Dilapidations – Think ahead to limit liability
By Greig Fenton, Associate Director
Dilapidations and Schedules of Dilapidations in commercial leases can be a somewhat contentious issue, often resulting in disputes and serious financial implications for Tenants and Landlords alike. Referring to the condition or disrepair of a commercial property at the end of a lease, Tenants often fail to appreciate the extent of their obligations and accordingly do not allow sufficient financial provisions for this potentially-significant liability. Cost levels can further escalate if the Landlord’s claim involve a loss of rent covering the period required to carry out the reversion works.
With increasing economic challenges, the last thing a business wants is to be tied into onerous repairing obligations as part of a lease agreement. It’s important therefore that Tenants take steps to limit their dilapidations liabilities at the commencement of a lease or, at the very least, to fully comprehend the notion and significance of the dilapidations process.
Top Tips for Dilapidations
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 – as an alternative to accepting full repairing and insuring liability – that the repairing liability be restricted to leaving the building in no worse condition than at the start of the lease.
In lease terminology, the word repair can include a liability to renew where, for example, a building element is in such a condition that replacement is the only practical option. In order to limit repairing liability a Chartered Building Surveyor should be instructed by the tenant to produce a Photographic Schedule of Condition, recording the subject’s general condition and any pre-existing items of disrepair.
These precautions are also very relevant in situations where a new tenant takes on the obligations of an existing tenant. Here, any alterations and instances of disrepair must be reviewed carefully by the Tenant when considering the purchase (assignment) of another Tenant’s lease.
If breaches of lease or unlicensed alterations are identified prior to the assignment of the lease, the new Tenant may be in a position to negotiate a reverse premium from the outgoing Tenant.
Professional Help in Dilapidations Matters
Landlords and Tenants will almost certainly need professional assistance, ideally from a Chartered Building Surveyor, when dealing with these matters. The appointment of an experienced dilapidations surveyor takes on further significance in instances where disputes arise. In the case of the Landlord, schedules must be accurate and able to withstand legal scrutiny. In the case of the Tenant, the acting advisor needs to determine:
1. Is the Schedule of Dilapidations accurate?
2. Is the standard of repair required by the Schedule of Dilapidations justified?
3. Are there any appropriate statutory reliefs which may be applied?
4. Should the Tenant organise repair works prior to lease expiry, or would it be preferable to pay damages in lieu of reversion works?
Through our Building Surveying division, we have undertaken a large number of instructions to provide strategic dilapidations advice to a wide variety of Clients across many sectors . As part of this service, our team will review the lease, highlight obligations of repair, and thereafter compile a Schedule of Dilapidations (when acting on behalf of the Landlord), or provide an appropriate response to a previously issued Landlord’s schedule (when acting on behalf of the Tenant).
The aim of this service is to:
– If client is Tenant – minimise the cost of the Tenant’s dilapidations liabilities
– If client is Landlord – ensure maximum settlement is achieved based on lease obligations
– Thinking ahead in this way means that any necessary works can be planned, or more amicable negotiations conducted.
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