Dilapidations claims: a tenant’s guide

For many commercial tenants, the end of a lease can come with significant and sometimes unexpected costs – particularly in the form of a dilapidations claims.

These claims are brought by landlords for breaches of lease covenants concerning the condition of the premises and can involve substantial sums, making it essential for tenants to understand their obligations and the steps they can take to protect themselves.

Assessing a liability for dilapidations will usually involve a consideration of compliance with the covenants in the lease to repair, decorate or return (or “yield-up”) the premises in the required state at the end of the lease term and/or to reinstate alterations. Tenants may also need to review requirements in any licences to alter, deeds of variation and schedules of condition to establish the extent of its obligations.

How to respond to a dilapidations claim

A dilapidations schedule will set out in detail the landlord’s claimed breaches of covenant, together with the consequential losses being claimed (loss of rent, professional fees etc). Landlords will issue dilapidations schedules to tenants either as:

• An “interim” schedule served during the lease term if the landlord feels that disrepair is occurring); or
• As a “terminal” schedule, usually provided in the last few months before lease expiry or shortly after the lease ends.

It is vital that, when served with a dilapidations schedule, tenants seek legal advice and/or specialist surveying advice at the earliest opportunity to ensure it is aware of its obligations and to mitigate its exposure. There is also a “dilapidations protocol” which tenants may need to comply with which sets out fixed timescales for any response.

Defences to a dilapidations claim

Although dilapidations claims can initially appear daunting, there are legal safeguards in place that can limit a tenant’s liability. Section 18(1) of the Landlord and Tenant Act 1927 places a cap on claims so that a landlord cannot recover more than the amount by which the property’s value has been reduced as a result of the disrepair or where the premises will be subject to demolition or structural alterations which would render valueless any repairs. In many cases, this can significantly reduce the size of the dilapidations claim, especially if the landlord plans to refurbish or redevelop the property regardless of its condition at lease end.

In the first instance therefore, it is always essential to consider the landlord’s plans for the premises and whether circumstances exist which would affect any potential claim. The landlord may have indicated that it is keen to get back possession of the premises quickly – in which case it may accept payment of a reduced lump sum for dilapidations in return for an early surrender of the lease. Equally, the landlord may have indicated plans to redevelop the premises – either by serving a Section 25 Notice seeking to oppose renewal on that basis or having submitted a planning application. Given that the landlord’s plans for the premises may significantly affect the value of its claim, all relevant circumstances will need to be considered.

Another key principle affecting a claim is the landlord’s obligation to mitigate its loss. If it fails to take appropriate steps to re-let the premises or only carries out only minimal repair work, it may affect the legitimacy or scale of its claim. Similarly, if the landlord carried out works which fall outside of the obligations in the lease or which would amount to significant betterment, any dilapidations claim will be appropriately reduced.

Practical tips for tenants regarding dilapidations

A frequent mistake made by commercial tenants is underestimating the importance of their lease obligations and the potential claims that can arise. Many tenants focus on the rent payable and the location of the premises, giving little attention to the repair clauses they have agreed to. However, these clauses can lead to substantial costs if overlooked.

Another issue is often a failure to allow sufficient time and budget for any necessary works before the lease ends. Leaving repairs until the final few weeks often results in a rushed and more expensive process, or worse, inaction that opens the door to what can be a substantial financial claim.

Alterations to the premises during the lease term are another area of risk. If the lease requires reinstatement of these alterations upon lease expiry, tenants must plan for this. Disputes often arise when tenants assume minor modifications can remain in place, only to be hit with significant reinstatement costs.

The best protection against a dilapidations claim is forward planning. Practical steps that commercial tenants can therefore take to limit exposure are:

• At the start of the lease, consider negotiating a schedule of condition to limit your repair obligations to the property’s initial state and/or negotiate a cap on dilapidations liability
• Seek clarity around reinstatement obligations for any alterations you intend to make
• During the lease, ensure the property is properly maintained and inspected regularly
• As the lease approaches its end, act early, obtain professional advice and take any necessary steps to repair and restore the property as required and/or seek to negotiate a structured exit with the landlord.

Dilapidations claims can have a serious financial impact on tenants who are unprepared. However, with clear lease negotiation, ongoing property management and expert legal support, these claims can often be mitigated or resolved efficiently.

At HCR Law we have significant experience navigating dilapidations disputes. Please contact Tahlia Woollatt in our specialist Real Estate Dispute Resolution team if you need further advice.