Commercial leases usually contain a repairing obligation (and very often an extensive one) which sets out the extent of a tenant’s obligations to maintain and repair the leased property.
"Dilapidations" is the term generally used to refer to the process a landlord needs to follow to recover any loss they may have suffered as a result of the tenant's failure to return the property to him at the end of the lease having reinstated any items of damage or disrepair in accordance with the repairing standard imposed on them.
What are dilapidations and why are they important?
When budgeting for a lease a tenant should, and generally will, budget for the obvious outlays such as the rent, business rates, utility bills, any service charge and their fit out costs. A less obvious concern may be the potential dilapidations liability at the end of the lease as this is likely to be furthest from their mind at the beginning of the lease. However, it is very much worth getting the drafting right at the beginning to ensure that, at the end, the tenant (and equally the landlord) is not met with an unexpected outlay.
If the repairing clause and dilapidations clause are clear from the outset this allows the tenant to make an informed estimate of their liability during and at the end of the lease. This is a complex exercise and some factors which will enter into that equation are:
- the age, size and character of the property - is it reasonably new or is it a 19th century tenement? Is it a huge industrial shed or a small storage unit?
- the length of the lease
- is it a new lease or is the tenant is taking on a lease part of the way into the term? – is an assignation of lease required?
- does the lease contain a Photographic Schedule of Condition to limit the tenant’s repairing obligation to keeping the property in the same condition as shown in that schedule?
- the extent of the repairing obligation - is the tenant responsible for the whole of the property or just the internal parts? Who repairs the roof? What about redecoration at the end of the lease?
- the extent of any tenant's fit out and is it to be removed at the end of the lease?
- what are the construction materials? Is the whole building statutorily compliant?
What happens at the end of a lease?
A lease is a contract. Strictly, at the end of the lease, the obligations the parties have to each other cease except for any claims against each other in relation to breaches of the lease which have occurred before the lease ends.
A lease usually allows the landlord to serve a Schedule of Dilapidations specifying any repairs required to a property at any time during the lease, and in addition, within a reasonable amount of time after the lease ends.
The Schedule, especially at the end of the lease, is generally prepared by a surveyor. We would recommend the surveyor seeks legal advice, particularly as to the legal interpretation of the repairing obligations in the lease. We would also recommend the Schedule is served by a solicitor to (1) ensure the notice provisions in the lease are complied with; and (2) ensure that all potential heads of claim under the lease are included.
Where dilapidations exist, a commercial lease generally provides the following options:
- for the tenant to complete the works at their own expense and where they fail to do so for the landlord to complete them at the tenant’s expense; and/or
- for the landlord to complete the works at the expense of the tenant; and/or
- for the tenant to pay to the landlord a sum equivalent to the cost of putting the property into the condition it should have been in had the tenant complied with their repairing obligations.
It is important to note that in the case of option 3, recent case law has interpreted such provisions as allowing the landlord to claim this sum whether or not they actually intend to carry out the works and, therefore, suffer no loss. Much, however, depends on the specific wording used in the lease. In the absence of wording to this effect the landlord’s claim for dilapidations after a lease ends is based on breach of contract and is a claim for damages. They will, therefore, have to prove their loss.
Dilapidations is a complex area and the subject of extensive litigation. The sums involved regularly reach the millions and, therefore, it cannot be stressed enough that getting it right at the beginning is of paramount importance. A poorly drafted lease will lessen the value of a landlord’s investment and both landlord and tenant could suffer a nasty shock at the end of the lease which may, in the absence of a negotiated settlement, lead to expensive and time consuming litigation.
Our Commercial Property and Property Litigation experts can provide information and advice to ensure any loss is recovered where tenants fail to meet obligations included in the lease.
