Dilapidations Provision Report – The What And Why

If you’re a business with a leased premises, you may not know that you face some hidden risks. In fact, you might not be aware of them until the end of the lease. That risk is called dilapidations. Dilapidations liability comes about as a result of non-compliance with lease clauses. So our question is this. Even if you’ve read your lease from beginning to end, do you really understand your liabilities, and in particular your exposure to dilapidations? And more importantly, do you know about dilapidations provision reports.

What is Dilapidations?

In basic terms, dilapidations is the process of one party on a lease seeking to recover damages from the other because they haven’t met their lease obligations. This claim is usually made by a landlord against their tenant and is very common at lease end. That’s because many leases can be very strict about the condition a property has to be kept in during the course of the lease, and most commercial leases don’t have a fair wear and tear provision, unlike residential leases.

If you want to know more about the basics of dilapidations and how the claims come about, you can watch our YouTube video here.

How Can my Business Prepare?

Since every commercial lease is different, the best way to minimise dilapidations liability depends on the specifics. That’s where a dilapidations specialist chartered building surveyor comes in. They can visit your premises and compare the current condition of the property against a copy of the lease, taking into account any future refurbishment or remodelling plans you might have for the building.

After this visit they’ll be able to set out an estimate of the likely landlord claim at lease end, as well as providing a provision figure. This is usually a lot less than the landlords initial claim! Some surveyors might also want to set out a more aggressive target for a settlement, but the actual provision report will factor in a level of risk and future factors, which will include any future business plans or an extremely bullish landlord.

Using this estimate they might also set out some mitigation strategies, which could include advising you to complete works or negotiating a settlement with your landlord.

What is a Dilapidations Provision Report?

This type of assessment is called as a dilapidations provision reports. It’s a written document that’s prepared after a surveyor collects and reviews legal documents relating to the occupation of the building. This would include things like leases, licenses to alter and statutory test documentation.

In the normal run of things, your surveyor will prepare a high-level schedule of dilapidations in the same way as your landlord would at lease end to check for breaches. This will provide an idea of the likely level of the landlord’s claim. But this isn’t the end.

Once that schedule has been prepared, your surveyor will consider where the landlord’s loss truly arises – if any. During this they’ll consider the type of building it is and any likely future uses for the building. This will normally provide the third figure – a ‘target’ cost to deal with dilapidations, whether it’s based on work undertaken or a negotiated settlement. Often this figure can be very low in comparison to the landlord’s potential claim, and in rare cases could be limited to the cost of the preparation and service of a schedule of dilapidations.

Your surveyor will then add the risk factors back in, including:

The landlord completing works
When the target figure is based on a re-let to a third party under similar lease terms (which can often reduce the landlord’s loss)

By sensibly considering all of the risks, your surveyor can recommend a provisional figure, which is the amount you should allocate to cover dilapidations costs at the end of the lease.

Why is a Dilapidations Provision Report Important?

If you’re a business taking out a commercial lease, you need to understand the dilapidations liability process for a couple of reasons.

The first is so that you can plan your cashflow around lease end. Moving premises is already an expensive process, and the last thing you need is another big cost squeezing your bank account, or adding stress to the directors’ lives.

Secondly – and here’s the good part – proper preparation and provision for dilapidations means that liability can be offset against your profits over the course of a lease, rather than taking a big hit to profits in the year the lease ends. This helps you to reduce corporation tax liability, improving your cashflow over the course of the lease. This is especially important if your lease end is likely to coincide with a business sale. If you’re selling you probably want your profit figure to look healthy in the final year of a lease to increase attractiveness, and if you provision well in advance you can use the dilapidations provision report to improve the value and saleability of your business.

That last point does come with a word of warning though – we aren’t tax accountants, so if you plan to do this, you must discuss offsetting accrued dilapidations liability against your corporation tax with your accountant.

If you need a dilapidations provision report, or you aren’t sure if there’s something you need, we are happy to help. At Harrison Clarke, we have a team of true dilapidations specialists who are intimately acquainted with the dilapidations process and how it interfaces with your business and daily operations. We can discuss the extent of provisioning for your business, especially if you have multiple sites, and provide tailored advice. If you’d like to find out more, just get in touch with our team by calling 023 81550051.

We also have a range of videos talking through various aspects Building Surveying. You can access them via our website or our YouTube channel

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Tim Clarke, Director at Harrison Clarke chartered surveyors.

About the author

Tim Clarke,
BSc (Hons) MSc MBA MRICS CMgr FCMI

Director

Tim set up Harrison Clarke Chartered Surveyors in July 2017 following a series of public and private sector surveying roles, having previously worked for the University of Cambridge, Rund Partnership, Goadsby, and CBRE. 

Tim has degrees in building surveying, construction project management, and business administration.