A tenant will often not turn attention to the question of dilapidations until the end of a commercial lease is looming, or perhaps until a schedule of dilapidations arrives in the post. However, such claims can be sizeable and it pays to start thinking about it at a much earlier stage.
These are some tips for tenants as to what they should be thinking about at the various points of a letting.
1. Before Signing the Lease
The potential liability for dilapidations is something that should be at the forefront of a tenant’s mind even before the lease is entered into. Those who are less experienced in such matters may not realise that if a standard full repairing lease is entered into then the condition of the property at lease commencement will have little bearing on the standard of repair that it must be returned in. This is because the obligation to keep the property in repair implies an obligation to ‘put’ it in repair. Therefore, if a tenant does not wish to be obliged to give the property back in an improved state, it is imperative that the repair obligation is limited by a schedule of condition.
2. During the Term of the Lease
It also pays to keep an eye on the condition of the property throughout the term. Keeping the property in good repair is likely to have practical and operational benefits in any event, but it will also help guard against a landlord seeking to exercise a right to enter and repair.
Most commercial leases give the landlord the right to enter and repair if the tenant fails to comply with a repair notice. If such a notice is served, the tenant will have a certain amount of time to remedy the defects, failing which the landlord can instruct their own contractors and claim the cost of the works from the tenant. This is a loss of control and a disruption that most tenants will be keen to avoid.
If a tenant does find itself on the wrong end of such a notice, it may be possible to challenge the validity of the notice, or attempt to refuse entry, but such disputes are best avoided if possible.
3. As Contractual Expiry Approaches
As lease expiry approaches, one key issue to keep in mind is the question of reinstatement of alterations, in terms of identifying what changes have been made to the property and what obligation there may be to reinstate. This will require an analysis of the lease and any licences for alterations that may exist. It is sometimes the case that reinstatement will only be required if the landlord provides a certain amount of notice, so it is important to keep this in mind when determining what steps should be taken and what claims may be faced at lease expiry.
In relation to any disrepair that may exist at the property, the tenant should consider whether it intends undertake some or all of the necessary works, or would prefer to settle a claim for damages after lease expiry. However, even if the latter approach is preferred, it will often be worth instructing a surveyor well in advance of lease expiry to advise as to whether there are any easy wins. There will often be a number of steps that can be taken to resolve disrepair at a significantly lower cost than would end up being claimed by the landlord.
Leases will usually contain an obligation to decorate the property at regular intervals and within a certain amount of time before the end of the lease. The final redecoration will very often require the colours and materials be approved by the landlord. Therefore, the tenant should carefully consider whether it would be better to undertake this work, so that it retains control on the cost incurred.
Tenants should also be aware that there is no obligation on a landlord to serve a schedule of dilapidations prior to lease expiry. Therefore, a tenant would be well advised to instruct their own surveyor in the months leading up to lease expiry in order to get an understanding as to the potential liability and to decide how best to deal with the situation. In any event, tenants should certainly set aside a provision for dilapidations, as there will almost certainly be a claim of some description once the lease expires.
An experienced surveyor will also be able to provide some indication as to the likelihood of there being a cap on the landlord’s claim. This arises because although the cost of the works is the common law measure of damages, any claim for disrepair is capped by section 18(1) of the Landlord and Tenant Act 1954. The Act basically means that the landlord’s claim is capped by the diminution in value to the property that is caused by the disrepair. Ascertaining the diminution requires the value of the property in its actual condition to be compared against the value of the property if the repair obligations had been fully observed. This is a complicated area and a specialised s18 valuer may need to be instructed at some point.
In summary, the repair, reinstatement and redecoration obligations in a lease are something that deserve a lot of attention at all stages. They should be the subject of careful thought before entering into a lease, as well as being monitored throughout the term and being brought to the top of the agenda a year or two prior to lease expiry.
Blake Morgan has decades of combined experience in dealing with all manner of dilapidations claims from a few thousand pounds in value to multi-millions for both tenants and landlords. We also have excellent links with experienced surveyors and valuers who can assist in understanding the likely value of claims, preparing schedules and bringing or defending claims.
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