Why they cost what they do, and what to consider when you are comparing quotes
If you lease a commercial property, you are going to need to know what this term means and you are definitely going to need to know how it affects you and what your responsibilities are.
The definition of ‘dilapidations’
When you think of dilapidations you may think of run down, abandoned buildings with smashed windows. So, it is not surprising that some tenants who feel that they have looked after their premises are baffled by having to deal with dilapidations.
Dilapidations refers to the condition of a leasehold property, both during a tenant’s occupancy and when a lease ends, and the dilapidations process is a way to document and remedy any breaches of lease covenants.
The most common lease wording is that the tenant will need to keep the property in good and substantial repair. Exactly what standard of repair is required will vary from lease to lease, so it is important to carefully check your lease for the exact wording. You may wish to delegate this responsibility to your dilapidations surveyor, for them to cast their expert eye over your lease and clarify your obligation.
It is critically important to understand exactly which areas of the property are demised to you. Demised means transferred to the tenant by lease and it explicitly spells out exactly which parts of the building and surrounding land the tenant is responsible for. Normally this crucial detail will be near the front of the lease.
If you have a true Fully Repairing and Insuring lease (often known as an FRI lease), you will be responsible for looking after the entire building, and any grounds.
It is less straightforward when you only lease part of a building, as every lease is different, and leases can be conflicting. For example, in one lease Harrison Clarke reviewed recently, the lease said that the tenant was responsible for repairing the windows; however the lease plan clearly showed that windows were excluded from the leased area. In this case, it appeared that the reference to windows in the written lease was an error, and the lease plan should take precedence. As in this case, small and subtle variances can have significant consequences, so investing in professional advice can be a wise decision that potentially saves you a huge amount of money.
How you know whether an item meets the required standard of repair
To establish this important fact, we need to ask four questions:
A common refrain from tenants is that they do not understand why the landlord is asking for the building to be repaired when it is already in better condition than it was at the start of the lease. However, ‘good repair’ is not a comparison between the condition of the property when their lease started and ended.
Also, as common law has developed, it is generally accepted that even if the lease says ‘keep the property in good repair’, there is an implicit ‘put and’ in the phrase, meaning that a covenant to keep the property in good repair actually means that the property must first be put into good repair and then kept that way.
How to limit your repairing liability
The first and most common method is to append a photographic schedule of condition to your lease. This can be used to modify the repairing clause in that the property does not need to be returned to the landlord in any better state of repair than is shown in the schedule. This small investment in a photographic schedule of condition at the start of your lease can save many thousands of pounds at lease end.
When negotiating your lease, it might be possible to require your landlord to maintain certain additional parts of the building either at their own cost, or shared under a service charge.
You could also negotiate with your landlord to confirm that, if fittings are already on their last legs, they could be completely excluded from the repairing liability and handed back in a non-functional condition. This would usually happen in a situation where the landlord is likely to complete a significant property refurbishment after your lease term, which could render your repairs valueless.
All of these strategies must be considered before entering into the lease and, for this reason, Harrison Clarke recommends that you speak with a specialist dilapidations surveyor before you enter into your lease rather than waiting until lease end, when your options to limit liability are significantly reduced.
Redecoration – the extent of your responsibility
Under the terms of your lease, you are likely to need to redecorate the property both internally and externally, depending on the extent of your demised area. The frequency of decoration required can vary from lease to lease, so you or your dilapidations surveyor should check your lease for the exact wording.
If the landlord needs to intervene to require a tenant to complete decoration work part way through the lease, they can normally only enforce external decorations if the failure to redecorate is leading to accelerated wear or failure to other building components, such as timber windows. This is unlikely to be the case for mid-lease internal redecoration.
When you leave the premises, however, both internal and external redecoration can be enforced.
As a general rule of thumb, everything within the premises that has been previously decorated will need to be decorated at lease end. This can include skirting, walls, doors, built-in fittings and other joinery. It is worth noting that redecoration does not just include painted finishes, it also includes wallpapering, staining and varnishing.
