What are dilapidations?
Unlike residential tenanted properties, for commercially owned and leased units the obligation is on the tenant to maintain the unit. In basic and simple terms, dilapidations refer to where the tenant breaches their obligation of the lease during the tenancy in relation to areas such as repairs, reinstatement, alterations, and redecoration of the premises.
When can a claim be made?
The dilapidation process can be completed during the tenancy or at lease end.
Dilapidations schedules which are served during the term of the tenancy, are called an “Interim Schedule of Dilapidation”. These schedules are used where the landlord believes the tenant is not adequately maintaining the property. Typically, an interim schedule will only highlight items of repair and wouldn’t include financial costs as the intention is to persuade the tenant to correct specific items of disrepair. The required timescales and other details for serving of this schedule will be found in the lease.
A terminal schedule of dilapidations, is a dilapidation schedule/scott schedule which is served on the tenant at the end of their lease term. This is an itemised report of each item of disrepair, reinstatement or decoration works which are required, each item will then have an associated cost. The total of all the items will then form the total dilapidation claim.
The terminal schedule can be served between 18 months to 3 years before lease end. The Dilapidations Protocol, which sets out ideally how landlords should make a claim, advises that claims should be made within 56 days from the end of the lease. This schedule will also typically include other cost items including loss of rent claims, service charge and void rates costs due to the property or unit being in poor condition and unable to be re-let until the landlord has instigated the repair, reinstatement or decoration works.
So, what’s included in dilapidations?
This always comes down to the terms/covenants in the lease. In most leases the following terms and covenants are commonly found, which we have discussed below:
Repair and Maintenance
A typical repair and maintenance term in a lease is along the lines of “The tenant shall keep the Premises in good and substantial repair and condition and clean and tidy”.
This covenant obligates the tenant to repair any elements of damage caused by the tenant which is within their premises. For example, worn floor coverings, broken or damaged windows and doors, damaged or dented external wall cladding, cracking to brickwork, roof leaks, to name but a few. It also stipulates for the premises to be cleaned and left in a tidy state.
Alterations/reinstatement
This refers to reinstating any changes undertaken by the tenant back to the original condition at the start of the lease.
A common clause is, “Before the termination of the term the tenant shall reinstate the premises to their condition prior to the carrying out of any works carried our during the term of this lease and/or during the terms of the previous leases by the tenant or any under tenant or any of their predecessors in title and shall make good all consequential damage, to the landlord’s satisfaction”.
A typical lease will usually allow the tenant to install non-structural alterations, e.g. stud partition walls, without permission but will request for all works to be completed under the relevant statutory legislation e.g. building regulations. For more extensive alterations, a license to alter will be required which must be approved by the landlord. The above covenant then forces the tenant to remove these at lease end.
Decoration
This is a very standard term found in most leases. The clause may typically read, “To keep the premises painted or otherwise decorated to a good standard and to redecorate them to a good standard on the exterior and in the interior in the first year of the term and in the six months preceding determination (but not so as to require redecoration twice in any 12-month period).”
This will often include painting of external painted render, timber windows and doors and painted masonry. Then internally a decoration obligation will include all plaster wall and ceiling finishes, joinery items including windows, window boards, skirtings, architraves, and doors, painted concrete floors often located in warehouses and previously painted radiators.
Yielding Up
A common wording found in many leases is: “At termination of the term, the tenant shall yield up the premises with vacant possession and in the state and condition required by the lease”.
This covenant forces the tenant to remove all their belongings, furniture etc at lease end, leaving the premises vacant. There is also often wording within the lease to allow the landlord to remove any remaining tenant’s items post lease expiry and reclaim the cost from the former tenant.
Indemnify
This covenant often refers to the tenant’s obligation to cover the landlord’s loss, in regard to any items arising from the dilapidations process.
Common wording in a lease may be along the lines of, “The tenant shall indemnify the landlord in respect of all loss arising as a consequence of any breach of the tenant covenants”.
This will allow the Landlord to recover costs, reasonably incurred, in correcting these breaches and, in the context of a dilapidations claim, extends to surveyor’s and solicitor’s fees in connection with procuring and carrying out works.
Costs
This is a similar covenant to the indemnify covenant described above and generally relates to the landlord’s right to reclaim all reasonable costs, expenses, loses and liabilities properly incurred by the landlord because of:
- Breaches of the tenant of any of its covenants or obligations in the lease.
- Any other costs in relation to consents to alter, serving of notices and surveyors fees in relation to dilapidations.
How does the process work?
The landlord should serve a Scott Schedule/schedule of dilapidations, which is essentially an itemised list of defects/ repairs with associated costs, on the tenant within 56 days of lease expiry. This must follow the RICS guidance, which sets out industry standards on how to layout the schedule.
The tenant can undertake the works listed in the dilapidations schedule prior to lease end or the parties can look to achieve a financial settlement for the items listed in the dilapidation schedule, or a combination of both. Of course, there are various routes and cases here which can affect negotiations and the amount of the claim, including supersession (items of disrepair which may no longer be applicable on the tenant due to future planned works of the landlord) and diminution in valuation (the difference in value of the property with the works undertaken in comparison to the value of the property without the dilapidation works being completed). This is where the appointment of a surveyor becomes invaluable and could save certain parties thousands in unnecessary dilapidation costs.
In the majority of cases, surveyors will be appointed to act for the tenant and landlord to negotiate the claim in an attempt to reach a settlement. If no agreement can be reached, further dispute and legal options will need to be taken and various options are available which your solicitor will be able to advise you upon. This may again be stipulated within your lease as to which legal routes are to be followed. Common dispute resolution routes include:
• Independent expert determination
• Mediation
• Arbitration
• Early neutral evaluation
In summary, the dilapidation process can be complex and there are various routes available to tenants or landlords in regard to negotiating a dilapidation claim. Here at Survey Network Ltd, we have a wealth of experience dealing with dilapidations for all types of commercial properties and will be able to assist you achieving the best settlement possible, whether you are a landlord or tenant.
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