Real Estate Building Blocks - Dilapidations in commercial leases

Real Estate Building Blocks - Dilapidations in commercial leases

Real Estate Building Blocks - Authorised Guarantee Agreement

At the end of a lease, landlords will be keen to ensure that their tenants hand the property back in a good condition so they can re-let the property with minimal delay. As a result commercial leases will usually include a number of covenants that require the tenant to keep the property in repair, to attend to redecoration, to keep the property clean and to comply with all statutes. The lease will also include yield up and reinstatement requirements relating to any alterations carried out during the lease term. Most often the clauses are contained within the lease but there may be supplemental documents such as licenses for alterations or deeds of variation to consider.

Landlords will often start considering dilapidations well ahead of any proposed exit date. The starting point for the calculation of damages is the cost of carrying out the necessary works, together with, potentially, a sum that compensates for any loss of rent the landlord will suffer from having to carry out any repair works which the tenant should have completed during the lease term. Dilapidations claims are often highly contested, and landlords will have to prove their entitlement to the damages they are claiming from their former tenant. Limitations on what the landlord can recover may be imposed by statute depending on what the landlord intends to do with the property, for example if it intends to demolish and redevelop, and loss of rent claims can be hard to prove.

Likewise, tenants may also be eager to engage with their landlords on dilapidations at the earliest opportunity to have certainty around the costs of any works required when exiting a property. A tenant could try to negotiate a financial settlement if it does not wish to do the works but if the tenant would prefer to do the works, then it should address dilapidations whilst it still has possession of the property. Once the landlord has the property back after the end of the lease term, a tenant has no right of access to carry out works. 

A landlord can serve a schedule of dilapidations before or following the end of the term. Landlords and tenants should check the terms of the lease for any time periods that they need to comply with, particularly for works of reinstatement. A landlord will usually instruct a surveyor to inspect the property and prepare a schedule of dilapidations. The schedule of dilapidations will cover any alleged breaches of the lease by the tenant and detail the intended works that the landlord believes the tenant must carry out. Tenants, once served with the schedule of dilapidations, should carefully consider the contents and whether to engage their own surveyor to assist. Dilapidations claims and what a landlord can or cannot properly recover from a tenant is far from straightforward and both surveying and legal advice may needed.

Stevens & Bolton is well positioned to advise landlords and tenants on dilapidations and we can assist in the preparation and review of settlement agreements. We would advise taking advice from a solicitor and surveyor well before the end of any lease to be best placed to deal with any terminal dilapidations claim.

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