Release date: May 2009

In recessionary times, the thorny issue of dilapidations in commercial premises becomes more important for commercial landlords and tenants alike. Malcolm Woolfe, a solicitor at Close Thornton specialising in commercial property law, explains that clarity from the outset is key.

Dilapidations is a term used to refer to a breach of the repairing and decorating obligations contained in a lease of commercial premises, either during or on expiry of the term. Although a tenant's liability to repair can have serious cost implications, it is something often overlooked by many tenants before entering into a lease or when vacating their premises. It is a very important provision of a lease which if not dealt with correctly can lead to substantial liability. The term "dilapidations" is of particular importance in the context of a full repairing and insuring lease (FRI). This particular type of lease has more often than not been the norm in boom years. In leaner times when commercial tenants become scarce we may see a move away from this. In a FRI lease a tenant is usually responsible for repairs to the whole of the building, including the structure and roof and is often obliged to hand the property back in a "good" "good and tenantable" or "good and/or substantial" state of repair and condition when the lease ends.

Before entering into a lease, a tenant should consider whether he needs to instruct a Chartered Surveyor to prepare a "schedule of condition" to limit any dilapidations liability. This is particularly important in shorter-term leases, especially of older buildings. The schedule will usually record existing defects and usually refers to a schedule of photographic condition. With the agreement of the Landlord (which should be obtained at the negotiation stage), the lease will be drafted so that the tenant is required to leave the property in no worse condition than as shown on that schedule. This is something we at Close Thornton always recommend to our business tenant clients at the outset.

Similarly, when a tenant is buying an existing lease (known as an assignment) it is just as important that they instruct a Chartered Surveyor to identify any existing breaches of tenant covenants before they exchange contracts. The reason is that the buyer will become liable for those breaches even though he did not commit them.

If a "Schedule of Dilapidations" is served by a Landlord either at any time during and/or at the end of the term, the tenant must either carry out the works listed or pay to the Landlord damages. Failure to do so can result in litigation or at worst forfeiture of the lease for non compliance with the repairing covenants. The schedule is simply a list of all outstanding disrepair which a landlord determines has arisen by reference to the lease terms. In addition the tenant usually has to pay the Landlord's solicitors and surveyor's fees incurred in the preparation and service of the schedule; these often easily exceed £1000 plus VAT and sometimes more for larger buildings.

By planning well in advance during and at the end of the term and by working together it is hoped that any necessary works could be carried out by a tenant before expiry and thereby reduce any claim for dilapidations. Where a final schedule has been served and the Landlord requires damages, the Tenant may have the protection of the Landlord and Tenant Act/ Law of Property Act 1925.

It could be critical, therefore, that a tenant instructs a Chartered Surveyor to determine whether the list of dilapidations is accurate, whether the standard of repair required is justified, whether any reliefs may be available, how and when any repairs should be undertaken or whether it would be preferable to pay damages in lieu of carrying out the works. Close Thornton are happy to offer assistance at that point and if necessary recommend a suitable surveyor. Finally it is worth bearing in mind when conducting negotiations over a schedule of dilapidations of the potential for an adverse costs order being made against a party to court proceedings (if matters go that far) if they acted unreasonably during negotiations. Even if they win their case, a party may be penalised on costs.

For further advice about commercial property, Malcolm Woolfe can be contacted at malcolm.woolfe@close-thornton.co.uk or call 01325 466461

BACK