You should therefore think carefully about painting anything new, such as warehouse walls as, in doing so, you are creating a permanent decoration liability either for you or any future tenants.
Items which arrived on site with factory finishes, such as powder-coated shop fronts, do not generally have to be decorated. However, if damage such as chipping and scratching has occurred to these finishes, this is likely to fall under the heading of disrepair which may result in you having to decorate it anyway.
It is common for tenants to only redecorate the walls and believe they have met the requirement set out in the lease. However, the landlord will be within their right to claim for any other previously decorated items as part of a dilapidations claim, such as joinery and metalwork.
Before entering into a lease, you can take steps to limit the extent of your redecoration liability, most commonly by appending a photographic schedule of condition to your lease. This is usually only referenced within the repairing clause, but Harrison Clarke always recommends that it is referenced in the redecoration clause too, so that decorations need not be better than they were at the start of the lease.
If you think your landlord will be altering your property after you vacate it, your lease can reflect this and exclude particular areas from the redecoration covenant.
Remember, if a tenant has not decorated the property as required in the lease, they could face a financial claim from their landlord to cover the cost of them doing so.
Alterations to your leasehold premises
Whether you are allowed to make alterations or not depends on the content of your lease, so check it very carefully. Some leases might allow for minor alterations to be made, such as erecting demountable partitions, without the landlord’s permission. Others might require a tenant to gain the landlord’s written consent to complete any alterations, however minor.
Some leases will completely prohibit certain types of alteration, such as structural alteration.
If you make alterations, you may have to remove them at lease end or face a claim for damages if you fail to do so. Again, it depends on the terms in your lease which you, or your surveyor, should check very carefully.
Note: there are certain circumstances where the landlord will lose the right to insist on removal of alterations. For example, if you are on at least your second consecutive lease on the same premises, but the alterations were made under a previous lease and the current lease does not reference alterations made under previous leases. In this case, your previous alterations actually become the landlord’s property, although the landlord can require these alterations to be handed back in good condition unless they intend to remove them themselves.
Another, lesser-known, defence is that if a lease prohibits alterations but has no specific guidance on reinstatement, alterations made more than 12 years ago without permission can sometimes be left, as the landlord has missed the enforcement period set out in the Limitation Act 1980. As most modern leases are five years, it is quite rare to be able to use this defence but it’s worth knowing, just in case.
Alterations and break clauses – beware!
A 2016 High Court decision in the case of Riverside Park Limited v NHS Property Services complicated the issue of reinstatement during a break clause. While the details of the case are very specific, it opened up the possibility that some alterations can be considered chattels, in specific but not uncommon circumstances. Therefore, if too many chattel alterations remain, this could mean that vacant possession has not been given, causing a break to fail. This could be extremely costly, tying you into rent payments and business rates for another two to five years on your existing building, even if you have also signed a lease on a more suitable building.
Courts are very strict about compliance with break clause requirements and you could find that your break fails if you do not comply with the requirements of the break clause.
If you plan on activating your break clause, we recommend that you first take advice from both a solicitor and specialist dilapidations surveyor, particularly as recent case law has made lease breaks even more of a minefield.
Explaining the ‘yield up’ clause
The yield up clause sets out how you need to hand back the building at the end of your lease. It may simply stipulate that the building must be handed back in the condition described elsewhere in the lease, or it may go further. For example, it may describe that the building is to be passed back in a slightly different layout than at lease commencement – if, perhaps, a tenant has been granted a rent-free period to remove the former tenant’s partitions or other installations, they may agree that the building or unit is to be handed back in ‘white box’ format – ie with partitions removed and walls decorated plain white.
Typically, you will be asked to hand the building back with Vacant Possession, so that the landlord can take beneficial occupation straightaway. In layperson’s terms, this means that the landlord or the next tenant must be able to use the space for their own purposes, without having to clear out the previous tenant’s belongings, such as furniture or rubbish.
