Dilapidations refers to the process by which a landlord seeks to recover losses arising from a tenant’s failure to meet the repairing standards imposed in a commercial lease.

It is one of the most significant areas of risk in commercial property and can give rise to substantial financial exposure for both landlords and tenants. Understanding the repairing obligations within a lease, engaging early and securing appropriate expert advice are essential steps in managing that risk effectively.

Commercial leases usually contain a repairing obligation which sets out the extent of a tenant’s duty to maintain and repair the leased property. Such obligations are contractual, not necessarily statutory, so the precise lease wording is critical.

What are dilapidations and why are they important?

When budgeting for a lease, a tenant should account for the obvious outlays such as rent, business rates, utilities, service charges, and their fit out costs.

A less obvious concern may be the potential dilapidations liability at the end of the lease as this is likely to be furthest from the tenant’s mind at the beginning of the term.

However, it is important to get the drafting right from the outset to ensure that, at the end, the tenant, and equally the landlord, is not met with an unexpected cost. As liabilities can be significant and unpredictable, tenants should plan for them at the beginning of the process and not just at the end of the lease term.

If the repairing clause and dilapidations clause are clear this allows the tenant to make an informed estimate of their liability during and at the end of the lease. This is a complex exercise and some factors that will enter into that equation are:

  • The age, size and character of the property – is it reasonably new or is it a 19th-century tenement? Is it a large industrial shed or a small storage unit? A modern industrial unit involves different costs and expectations from a Victorian tenement-style building, especially if it is a listed building.
  • The length of the lease, as longer leases may require more repairs or replacement.
  • Is it a new lease or is the tenant taking on a lease part of the way into the term? Is an assignation of lease required?
  • Does the lease contain a photographic schedule of condition to limit the tenant’s repairing obligation to keeping the property in the same condition as shown in that schedule? As without such a schedule of condition, then a full repairing and insuring (FRI) obligation will apply even if the property is not in a good condition at the start.
  • The extent of the repairing obligation – is the tenant responsible for the whole of the property or just the internal parts? Who repairs the roof? What about redecoration at the end of the lease?
  • The extent of any tenant’s fit out and whether it is to be removed at the end of the lease.
  • What are the construction materials? Is the whole building statutorily compliant? For instance, if the building is not statutorily compliant, then the lease terms will determine if the landlord or tenant pays for bringing it up to standard.

What happens at the end of a lease?

A lease is a contract. Strictly, at the end of the lease, the obligations the parties have to each other cease, except for any claims arising from breaches of the lease which have occurred before the lease ends.

A lease usually allows the landlord to serve a Schedule of Dilapidations (“the Schedule”) specifying any repairs required to a property at any time during the lease, and also, within a reasonable amount of time after the lease ends.

The Schedule, especially at the end of the lease, is generally prepared by a surveyor. We would recommend that the surveyor seeks legal advice, particularly as to the legal interpretation of the repairing obligations in the lease. We would also recommend that the Schedule is served by a solicitor to (1) ensure the notice provisions in the lease are complied with, and (2) to ensure that all potential heads of claim under the lease are included.

Where dilapidations exist, a commercial lease generally provides the following options:

  1. For the tenant to complete the works at their own expense, and where they fail to do so, for the landlord to complete them at the tenant’s expense; and/or
  2. For the landlord to complete the works at the expense of the tenant; and/or
  3. For the tenant to pay the landlord a sum equivalent to the cost of putting the property into the condition it should have been in if the tenant had complied with their repairing obligations.

In the case of option 3, recent case law has interpreted such provisions as allowing the landlord to claim this sum whether or not they actually intend to carry out the works and, therefore may suffer no loss.

Much, however, depends on the specific wording used in the lease. In the absence of wording to this effect, the landlord’s claim for dilapidations after a lease ends is based on breach of contract and is a claim for damages. They will, as a result, have to prove their loss. Therefore, precise drafting at the start of any commercial lease is essential.

The importance of getting the drafting right

Dilapidations are a complex area and the subject of extensive litigation. The sums involved regularly reach into the millions and getting it right at the beginning is of paramount importance. A poorly drafted lease will lessen the value of a landlord’s investment, and both landlord and tenant could suffer a nasty shock at the end of the lease which may, in the absence of a negotiated settlement, lead to expensive and time-consuming litigation.

The dilapidations process is inherently complex and both parties are strongly advised to seek specialist legal and surveying advice at an early stage. Engaging the right experts, understanding the repairing obligations set out in the lease, and approaching negotiations realistically and transparently are the key factors in achieving an efficient, cost‑effective and fair resolution.

Our Commercial Property and Property Litigation experts can provide information and advice to ensure any potential loss is avoided and lease obligations are met. Early legal input can significantly reduce risk whether you are entering a lease as landlord or tenant.

Using our checklist to stay on track

Dilapidations can create costly and unexpected exposure for both landlords and tenants, making early clarity on repairing obligations absolutely essential.

Here is a practical guide for both tenants and landlords:

How we can help

Our Commercial Property and Property Litigation experts can provide information and advice to ensure any potential loss is avoided and lease obligations are met. Early legal input can significantly reduce risk when you are entering a lease as a tenant.

For more information, please contact the Lindsays Commercial Property team.