Dilapidations claims demystified: a guide for landlords and tenants

Dilapidations claims can be a significant source of dispute between a commercial landlord and a tenant. These claims are most commonly pursued at lease expiry, known as terminal dilapidations and concern breaches of the lease relating to the repair and condition of the premises at this time

The landlord may be left with a property that cannot be readily re-let as a result of the tenant’s breaches of the repair, decoration, and/or reinstatement covenants. While for tenants, it can result in unexpected costs being incurred.

Whether you are a landlord looking to enforce your rights and protect your investment, or a tenant aiming to either reduce the financial impact of a claim, or fight it altogether, remaining proactive and informed can be key, saving you both time and money in the long run.

In this guide, we outline what dilapidations claims are, why they matter, and the ways both parties can navigate them as effectively as possible to reduce the risk of a costly dispute arising.

What Are Dilapidations Claims?

Dilapidations claims arise from disrepair to premises. A lease commonly contains covenants relating to repair, decorations, reinstatement, compliance with statutes, and yielding up. If a tenant fails to comply with these a commercial landlord may have a claim.

While most common upon the conclusion of a lease, known as a terminal dilapidations, dilapidations claims can arise at any stage during the term of a lease.

For landlords, the main purpose of a dilapidations claim is to recover losses incurred as a result of the tenant’s failure to comply with the terms of their lease. However, landlords need to be aware that such claims are often hotly contested and can, as a result, be complex to resolve. It is up to the landlord to prove their entitlement to damages.

From the perspective of the tenant, they represent a potentially significant financial liability in the future. As a result, it is important that you are aware of the covenants within your lease and endeavour to maintain the property in line with those.

Why Do Dilapidations Claims Matter?

If you are a tenant or landlord, dilapidations claims bring potentially significant implications, in terms of both time, money, and stress. 

• For Landlords: A successful claim ensures that the property is able to be returned to a marketable condition. This is often pivotal in securing new tenants quickly and ensuring that your investment does not lie empty for longer than necessary, keeping as consistent a flow of income as possible while avoiding unnecessary and unexpected maintenance costs.
• For Tenants: By failing to properly address areas of dilapidation during their time in the premises, a tenant will leave themselves open to incurring a potentially substantial cost in the future.

Understanding Commercial Lease Repair Obligations and Covenants

Commercial lease repair obligations in England and Wales are set out in the lease terms, which specify the extent of the tenant’s responsibilities relating to repair, decoration, reinstatement, yielding up, and liability to pay costs. Licences to alter, deeds of variation, and schedules of condition may also be relevant. It is important that both landlord and tenant understand what they mean.

Commercial Lease: Who is Responsible for Repairs? 

Common types of lease obligations and repair covenants include: 

Full Repairing and Insuring (FRI) Lease: The tenant is responsible for all repair and maintenance to the property. Whether or not this applies to the structure will depend upon the terms of the lease. If the property forms only part of a building, the tenant’s repairing obligation can be limited to only the interior. Maintenance and repairs of the structure, façade, and common areas are the responsibility of the landlord — who often recovers associated maintenance costs by way of a service charge. This is common where a property forms part of a wider estate. 

The lease may provide that the tenant is to “keep” the property in repair. This is a significant obligation and involves the tenant putting the premises in repair if it was in disrepair at the start of the lease. 

Schedules of Condition: A tenant’s repairing obligation may be limited by a schedule of condition. These are commonly negotiated by tenants if a property is in poor condition at the outset of a lease. A properly prepared schedule of condition records, by way of photographs and sometimes video, a detailed description, the property’s condition at the beginning of the lease.

Given the many complexities involved, tenants and landlords should both ensure they take a thorough and proactive approach when it comes to the negotiation of commercial lease terms if they wish to avoid potentially costly and time-consuming disputes in future.

How Are Damages Calculated?

How damages are calculated as part of dilapidations claims is often a complex aspect of the process. Generally this will begin with a calculation of how much the works required to remedy the breaches will cost plus loss of rent for the time it takes to carry out those works. However, there are limitations, in particular as a result of Section 18 (1) of the Landlord and Tenant Act 1927 which relate to:  

• Diminution in Value: This limits a landlord’s claim to the amount by which the value of the reversion has been diminished. In practice, this means the landlord cannot recover more than the actual loss in value to their property interest caused by the disrepair.
• Supersession: If the landlord intends to carry out major structural repairs or potentially demolish the premises, a dilapidations claim may be reduced or defeated entirely.

It is important to note that the burden of proof generally rests with the landlord. Landlords must demonstrate that the tenant has breached the lease, they have suffered a loss and that loss should not be reduced by reason of Section 18(1). A diminution in value report, prepared by an expert valuer, may assist the landlord in proving its claim. 

In some cases, landlords may choose to carry out remedial works themselves to provide clear evidence of actual loss and costs incurred. However, this approach carries risks and should only be undertaken after taking professional advice from both a surveyor and solicitor at an early stage to properly assess the merits and potential value of any claim.

What is the Dilapidations Claim Process?

Understanding the dilapidations claim process is crucial for both landlords and tenants. It ensures compliance with the legal process and facilitates the effective resolution of any potential disputes.