Sometimes you will also see the reinstatement clause covered in the yield up clause. This will tell you under what circumstances you will need to remove alterations. As with most things dilapidations related, a very minor change of wording can mean very different things, so it is always best to take specialist advice.
Schedule of dilapidations
This formal report documents the breakdown of remedial works that will need to be carried out to reinstate the property to its original condition as agreed in the lease -– the exact breaches, how to remedy them and the estimated costs. If the tenant fails to carry out the works, it can also be used as a baseline for financial negotiations. It is split into five main parts:
What building it is referring to, which leases or other documentation have been considered, who asked for the schedule to be prepared, and who actually prepared it, amongst other key information.
Under the Dilapidations Protocol (a pre-action protocol set out by the courts), the person preparing a schedule of dilapidations must confirm that they have taken into consideration the landlord’s intentions for the premises and that they believe the losses documented within the schedule have been accrued by the landlord.
Copied into the schedule of dilapidations, they demonstrate to the recipient how the lease relates to the claim being made. Only those lease clauses relevant to the claim should be included.
This is an item-by-item list of all salient lease breaches, detailing which clause has been breached, what the breach is, a suggested remedy for the breach, and an estimated cost of the remedy. It is laid out in a way that allows parties to comment on each breach/response individually.
This section provides a total claim figure. Whilst, in theory, the cost schedule is slightly different to the quantified demand, in practice most dilapidations claims are simple and the cost schedule is used as the quantified demand.
How dilapidations losses are assessed
The guiding principle is that if a breach of a lease does not leave the landlord in a worse financial position, they have suffered no loss. Typically, the landlord will incur a loss either because they have to spend money to rectify matters, or because their property is now worth less money as a result of breaches of the lease.
The most common way to assess dilapidations losses is by the costs of a landlord completing remedial works but, just because a landlord has completed works, it doesn’t always mean they were necessary, so you should still ask a dilapidations surveyor for advice before you pay thousands of pounds to your landlord.
Reduction in value
If the lease breaches have led to a reduction in the market value of a property, this reduction in value can be calculated by an experienced Registered Valuer. The difference in value between the building as it was at lease end, and what it would have been had the tenant complied with their lease requirements, is known as a ‘diminution valuation’ and typically it limits the entire dilapidations claim, not just items related to disrepair.
Supersession is where the landlord supersedes the requirement to complete works by demolishing the affected building, either totally or in part. For example, there would be no reason to pay the landlord damages for failing to decorate a wall if they plan to remove the wall, even if decorating that wall was in the tenant’s lease covenant.
Time sometimes working in your favour
If a landlord decides not to complete remedial work, sometimes waiting to see what happens next can play to a tenant’s advantage, as often a dilapidations claim will naturally disappear if a new tenant takes the property on the same, or similar, terms. If this is the case, the new tenant will carry the liability to put right some or all of the technical breaches of the lease, often meaning that the landlord has incurred no loss, but will ask the new tenant to rectify any issues at the end of their lease term instead.
The reason for this is that many new tenants are happy to let properties which fall below the standard required by a full repairing and insuring lease, often because their fit-out works do not depend on the entire building being in good repair.
If a new tenant takes a lease restricted by a photographic schedule of condition, though, the landlord could still have a claim against the former tenant, as there is a future obligation for them to complete works rendered necessary by the former tenant’s lack of adherence to their lease. However, unless the content of the schedule of condition is exactly aligned with the schedule of dilapidations, it may be that some claim items drop away.
Finally, a new tenant might negotiate an enhanced rent-free period to put right dilapidations items.
For a landlord to make a successful claim for the value of an enhanced rent-free period, we would expect to see contemporaneous evidence that the additional rent-free period is actually connected to the former tenant’s outstanding dilapidations work rather than, for example, the new tenant upgrading the property. For this reason, your dilapidations surveyor will need to see background documentation for a new lease such as Heads of Terms. If it is not clearly documented that the rent free is connected to disrepair, claims calculated using this methodology will usually fail.
