Dilapidations and commercial property lease repairs

Dilapidations & End of Lease Repairs – Commercial Property Dilapidations Claims

In simple terms, dilapidations are a landlord – tenant issue primarily associated with the breach of a tenants repairing obligations under the terms of a commercial property lease. Dilapidations typically relate to any redecoration, reinstatement or repair works that have not been completed by a tenant, usually at the end of their lease, and which constitute a breach of the terms of that lease.

Typically a tenant’s failure to comply with their repairing and reinstatement obligations at the end of their lease will mean that the landlord is entitled to claim damages from the tenant in the form of dilapidations.

Dilapidations claims would normally be based on the cost of the repairs and reinstatement works that the tenant should have completed, plus any loss of rent for the period needed to complete those works, although there is a statutory cap on the size of the landlords claim.

Under Section 18(1) of the Landlord and Tenant Act 1927 the size of the landlords claim for damages is limited to the diminution in value to the landlord’s reversion caused by the tenants breaches of their lease.

Types of Schedule of Dilapidations

There are two main types of schedule of dilapidations and they are as follows:

  • Interim Schedules & Repair Notices

    Interim schedules of dilapidations and repair notices can be served by the landlord during the lease.

    An interim schedule or repair notice would normally require the tenant to carry out repairs in accordance with the terms of their lease.

  • Terminal schedules

    Terminal schedules are schedules of dilapidations that are served once a lease has ended.

    Because the lease has ended the tenant no longer has the ability to carry out the repairs so any settlement will be financial.

Commercial Property & Tenants Repairing Obligations

It is usual in the case of commercial property leases for the tenant to be contractually obliged to maintain the premises they are renting in a good state of repair, but of course there are always occasions when these repairing obligations are not met, particularly at the end of the lease.

In such situations, what can a landlord do to ensure that the necessary repair works are carried out to their property?

First of all the landlord could try a little persuasion… reason with the tenant and hope that their requests do not fall on deaf ears.

If however that fails to work, then the landlord is perfectly entitled to have the repairs carried out on their behalf, and issue the tenant with a claim for damages.

This claims procedure is commonly known as a dilapidations claim.

Schedules of Dilapidations & Claims for Damages

Subject to the terms of the lease agreement, a landlord is usually well within its rights to prepare then serve a schedule of dilapidations and claim for damages, although they must be careful to observe certain important points.

  • Disrepair & Lease Obligations

    The landlord must be able to prove that the items included in the schedule are in disrepair, and that they are ones which the tenant is formally obliged to carry out under the terms of their lease.

  • Costs are Reasonable

    The landlord must be able to prove that the costs claimed for the repairs, reinstatement works etc… the damages, are reasonable.

  • Loss of Rent

    The landlord must show that rent has in the interim been lost because they have been unable to re-let the property in such a dilapidated condition.

  • Improvements

    The tenant should not be required to repair of refurbish the premises to a higher standard than it was when the lease commenced.

  • Diminution in value

    Finally, there is a monetary limit to what a landlord can claim in damages from the tenant.

    If, for example, it costs £75,000 for the repair works to be completed, but the value of the landlord’s property is reduced by only say £25,000 (diminution in value to the landlord’s reversion) as a result of the disrepair, then the landlord can claim only £25,000.

Property Litigation Association Pre-Action Protocol for Dilapidations Claims

The Property Litigation Association (PLA) is an organisation for professionals specialising in all aspects of commercial, residential and agricultural property litigation.

The PLA has published their “Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at the Termination of a Tenancy”, commonly referred to as the “The Dilapidation Protocol”.

The PLA’s dilapidations protocol is a very useful document and is generally accepted as a way of improving relationships and communication between landlord and tenant before formal court proceedings associated with an alleged claim for dilapidations are issued.

The PLA’s protocol helps to pave the way for a better chance of an early settlement between the two parties without recourse to further, potentially costly litigation.

Schedules of Dilapidations

If however, no progress towards a settlement can be made between the landlord and tenant then the landlord would normally serve a formal Schedule of Dilapidations, which must summarise all alleged breaches of the terms of the lease for which the tenant is responsible.

The schedule of dilapidations should include detailed information regarding the current condition of the premises, the repairs which are deemed to be necessary and the estimated cost of the repair works.

This dilapidations schedule will be prepared by the landlord’s surveyors, usually specialist chartered surveyors with expertise in dilapidations and disrepair issues, and who are regulated by the RICS.

As far as the tenant is concerned, once a schedule of dilapidations has been formally served they will need to respond by answering all the points raised by the landlord and their surveyors.

At this point the tenant would normally appoint a surveyor and solicitor to act on their behalf in defending the landlords claim for damages.

Once these formal proceedings are issued on behalf of the landlord in the courts, then all the necessary steps, and consequently the time-scales, will be decided by the Court.

What are the Alternatives?

As a landlord of a commercial property you may wonder if there are alternatives to this particular course of action.

  • Good Tenants

    If the landlord is serving an interim schedule of dilapidations, it may well be that they do not want to lose a business who has otherwise been a good tenant.

  • Man of Straw

    Under other circumstances it may well be that tenant has fallen on hard times, possibly due to the economic climate, and that they have insufficient financial resources to meet any claim for damages.

    In such circumstances the landlord should think long and hard about pursuing a claim where they have an unrealistic chance of ever recovering damages.

  • Landlord Completes Repairs

    Another possible alternative to consider is for the landlord to complete the repair works identified in the schedule of dilapidations themselves.

    If after giving the tenant suitable notice of the required repairs and a specified period in which to carry them out, the tenant fails to complete the repair works then the landlord could enter the premises to complete the repair works directly.

    This option is allowed by the vast majority of commercial property leases today.

    One advantage of this course of action is that the landlord does not have to prove that there has been a diminution in value to the reversion.

    It also enables the landlord to recover the cost of all reasonable repairs from the tenant as a debt.

    It is also possible, but only in exceptional circumstances, for a landlord to seek an order from the Court for “Specific Performance”, which will force the tenant to carry out repairs; but it is most unlikely that they will be successful in this if they have the right to enter the premises to do the repairs.

  • Opposing the Granting of a New Lease

    In a situation where the premises are let as a business tenancy protected under the Landlord and Tenant Act 1954, then a landlord has the right to oppose the grant of a new lease on the grounds of disrepair.

  • Forfeiture of a Lease

    The remaining alternative is for the landlord to apply for forfeiture of the lease.

    Where the lease has more than three years to run the landlord would need to seek the Court’s permission to issue such proceedings.

    This may not be such a good option should the tenant be keen to terminate the lease, as that would present a real obstacle to a landlord recovering any monies.

    On the other hand however, it would be a good lever if the tenant wanted to remain in the property.

Settling Dilapidations Claims by Negotiation

In our experience it is usually in the interests of both the landlord and tenant to enter into negotiations at an early stage, before any dilapidations claims for damages are formally served in the courts.

In this way it may at the very least be possible to reduce the areas of dispute, if not eliminate them altogether.

Both landlord and tenant would be well advised to attempt to reach a settlement before legal proceedings are issued and on this note we would refer any landlord or tenant of a commercial property involved in such a dilapidations dispute to the PLA’s “Dilapidation Protocol”.

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Further reading…

More information about dilapidations for commercial property from the RICS… here →

More information about the The Property Litigation Association Dilapidations Protocol… here →