Real Estate Building Blocks – Dilapidations in Commercial Leases

In most commercial leases, the tenant is required to maintain the property and to undertake any required repairs. Under the lease, this normally includes interior and non-structural repairs. If the tenant fails to keep the property to its pre-let condition, the landlord can make a claim by issuing a Schedule of Dilapidations to the tenant, which outlines the work required to return the property to its pre-let state.

Definition

‘’Dilapidations’’ – This generally refers to disrepair or damages to the property covered by the repairing covenants within a lease.

‘’Dilapidations clause’’ – This is common in commercial leases which refers to repair work a tenant is required to carry out on the property either during or at the end of their lease. Whilst standard contracts may usually require the tenant to undertake repairs to the building, the level of work required will entirely depend on the agreed terms contained in the lease.

A Dilapidations claim may arise if the tenant is in breach of the following covenants: –

• Repairing/redecorating clauses.
• Reinstatement clauses.
• Yield-up clauses – specifying the required state a tenant should leave the premises at the end of the lease.
• Statutory compliance clauses.

Points to Tenant #1 – Before signing a Commercial Lease

(i)            Understanding the terms of the lease

It is vital that the tenant understands the repair provisions concerning dilapidations before entering a commercial lease. This can avoid substantial costs in relation to dilapidations at the end of the lease term.

(ii)           Obtaining a Schedule of Condition Report from a Surveyor

A prudent tenant should obtain a Schedule of Condition Report from an independent surveyor and request that the Schedule is attached to the lease before signing. The Schedule will detail all the items in disrepair. This prevents unexcepted costs and disputes in relation to dilapidations. The tenant should also inspect the property to ensure that the description of the property within the Schedule matches the pre-let state of the property. This prevents the tenant from entering a lease with inherent defects.

(iii)          Seeking independent legal advice to review and/or negotiate terms of the lease

The tenant should seek legal advice in relation to repair covenants contained in the lease. This enables the tenant’s solicitors to negotiate terms that they do not agree with and limit the tenant’s obligation in repair.

Points to Tenant #2 – Conducting works on the commercial property

It is also important for the tenant to check the terms of the lease before conducting any alteration works on the property, as some leases may require the tenant to obtain prior permission or approval from the landlord.  Although a tenant may believe that they are adding value to the property by making alterations, altering the property without the appropriate permission can give rise to dilapidation claims.

Serving Schedule of Dilapidations and Quantified Demand

A Schedule of Dilapidations is a schedule served by a landlord on its tenant, which sets out the items of disrepair at a property caused by the tenant’s failure to perform its repairing, redecorating, or reinstatement obligations in the lease. At the same time, the landlord should also be serving a Quantified Demand on the tenant, which details the monetary sum sought as damages in respect of the breaches and any losses claimed by the landlord. The Dilapidations Protocol (‘’the Protocol’’) restricted the Quantified Demand to the landlord’s likely loss, i.e. reduced value of the property because of the disrepair of the property, rather than the cost of works to remedy the breaches.

Next steps

For landlords – Landlords are advised to obtain legal advice in reviewing the terms of the lease concerning dilapidations and to instruct an independent surveyor to prepare a Schedule of Dilapidations. The landlord should serve both the Schedule of Dilapidations and Quantified Demand (‘’the Documents’’) within 56 days of the tenancy ending.

For tenants – Upon receipt of the Schedule of Dilapidations, the tenant may seek advice from a separate surveyor who can check the list and prepare a detailed response (‘’the Response’’) to the landlord’s claim, within 56 days after the landlord serves the Documents.

Under the Protocol, it suggests that both parties should negotiate, within 28 days after the tenant sends the Response, and seek alternative dispute resolution methods first, such as mediation, before issuing proceedings at court, as that would be deemed as a last resort.

Conclusion

To conclude, prospective tenants should read and consider dilapidations carefully before entering a commercial lease. A prudent tenant should seek legal advice and obtain a Schedule of Condition Report from a surveyor first before signing the agreement, this could avoid any huge or unexpected costs at the end of their lease due to the disrepair of the property.