Dilapidations advice for tenants

Date: 20th March 2012
Author: Building Surveying
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Tenants are already faced with substantial business premises occupancy costs such as rents and rates, and then, usually at the end of their occupational Lease they are served with a schedule of dilapidations; the other bane of commercial property occupation.

 Head of Building Consultancy explains how to avoid the charges.

 Dilapidations are breaches of covenant for which a business tenant is liable under the terms of a Lease. The liability under the Lease usually includes an obligation to repair and to decorate, however, there are several ways in which Tenants can minimise cost. Here we deal with frequently asked questions relating to dilapidations:

What can a tenant do to safeguard against dilapidation charges?

Any Tenant considering signing a Lease should seek professional advice in respect of the liability. One way of minimising liability is to agree a schedule of condition which will accurately record the condition of the premises at Lease commencement. The repairing covenant can then be limited to no better than that at lease commencement.

 If damage occurs to a Leased property what does the Tenant need to do?

Dilapidations need to be properly considered well in advance of the expiry date of the Lease. This will allow the Tenant to appoint appropriately qualified advisors who can assess the level of liability associated with any disrepair. The advisors will open discussions with the landlord in order to agree an amicable solution, whether it is undertaking of works or a cash settlement.

It is good practice to keep on top of dilapidations and repairs are best dealt with annually to avoid a backlog of repairs at Lease expiry which otherwise can lead to unexpected cash flow problems.

How can we limit the liability?

Tenants need to be aware of the Landlord’s intentions at the end of the Lease. The dilapidations liability of a Tenant is limited to the loss incurred by the Landlord as a result of the Tenant’s failure to comply with Lease Covenants. Dilapidations are not simply a money making exercise for the Landlord!

If the Landlord was to substantially alter the property the Tenant may not be liable for some of the repairs arising out of the Lease. For example, if the Landlord converts an office building into residential (a strategy often utilised in today’s market) no loss will be incurred by the Landlord as a result of the Tenant’s lack of repair as the conversion works would render valueless any repairs previously required.

An example is where the Landlord wouldn’t be able to claim for the cost to repair a damaged wall, if the same wall is to be demolished as part of the conversion works.

The value of the Landlord’s loss needs to be identified, because if there is no loss, there is no claim!

 Is a tenant liable if they alter the premises?

A Tenant is usually liable for the cost to put the property back into the condition and layout of that at Lease commencement.

If a Tenant undertakes alterations he must ensure that a licence for alterations (permission) is obtained. The licence will usually include a “re-instatement clause”, which will detail what reinstatement works the Tenant needs to undertake before lease expiry.

Dilapidations are usually limited to the diminution of the value of the property being returned to the Landlord, however re-instatement clauses are obligatory and the Landlord can demand money in lieu of reinstatement works even if the alterations are an improvement to the value of the freehold property.

Where can tenants go to for advice or help?

Chartered Building Surveyors usually deal with dilapidations issues and provide advice for Tenants on how to mitigate loss associated with business occupancy and repair.

For information and advice please contact the Building Surveying Team at Roger Hannah & Co.

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Steven Whittle BSc (Hons) MSc MRICS Associate Director
Neil O’Brien BSc (Hons) MRICS IMAPS Director | Head of Building Consultancy