Dilapidations – What Our Tenants Should Know

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What are dilapidations?

When the term ‘dilapidations’ is used in conjunction with the letting of property, it usually refers to breaches of Lease covenants that relate to the condition of the respective property, and the process of remedying those breaches.

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Our aim with regard to dilapidations

As responsible Landlords, we need to ensure that all of our properties are suitably maintained and well looked after at all times, regardless of whether they are let or not. As such, we do our best to adopt a pro-active attitude towards their general upkeep by conducting inspections at least every year when let, or every month when unlet.

We believe that frequent inspections keep our own and our Tenant’s (or, if unlet, any future prospective Tenant’s) best interests in mind by diminishing the likelihood of any of our properties falling into a serious state of disrepair.

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Full Repairing and Insuring Leases

Nearly all Landlords who Lease commercial property to a Tenant protect their interest in their property by issuing a Full Repairing and Insuring (FRI) Lease. This essentially ensures that the Tenant, while renting the property from the Landlord, properly looks after it and will ultimately return it to the Landlord in a suitable condition so that it could easily be let again.

Within each FRI Lease there will usually be various clauses relating to the frequency that each Tenant should perform external and internal re-decorations of the property i.e. painting the outside and inside of the property, while other clauses will cover some more hands on maintenance aspects, such as cleaning the windows every month as well as ensuring that all Service Media (such as drains, gutters, flues, etc…) remain in good working order. As such, we recommend that our Tenants read their Lease and make sure that they consider their potential future dilapidations liability in good time, and budget for this obligation.

PLEASE NOTEFinancial Reporting Standard 12 states that some of the provisions set aside by Tenants for any future dilapidation liabilities might possibly be allowable against their tax liability. However, so as to be clear about what allowances you can claim, we recommend that you speak to your accountant, surveyor and/or directly to the HMRC.

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Inspection of properties

Despite the fact that there might be an FRI Lease in place between a Landlord and Tenant, we know this doesn’t always prevent a property from falling into a state of disrepair. Sometimes minor dilapidations can easily be overlooked and, after sometime, they can mount up to become major problems.

Thus, to ensure proper dilapidations practice, we make sure to regularly inspect all of our properties at least once every two years so we can inform our Tenants in advance of any possible type of neglect. This ensures that any risk to the asset value of the property is arrested before a problem becomes extensive and thereby minimizes the costs to the Tenant and ourselves by diminishing the need for any major remedial works (namely a “Stitch in Time…”).

Saying that… There will be rare occasions where properties will have been allowed to be fall into severe disrepair. For example, we might have only just acquired a property through sale and, having not been given proper access to the whole property prior to acquiring it, we might stumble upon some major breaches of Lease covenants that relate to the condition of the respective property and, so, will have to serve the Tenant leasing this property with an Interim Schedule of Dilapidations.

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Schedule of Dilapidations

In the unlikely event that a property has lapsed into a serious state of disrepair, the Landlord can (and usually will) serve an Interim Schedule of Dilapidations which, although more limited than a Terminal or Lease-end Schedule of Dilapidations (see RICS guide below regarding this subject), will usually focus the attention of the Tenant on the existing problems that need to be immediately addressed so as to bring the property back into a good overall state of repair.

In most instances where an FRI Lease is in place between the Landlord and Tenant, the Landlord will be allowed to perform an Interim Schedule of Dilapidations at the expense of the Tenant. This will usually be conducted by a qualified Chartered Surveyor of the Landlord’s choosing.

As such, if you’re a Tenant of ours and you haven’t performed a recent inspection of the property that you are Leasing from us, then we must strongly advise you perform an inspection immediately. Doing so sooner (rather than later) will usually ensure that you have a good chance to remedy any breaches of covenant before we inspect, thus minimizing your chances of being served with an Interim Schedule of Dilapidations and suffering the costs that are associated with them.

PLEASE NOTE – we really do not enjoy serving Interim Schedules of Dilapidations on any of our Tenants for the simple reasons that they are time consuming and costly to both the Tenant and ourselves. Not to mention, if the property falls into a really fowl state, then Building Control might well have to become involved and oversee the remedial works needed, making the repairs more detailed and costly to the Tenant.

Thus, in an effort to try avoid the need to serve an Interim Schedule of Dilapidations, we have chosen to publish this article on our website so as to remind our Tenants to keep a watchful eye on the overall state and condition of the property they are Leasing from us, as this will ensure that their costs are minimised, as well as keep the property they are renting in a good overall state of repair, allowing them to continue trading without any hindrance or unnecessary cost to their business.

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A couple of guiding points for our Tenants:

1. If you’re unsure as to what your responsibilities with regard to maintaining the property you’re leasing are, you should seek advise from either your solicitor and/or a chartered surveyor.

2. If your Lease is coming to an end in the next year, and you no longer wish to extend your Lease interest, you should make provision – as is mentioned in your Lease – to leave the property in a suitable state of repair (see below). Again, if in doubt as to what this means, you should read your Lease and seek advise from either your solicitor and/or a chartered surveyor.

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I will finish this article off by quoting the recently published (November 2012) RICS guide to lease-end dilapidations for commercial property.

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RICS

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LEASE-END (OR TERMINAL) DILAPIDATIONS IN COMMERCIAL PROPERTY

The content is based upon circumstances current in May 2012.

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Scope and terminology

The term “dilapidations” refers to breaches of lease covenants that relate to the condition of the property, and the process of remedying those breaches.

