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Dilapidations – an avoidable headache for landlords and tenants

News / / Bristol

The pandemic has forced many businesses to adapt. Arguably, one of the biggest changes was the mass move of staff from predominantly office-based working, to working from home and the encouragement of agile/flexible working.

Understandably, as a result, many businesses have taken the opportunity to re-evaluate their requirement for office space, from opting to exercise break-clauses within their existing leases, to deciding not to renew their leases in favour of downsizing premises to cut costs.

Consequently, both landlords and tenants alike will be looking to the tenant’s dilapidations obligations under the lease. It is essential for both parties to understand their rights to ensure that they do not become entrenched in what can often be a costly exercise.

In this article, we will look predominantly at terminal dilapidations. Whilst we will not cover all eventualities or considerations, this article should provide a useful starting point, with things you will need to consider when encountering issues with dilapidations.

What are dilapidations?

The term dilapidations refers to items of disrepair covered by repairing covenants within a lease. Other covenants that can also be relevant relate to obligations as to decorating and compliance with statute (as discussed below).

Where should you look for dilapidation obligations in a lease?

Generally, a lease will contain clauses that refer to repair, decoration, reinstatement requirements or covenants that require compliance with statute. Other clauses could also include yield up clauses or other requirements as to how to leave the premises upon the tenant vacating the property. There may also be further clauses in other documentation that is supplemental to the lease such as licences for alternations or deeds of variations.

Therefore, it is strongly recommended that both landlords and tenants review these obligations and seek any necessary legal advice before break clauses are engaged or the lease is due to expire - so that both parties are aware of their position.

What are the first steps for enforcing dilapidation claims?

Firstly, landlords will want to establish whether there has been a breach by the tenant of their obligations under the lease. Frustratingly for tenants, there may be no provision under the lease or other documentation requiring the landlord to provide notice of the same before the conclusion of the lease. Nonetheless, it is essential that landlords review all documentation to check that notice is not required to avoid falling foul of such provisions.

Landlords will be well advised to instruct a chartered building surveyor as soon as possible to prepare a schedule of dilapidations. If a landlord decides to serve an interim schedule of dilapidations to start discussions with the tenant early, they need to be aware that the tenant may conduct some works prior to the cessation of the lease which will devalue the landlords claim. In the event that an interim schedule is served, landlords should remember that they may need to serve a terminal final schedule (in the event that the schedule has changed since the interim schedule) and quantified demand (the loss which the landlord is claiming from the tenant in respect of the dilapidations).

For best practice, parties will need to have particular consideration to the requirements set out in the Dilapidations Protocol within the Civil Procedure Rules (the Protocol) and the recommended steps and deadlines listed therein as well as the relevant RICS guidance note. Parties should also be mindful to consider forms of alternative dispute resolution procedure to resolve issues without the need for court intervention or run the risk of adverse cost consequences.

Other considerations for landlords

Section 18(1) of the Landlord and Tenant Act 1927 provides a statutory cap on the damages available for breaches of repairing covenants or covenants to leave premises in repair on the termination of a lease. It is therefore strongly advisable that where court proceedings are contemplated, advice is sought as to whether your claim may be capped under section 18.

Solvency of the Tenant should be considered at the outset. If you are aware that the tenant is facing financial difficulties or is insolvent, it does not make commercial sense to accrue costs in enforcing breaches where it is unlikely that the tenant will comply.

What are some other considerations for tenants?

Tenants would be wise to familiarise themselves with their lease obligations and consider whether it is practical or prudent to undertake works of repair and decoration whilst they are still in occupation of the premises to reduce the amount of any dilapidations claim that may be made against them. Once the lease is terminated (whether because of the exercise of a break or of expiration), a tenant has no right to enter the premises and any claim by the landlord becomes a purely financial one.

If the tenant is served with a dilapidations claim it should seek advice and should not simply pay the amount specified. Often, both the content and sum of these claims can be reduced significantly by negotiation.   

What are the key conclusions for landlords and tenants?

For dilapidations, it is essential that both landlords and tenants seek advice from surveyors and legal advisers as soon as possible to ensure that they receive advice in a timely manner and to ensure compliance with the protocol, the lease (and any supplemental documentation) as well as the relevant RICS guidelines. It is also important to be open to settlement or alternative dispute resolution (ADR) procedures to resolve matters, to avoid running the risk of becoming entrenched in lengthy, and often costly, court battles.

For more information and advice, please get in touch with a member of our team using the details above.

Rhona Forster

Rhona Forster Legal Director, Commercial Property

Holly Manners

Holly Manners Senior Associate

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