Dilapidations 101: A Landlord's Guide

Your commercial tenant's lease term is expiring shortly, or has already expired, and the property is in disrepair. You need to deal with this prior to re-letting but you're not sure what steps you need to take. You've heard the term "dilapidations" bandied about by lawyers and property managers, but what does it actually mean?

What are dilapidations?

Dilapidations refer to the state of disrepair of a property as a result of a tenant failing to comply with its obligations and covenants in its lease - most commonly in respect of repair, decoration and reinstatement. When the property is in a state of disrepair during the term of a lease this is referred to as 'interim dilapidations'. When a property is left in a state of disrepair at the end of a lease this is called 'terminal dilapidations.'

I'm a landlord and my property is in disrepair at the end of a lease, what should I do?

1. Establish the extent of disrepair and prepare a schedule of dilapidations

You should instruct a building surveyor to inspect the premises and itemise any breaches in a schedule of dilapidations and a quantity surveyor to prepare a quantified demand.

If the inspection is completed prior to lease expiry, you should be mindful of the following:

• A lease usually reserves a right of entry for the landlord (or others authorised by it such as a surveyor) which can be relied on to inspect the premises. This right may be conditional e.g. on the landlord giving the tenant reasonable notice prior to entry, or only entering at certain times. You should ensure any conditions on entry are complied with so that you do not end up in breach of the lease.
• The dilapidations claim relates to the state of the property as at the date of lease expiry. Therefore, it is advisable that the property is re-inspected as soon as possible after lease expiry to document any disrepair at that point in case there have been changes (unless the tenant's liability has already been settled).

2. Serve the schedule of dilapidations on the tenant

The next step is serving the schedule of dilapidations on the tenant. Common points to consider are as follows:

a. When do you serve the schedule?

The Pre-Action Protocol for Claims for Damages in relation to the physical state of commercial property at termination of a tenancy (the Dilapidations Protocol) applies to terminal dilapidations and prescribes a timetable for dealing with disputes. The protocol requires the schedule and quantified demand to be served within a reasonable time after the end of the term which is normally not more than 56 days.

However, the lease and/or any relevant supplemental licences may have specific terms which affect when the schedule should be served. For example, the landlord may be required to serve the schedule within a certain period after lease expiry or else its ability recover costs in connection with the preparation and service of the schedule is restricted.

b. How do you serve the schedule?

The lease may have specific requirements as to how the schedule of dilapidations (or notices under the lease generally) must be served on the tenant to be valid. You should therefore review the lease carefully to identify any such requirements and ensure they are adhered to. Ordinarily a solicitor will be instructed to serve a schedule of dilapidations.

c. Can I serve the schedule prior to lease expiry?

Yes, many landlords opt to serve the schedule prior to lease expiry. Waiting until after lease expiry to deal with dilapidations (and so any disputes or negotiations with the tenant in respect of dilapidations) can delay repairing, marketing and reletting the property.

However, landlords should be aware of the following if the dilapidations schedule is served before lease expiry:

• The tenant may wish to carry out the necessary repair works itself prior to lease end. Depending on your specific situation, this may or may not be welcomed.
• Further disrepair may occur between service of the dilapidations schedule and lease expiry, in which case the landlord would need to serve a further schedule of dilapidations.

d. Can I recover the costs for preparing and serving the schedule?

You will need to review the specific lease terms. In many leases there is a term which specifically provides for recovery of these costs; however, even if these costs are not specifically mentioned, they are likely to fall under a more general landlord costs recovery provision.

3. Negotiate with the tenant

The Dilapidations Protocol provides that the tenant must be given a reasonable time to respond to the schedule of dilapidations. This is usually 56 days, however, the lease may specify a different period and this will depend on factors such as the complexity of the breaches specified in the schedule.

As mentioned above, the tenant may wish to dispute or negotiate their alleged dilapidations liability. You will then need to consider how you wish to respond. You may enter into negotiations with the tenant to agree a sum of money to settle the tenant's dilapidations liability. Negotiations will involve a mix of legal and commercial considerations and many landlords instruct specialised dilapidations surveyors to carry out those negotiations on their behalf. Once the parties have reached an agreement, this will need to be documented in a dilapidations settlement agreement, which is usually dealt with by a solicitor.

Conclusion

Whilst this article provides guidance on how to approach a potential dilapidations claim, it is important to keep in mind that each claim is unique and will depend on its specific facts e.g.. the lease terms, the property and parties involved, and the extent of disrepair. Our real estate disputes team is well-versed in guiding clients through dilapidations claims including serving schedules, negotiating with tenants, and completing settlement agreements. If you have any questions or would like to discuss your specific situation, please feel free to reach out to us.

Author: Debbie Eliad, Junior Associate