Check the landlord’s motives for the premises.

 

Beware

 

Failure to engage in the dilapidations process can lead to an expensive damages claim if the landlord is forced to commence proceedings to recover sums legitimately due under the lease. It will always be mutually beneficial from a costs perspective for the parties to try and engage constructively to deal with the claim and agree on the dilapidations liability before it needs to be escalated.

 

Lauren Fitzpatrick is an associate at RWK Goodman LLP