This guide deals only with breaches by the tenant and the landlord’s subsequent remedies towards the end of the lease term; sometimes known as “terminal dilapidations”. The guide does not deal specifically with leases which end because of the exercising of a break clause. It relates to the law and procedure in England and Wales; other parts of the British Isles have their own law and processes which can differ from those detailed here.

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Some Definitions

A “Schedule of Dilapidations” is a document prepared by the Landlord (or their surveyor) which lists the allegations, suggests remedial works and sometimes estimates the costs of those remedial works.

A “Quantified Demand” is a document prepared by, or on behalf of, the Landlord which sets out further details of the allegations. It is only issued after the end of the lease. It includes details of what the Landlord considers to be its likely loss as a consequence of the tenant’s alleged breaches. The likely loss does not always equate to the cost of the works set out in the Schedule of Dilapidations.

A “Response” is the reply from the Tenant (or their surveyor) to the Quantified Demand and/or Schedule of Dilapidations. This normally takes the form of a covering letter / email and a Scott Schedule.

A “Scott Schedule” is an extended version of the Schedule of Dilapidations which allows space for the Tenant’s surveyor to comment on the content of the Schedule of Dilapidations.

The “Dilapidations Protocol” is a document published by the Ministry of Justice which sets out the courts’ expectations of the landlord and tenant when it comes to lease-end dilapidations. The document is available to download from the Ministry of Justice web site.

The “Dilapidations Guidance Note” is a document published by the Royal Institution of Chartered Surveyors (“RICS”) which sets out the RICS’s expectations of the performance of its members in relation to dilapidations matters.

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I am a Tenant; what should I know?

Prior to signing the lease

The principle of ‘buyer beware’ holds as true when taking a lease of property as it does when buying it and so you should familiarise yourself with the lease terms and their dilapidations implications prior to signing the contract. A chartered building surveyor can advise you of the implications of the clauses you are signing up to.

During the lease term

It is recommended that tenants consider their potential future dilapidations liability in good time, and budget for that future obligation. Financial Reporting Standard 12 suggests that provision is made in advance, and may be allowable against future taxes.

If you undertake alteration works to the premises then it is likely that your landlord may require you to reinstate those alterations shortly before the end of the lease. A Licence for Alterations (or Licence to Alter) is often agreed which sets out the obligations.

Near the end of the lease term

Dilapidations disputes can ultimately end in a court. It is therefore important to protect your position in the event that the landlord eventually commences proceedings so you should always obtain early advice from your solicitor and surveyor. You may be advised to make offers to settle at various stages, and should consider such advice carefully, as it may be referred to later in court.

You should be aware of the extent of dilapidations work you have committed to complete. This can be a complicated assessment and there is decades of case law to take into account. It is normal to engage a chartered building surveyor, experienced in the field of dilapidations and familiar with the case law, to advise you.

Unless you have completed all the building work which the lease and any licences for alterations require of you then you should expect to receive a Schedule of Dilapidations from your Landlord. The Schedule of Dilapidations may be sent to you shortly before or shortly after the end of the lease term. If it is sent to you before the end of the lease term then the Landlord may update it at the end of the lease to reflect any changes to the premises.

If the lease or any licences for alterations requires them to do so, your landlord might serve you with a notice to reinstate alterations you have made. This notice may be separate from or included within the Schedule of Dilapidations.

Even if the Landlord does not send you a Schedule of Dilapidations you still have potential dilapidations obligations and a chartered building surveyor can give you advice as to the scope and potential cost of the obligations.

If you do not complete the dilapidations works before the end of the lease term then your landlord can claim damages from you to recompense them for the adverse financial position they find themselves in, because you did not complete the dilapidations works.

Landlords should not however profit from dilapidations payments and so the amount set out in the Quantified Demand is sometimes lower than that in the Schedule of Dilapidations. This may be because the landlord intends to redevelop the premises; because the landlord intends to upgrade the premises; because a new tenant wants the premises left as they are and the terms
of the new lease don’t prejudice the landlord; etc.

It can therefore sometimes be very difficult to decide whether to complete the work yourselves before the end of the lease or to wait for the landlord to send his Quantified Demand. It is possible that the Quantified Demand will include sums such as loss of rent, loss of service charge, etc. if the Landlord is confident that it can demonstrate a loss caused by the time taken
to complete the works which you should have completed before the end of the lease. These sums are not always payable and again a chartered building surveyor can advise you in this respect.

The Schedule of Dilapidations and Quantified Demand can also include an allowance for VAT, if the Landlord is anticipating carrying out the works and would not be able to recover VAT. In those circumstances, if you are able to recover VAT on such works then you might be more inclined to complete the works before the end of the lease term.

After the end of the lease term

You should have received a Schedule of Dilapidations and, within about 56 days after the end of the lease, also a Quantified Demand. However, you should be aware that the landlord’s entitlement to start a court claim will not become legally time-barred for six or 12 years (depending upon how the lease is signed) after expiry of the lease. Some leases contain a specific timescale for service. The Landlord or their Surveyor should have endorsed the Schedule of Dilapidations to confirm that it is reasonable and reflects the Landlord’s intentions for the building.

You are expected to respond to the Schedule of Dilapidations and/or Quantified Demand within about 56 days of receipt. Your Response should also be endorsed by you or your Surveyor. Normally, the surveyors appointed by the Landlord and Tenant meet and can narrow the differences sufficiently to recommend a settlement figure to their respective clients. If such a settlement is not possible then you may be faced with potential litigation from your former landlord. The Dilapidations Protocol states that the parties should consider alternative dispute resolution (ADR) in dilapidations cases.

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To see where we sourced this article from, please visit the RICS website by clicking here.