For Landlords:

1. Preparation: In order to prepare for the dilapidations claim process, landlords should review the lease, including any licences and deeds of variation, in order to understand what the tenant’s obligations are prior to lease expiry. A landlord’s ability to require the tenant to reinstate the property may be time limited. There may also be specific provision relating to the timing and service of notices. It is therefore, vital that preparations begin at an early stage.
2. Surveyor: It is suggested that you take advice from a surveyor at an early stage. There may be merit in serving an interim schedule in the lead up to term expiry, which lets the tenant know what is expected of them. It also gives the tenant opportunity to carry out the works.

For Tenants:

1. Understand Your Lease Obligations: It’s important to review the terms of your lease, to familiarise yourself with the repair, maintenance, decoration, reinstatement, and yielding up obligations.
2. Assess the Property: Prior to the end of the duration of the lease, it’s recommended that you conduct your own thorough inspection in order to identify any pressing maintenance needs and address issues promptly.
3. Address Maintenance Issues: You should ensure that you are making every effort to perform necessary maintenance and repairs throughout your lease terms in order to fully comply with obligations.
4. Take Advice early: It is important to consult with a surveyor and potentially take specialist legal advice at an early stage to ensure you are engaging with the process as you should.

Early engagement with professionals experienced in the field can facilitate a significantly smoother dilapidation claim process. Whether you’re a landlord seeking damages to uphold lease terms or a tenant aiming to mitigate the impact of a dispute and resolve an issue as amicably as possible, WHN Solicitors is here to help.

The Dilapidations Protocol

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’) sets out the conduct expected of parties before court proceedings are commenced.

The steps are broadly as follows: 

1. Schedule of Dilapidations: The landlord prepares a detailed schedule of dilapidations to outline what repair, decoration, and/or reinstatement works will be required to the property. This can include an estimate of costs. This schedule will typically be served on the tenant within 56 days of the lease ending.
2. The Response: The tenant then is required to respond. This should be within a 56 day timeframe.
3. Negotiation and Resolution: The Protocol encourages settlement. Negotiations commonly ensue between surveyors appointed to act on behalf of landlord and tenant, who will attempt to narrow the issues and reach a commercial settlement.
4. Legal Action (If Necessary): If negotiations between surveyors have not led to a satisfactory resolution, solicitor involvement can assist to unlock settlement without recourse to litigation. If settlement cannot be achieved, your best remaining option may be legal action by way of court proceedings in order to claim damages.

For additional information regarding dilapidations claims from the perspective of a landlord, view our dedicated blog: A landlord’s guide to terminal dilapidations

How to Avoid or Minimise Dilapidations Disputes

Ultimately, no matter whether you are a tenant or landlord, it is suggested that you do what you can to part ways as amicably as possible. However, contention can arise in scenarios such as this. Fortunately, there are measures that can be implemented that can avoid or minimise the risk of dilapidations disputes.

Best Practices for Tenants

• Negotiate lease terms extremely carefully in order to limit strict repair and maintenance obligations outside of what you would expect.
• Advice from a surveyor can be beneficial before you enter into a commercial lease. A surveyor would advise in relation to the extent of the obligations that you are potentially taking on and what it would mean for you financially both during and upon term expiry.
• Consider a schedule of condition and ensure that it is properly prepared. A surveyor can assist with this.
• Consider budgeting for potential end of lease repairs throughout your time in the premises, rather than waiting until the end and receiving the bill.
• Carry out dilapidation assessments, with the help of a surveyor, before vacating to identify potential issues and make efforts to resolve them prior to leaving the property. Once the lease has ended you will not have any right to re-enter to carry out works, unless the landlord consents.

For more information about how to avoid a large dilapidations claims bill when vacating a commercial property, view our dedicated blog.

Best Practices for Landlords

• Ensure that the lease is worded as clearly as possible in order to avoid any potential ambiguity.
• Plan the dilapidations claim, with your surveyor, well in advance of expiry of the lease. Landlords need to prove their entitlement to claim damages.
• Be aware of contractual deadlines for serving notices to reinstate and schedules of dilapidations, as failure to comply may prejudice your claim.
• Review the extent of costs recovery covenants within the lease
• Instruct a surveyor at an early stage who will inspect and advise in relation to value.
• Handle lease renewals carefully – if leases are to be renewed dilapidations still need to be addressed. If they are not a claim may be lost.
• Decide whether you want to carry out the remedial works yourselves, as this can strengthen the claim by demonstrating actual loss and intention to remedy.
• Comply with the Dilapidations Protocol to avoid cost penalties and ensure the claim proceeds efficiently.
• Ensure that schedules are served correctly and in accordance with the terms of the lease. This is where legal advice is crucial.

How WHN Solicitors Can Help Avoid & React to Dilapidations Claims for Landlords & Tenants 

Dilapidations claims are a significant consideration upon lease expiry and can result in a costly dispute if not dealt with properly. The complexity of lease obligations, valuation principles, and procedural requirements means that professional advice is often essential to protect your interests and achieve the best possible outcome.

Legal advice is recommended for any complex claims, to ensure that your best interests are protected throughout. An experienced solicitor can help advise landlords on how to best recover costs, serve schedules of dilapidations, ensure compliance with the Dilapidations Protocol, and recover damages.

For tenants, they can assist in defending or negotiating a claim. The expertise of an experienced professional can be key in challenging excessive claims.

Are you dealing with ongoing dilapidations claims? Is your lease, or that of your tenant coming to an end? At WHN Solicitors, our people can help and advise you — please contact Eleanor Longworth at [eleanor.longworth@whnsolicitors.co.uk] or call [0161 761 8082]