Common claim items
We regularly see landlords’ surveyors asking for asbestos surveys to be paid for which are not needed to comply with either legislation or the lease.
A lot of schedules of dilapidations also include costs for testing of services and fire installations where there is no requirement to do so. Lack of testing does not in itself mean that an appliance or service is in disrepair.
Although normally providing recent test certification is not a lease requirement, you should be aware that, if the landlord decides to test an installation, and the test finds defects, the tenant will become liable for both the cost of testing and for remedying the defect, so long as the testing was reasonably necessary to find the defect.
However, if no defects are found during testing, the landlord will have to bear this cost if testing is not a lease requirement.
Often, VAT will be included in a dilapidations claim, even where the landlord is not entitled to this. More correctly, as damages payments are not subject to VAT, a claim for damages in lieu of VAT might be made.
As a rule of thumb, damages in lieu of VAT can be claimed if the building is not elected for VAT (meaning that VAT is not paid on rent) and the landlord has completed the works for which they are claiming damages in lieu of VAT.
If the building is elected for VAT and VAT is paid on rent, this means that the landlord can reclaim VAT from HMRC.
If the works have not yet been completed, this element should be excluded from a claim (in whole or in part) as it is unproven whether the landlord will have to pay VAT at all.
What is covered by the statutory compliance covenant?
As a tenant, your landlord will expect you to comply with the laws of England & Wales. A number of different laws will apply to your occupation of a property, depending on the nature of your business. The most common types of regulations will be enacted under the Health and Safety at Work Act 1974; however other laws will also apply.
As lease end dilapidations deals with potential financial losses to the landlord, the focus on your compliance with laws will only be as they relate to the physical condition of the building.
If you breach a specification regulation, you may need to compensate the landlord for the cost of putting the building into a compliant state, but you cannot be further penalised for breaking this clause.
Due to the way that most leases are drafted, it is often the case that regulations which apply to the occupied property cannot be addressed under dilapidations. For example, when a building is vacant, it is not a workplace and therefore, strictly speaking, regulations enacted under the Health and Safety at Work Act 1974 do not apply.
As with everything relating to dilapidations, it is important to review individual claim items in the context of the overall claim.
Liquidated damages clause
Occasionally, a lease requires the tenant to pay the landlord a sum of money to cover the rent over the period which remedial works take place, if a tenant has not adhered to their lease covenants. Liquidated damages must be a ‘genuine pre-estimate of loss’.
Where this clause is not included in a lease, it is still possible for the landlord to claim for loss of rent, although it is extremely rare that a loss of rent claim is successful as it requires the incoming landlord and tenant to have agreed the exact terms of the next lease, with the only thing delaying occupation being works required as a result of the former tenant’s lease breaches.
As this is the case, this requirement is not really a genuine pre-estimate of loss at all and could be seen to be a penalty clause. Since only the Crown can impose penalties, and not individuals like landlords, this clause is normally meaningless.
How a qualified surveyor can help you
A highly qualified dilapidations surveyor, like one of the team at Harrison Clarke, can give you valuable advice before you enter your lease.
They can also help you at any stage of the process and they are often able to significantly reduce your liability as a tenant, even if you did not take advice before entering into your lease.
So that they can help you to prepare for your exit from your leasehold premises, you should ideally contact them six to 12 months before you leave your premises, but don’t worry if it is less time than that, or even after you have already left. They can still help you to develop a strategy for dealing with your dilapidations claim and minimise your costs.
Harrison Clarke has a strong record of defending claims. They frequently see vastly overinflated claims that get settled for sums significantly less than the total figure – sometimes well over 90% less, and they can occasionally even negotiate away the entire claim.
They can also help landlords too. A landlord who fails to deal with dilapidations can encounter financial implications in terms of not being able to re-let a premises in disrepair. A dilapidations surveyor can guide you through the process to mitigate the risk of loss.
For advice specifically tailored to your circumstances, call our highly qualified and experienced dilapidations surveyors on 023 8155 0051 or email email@example.com We look forward to hearing from you.
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