Dilapidations for Tenants
Dilapidations – advice for Tenants
Before entering into a lease it is vital for a tenant to carefully assess and understand the implications of the lease covenants, particularly those which relate to repair and redecoration obligations, and statutory matters (eg compliance with electric/gas/asbestos regulations etc), so that the tenant is aware of how the landlord might expect the building to be handed back at the end of the tenancy.
The condition of a property at the beginning of a lease can often be irrelevant if the tenant has contractually obligated to hand the property back in good repair as the tenant may well be committed to putting right pre-existing defects as well as those which have occurred during the tenancy. We can often help a tenant mitigate this position, and obtain protection from a dilapidations claim at the end of a lease, by arranging for a Schedule of Condition to be formally incorporated into the lease at the outset. This provides a reference to existing defects and disrepair so that these are excluded from any future claim.
It is important that this document is produced by an experienced surveyor who properly understands the implications of lease clauses and wording so that the Schedule of Condition affords as much protection as possible on interim and lease end dilapidations liability – a poorly/amateurishly prepared schedule will often fail to provide the protection intended with expensive consequences for the tenant.
In cases where a landlord may not agree to a Schedule of Condition being incorporated into a lease we consider it even more important for a tenant to commission a survey, and perhaps legal advice to assess potential dilapidations liability before making a legal commitment. Survey advice can also be important in cases where a tenant might be taking an assignment of an existing lease (whether or not the existing lease incorporates a schedule of condition) and also in cases where a lease incorporates a ‘break’ option which might be conditional upon the observance/performance of repairing, and other, lease covenants.
During a lease a tenant may well benefit from obtaining surveyors advice to assess the tenant’s likely dilapidations liability before the lease expires with a view to implementing works while time permits – it is often a more cost-effective option for the tenant to control how the works are undertaken (perhaps with savings of VAT and other consequential costs and fees which can apply at the end of the lease term). A prudent tenant can also benefit financially and be tax efficient, with accountancy and surveyors assistance, in apportioning dilapidations expenditure over the remaining years of the lease term by ensuring compliance with FRS 102 The Financial Reporting Standard – this process does needs to be carefully managed and normally requires an experienced surveyor to provide a detailed dilapidations assessment to be acceptable to the Revenue.
If you have been presented with a dilapidations claim towards, or at, the end of a tenancy, we can advise how to minimise exposure to the extent of a claim, and therefore the cost. The procedure when acting for a tenant usually involves:
- A careful study of the express repairing, and other relevant, covenants contained in the lease. The wording of the lease is critical in defining the Tenants liability and varies considerably from one lease to another. Licences/correspondence for tenant alterations, and maintenance/statutory certification, will also be examined.
Lease wording has been subject to significant scrutiny by the Courts and the specific meaning of key words and phrases such as ‘repair’ and ‘renewal’ is the subject of much dilapidations case law.
- A detailed survey of the building to establish its condition and an analysis of each item in the Schedule of Dilapidations to verify whether it is justified by the terms of the lease.
- Advice on best strategy for minimising the claim. Undertaking an agreed programme of work is often the best, and most economic, way of mitigating a claim. This gives the tenant control over costs and will avoid the Landlords costs associated with administering remedial work. The VAT element can usually also be reclaimed if the tenant is appropriately VAT registered.
- Consideration as to whether statutory relief applies, by virtue of protection offered by Section 18 of the Landlord and Tenant Act 1927. This section of the Act states that the Landlord’s claim is limited to the diminution in the value of the property caused by breach of repairing covenants (which can sometimes be less than the cost of remedial works).
A Landlord who intends to demolish and redevelop, or refurbish, a building upon the termination of a lease, will not be entitled to damages as any disrepair would be irrelevant in such circumstances.
- Meet and discuss the claim with the Landlord or Landlord’s agent and negotiate a fair settlement where common ground can be found. An agreed settlement is by far the most common outcome.
If no agreement can be reached, we are able to provide expert witness evidence as part of any Court proceedings or Dispute Resolution mediation.
A detailed estimate of fees will always be provided prior to commencement of professional advice together with regular statements of account detailing the work undertaken and time allocated to the case.