When a commercial lease ends one of the big considerations for both landlord and tenant is ‘dilapidations’ – or the condition of the premises.
Following the exercise of a break clause a tenant is usually required to return the property to an agreed state of repair, just as they would have done at the end of the term. The landlord should be able to re-let the premises without incurring additional costs either in terms of work required or lost rental income.
However, some leases may go further and require ‘full or material’ compliance with the repair and decorating covenants as a condition of a valid break. If a tenant fails to comply with such a provision, either because they have not considered it or misunderstood the provisions, the break may be invalid.
Where a successful break has such a condition, for tenants, this usually means carrying out repairs, redecorating and reversing any changes that they have made to the building or its interior. This work must be budgeted for and must be carried out to the landlord’s satisfaction for a break clause to be valid.
If you are a landlord, you must deal with dilapidations firmly as the financial implications for you can be significant.
However, remember that your tenant is obliged to return the premises to the agreed state and nothing more, so, to re-let the property you may face costs to modernise the space or make it more desirable to prospective tenants. This is not, unless agreed, a cost which can be passed to a tenant.
Engaging a chartered building surveyor to advise on the required repairs is advisable once a break notice has been served.
Your surveyor will draw up a schedule of dilapidations, which will be served on the tenant outlining the breaches of the repair, redecoration and reinstatement obligations and setting out the remedial action that is required.
The tenant will normally instruct their own surveyor to validate the claim before beginning to carry out the agreed work.
Following a further inspection, the landlord may provide an updated schedule of dilapidations highlighting any outstanding work required to comply with the lease, along with a quantified demand for compensation to cover the cost of the outstanding work and any loss of rent incurred while the work is carried out.
The process of negotiating dilapidations can become tense with tenants disputing the necessary repairs that are identified.
The key to avoiding disputes is for both landlord and tenant to be reasonable and understanding of each other’s positions and deal with the issues sooner rather than later.
If you do end up embroiled in a dispute over dilapidations, there is a protocol that sets out the steps that the court will expect you to have followed before beginning legal proceedings. This provides a clear framework to help landlords and tenants avoid litigation and agree a settlement.