As a landlord, you may not necessarily be well versed in dilapidations. Here at Harrison Clarke, we are often asked for support to bring a claim for dilapidations at lease end, and we find ourselves giving our landlord clients advice on the best way to prepare for a dilapidations claim. Just as a commercial agent advises landlords how best to prepare a commercial unit for relet, we support landlords to achieve the best level of dilapidations recovery come lease end.
The process is not always as cut and dry some landlords may think. A tenant who breaches their lease doesn’t always cause their landlord to incur a tangible loss. However, if a landlord wants to ensure the standard of their property doesn’t gradually diminish over time, landlords can take steps to repair their property, often with some or all of the cost being passed back to the tenant.
When should a landlord start preparing for dilapidations?
On a short to medium term lease, perhaps up to ten years duration, a landlord should consult a specialist dilapidations surveyor around a year before lease end. This gives the surveyor an opportunity to review the lease and flag up any areas of concern. For a longer lease, two or three years prior to lease end would usually be suitable.
The reinstatement clause should be of particular interest to you at this stage. Some leases will require the landlord to give six months’ notice if they want a tenant to reinstate any alterations. Typically, three months or no time period is stated, and it is recommended to find this out before the right to reinstatement is lost.
We also recommend that you ask a dilapidations surveyor to review the lease a year before a break date arises. It is not unknown for a lease to contain a requirement for the landlord to give six months’ notice for removal of alterations, at the same time as allowing a tenant to break their lease upon six months’ notice. Landlords can serve a reinstatement notice immediately upon receipt of a break notice if there is any doubt – but we recommend professional advice is sought first.
What happens next?
Once you and your surveyor understand a lease, you should commission a schedule of dilapidations to be sent to the tenant within a suitable timescale. Normally we would advocate this to be completed prior to lease end, as this allows the tenants an opportunity to complete necessary works themselves, leaving a property in a suitable state for reletting.
If not prepared before lease end, the schedule should be prepared as soon as practicable afterwards. The more time left between lease and preparation of schedule of dilapidations, the higher the chance a tenant has of claiming the disrepair arose after the lease has ended, meaning they cannot be held responsible for it.
If the tenant decides to complete the necessary work, the unit can be re-let straight after lease end, and the dilapidations situation concluded. A landlord should ask their dilapidations surveyor to inspect the works completed to confirm it has been completed to a satisfactory standard, and whether any material outstanding works remain. However, if a tenant fails to complete the necessary work, or only completes some of the work required, it is possible a landlord has suffered material loss in several ways, which we explore next.
Rent free period
Sometimes an incoming tenant can recognise a building is in disrepair and can claim additional rent free to help them cover the cost of remedying any defects, in exchange for taking on a fully repairing and insuring lease. In this situation, the landlord should document in the heads of terms the reason for the extended rent-free period. As a rule of thumb, a typical market incentive rent free period is roughly three months, so if the tenant secures a nine-month rent free period for example, any additional rent-free period because of disrepair should be noted – in this example, six months of the rent-free period will likely be attributable to disrepair.
Landlords must be honest when doing this. While sometimes the entire rent-free period can be attributed to disrepair, such as in specialist properties or in a particularly buoyant market, not being candid about the split between market incentive and disrepair rent frees can cause arguments at dilapidations stage. Attempting to claim the entirety of the rent free as attributable to disrepair can lead to diminished trust between surveyors at lease end, harming the overall chances of successful dilapidations recovery.
Schedule of condition
If a subsequent tenant relets a unit with a schedule of condition watering down their repairing obligations, damages for future work which are required to put the building into good repair at the end of the next lease can sometimes be claimed for. These types of claims can be very difficult to agree as these claims by their nature are riddled with ‘what-ifs’. Dilapidations does not like uncertainty. If it is uncertain a landlord will incur a cost, that particular cost is often removed from the claim.
Due to the uncertainty of whether the work will be completed, the value of the work needed is sometimes seen as a stand-in for a formal diminution valuation. This means that the property could be worth market value less the cost of outstanding work. This is usually fine in theory, but as no VAT loss has been incurred, and it isn’t certain it will be incurred, this means that any potential damages in lieu of VAT will be removed from the claim, and this will likely reduce the total claim by over 16%.
Doing the necessary works
If works arising out of the previous tenant’s failure to adhere to lease clauses are genuinely necessary to safeguard the value of the landlords property, it is often advisable for the landlord to do so. The main benefits of this approach are as follows:
- The cost of the work can be passed back to the tenant, including professionals’ fees involved in overseeing the work.
- The property will potentially re-let quicker as it will be more attractive to potential lessees.
- In the unlikely event the dispute ends up in court, the court is far more likely to award damages for works completed rather than a theoretical loss, and money spent now can be more tangibly measured than money perhaps or theoretically needing to be spent in the future.
If a landlord completes any works, they will be required to be seen to have done so using a value for money contractor, which doesn’t always mean the lowest tender cost. The landlord will need to keep records of all works completed as well as tender documentation. Any costs of raising finance to cover such works can also be claimed back from the tenant.
This article provides a generic guide on best practices. As with anything dilapidations, the best advice is that which can be tailored to your individual situation. Please contact us at Harrison Clarke on 023 8155 0051, where our team of expert dilapidations surveyors will be pleased to help you prepare for a dilapidations claim.
We also have a range of videos talking through various aspects of the Party Wall process. You can access them via our website or our YouTube channel.
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