Dilapidations

Schedules of Conditions

A typical way of protecting a tenant’s liability at the commencement of a lease is to have a schedule of condition annexed to the lease with stipulation that the tenant does not have to return the property in any better condition than evidenced in the schedule. Unfortunately, that does not always provide the protection a tenant believes it does. Whilst a schedule of condition may show an element of the building in disrepair, if this becomes worse and the only means of repair is replacement, the tenant is liable for the replacement at full cost.

Schedules of condition vary greatly in quality. Lots of schedules are purely photographic and it is not possible to fully examine the detail of damage within photographs.

If the schedule of condition does not show evidence of the defect seen at the end of the lease it is presumed that the property was in repair. A number of schedules do not include roofs or gutters or other difficult to access areas but if repairs are needed at the end of the lease, the repairs required will not be limited by the schedule of condition undertaken.

When planning alterations, a tenant should be aware of the implications of making good and reinstating the premises at the end of the lease. A tenant often thinks that their alterations and adaptations are an improvement to the property and the landlord will benefit from such improvement. An improvement/betterment for one person is not always of any merit to other and can be a hindrance to another tenant; for example a mezzanine whilst increasing net floor area and is useful for occupiers with a large office/storage of small items, it is a detriment to users wishing to store larger items or have free space for manufacture.

Reinstatement and Repairs

When a tenant is considering vacating, they should carefully plan their exit strategy to allow sufficient time to undertake repairs to return the property in compliance and remove and make good any alterations.

If they do not undertake work they are at risk of the landlord instigating the repairs and reinstatement and claiming their costs (and potentially loss of rent). In not undertaking reinstatement and repairs the tenant gives up control not only of the cost, but the quality of work being undertaken.

Landlords tend to have the schedule of dilapidations costed either by a professional or contractor and seek from the tenant financial compensation for the cost of the works. There is a limitation on the financial recompense the landlord can achieve, this being the overall loss that it suffers.

Fulfilling Lease Obligations

A tenant is required to fulfil its lease obligations and leave the property in repair at the end of the lease. Often tenants are spending significant sums in fulfilling this requirement, in some instances, particularly on old properties and industrial units, replacing windows and other elements of the property. In undertaking this work at the end of the lease the tenant does not derive any benefit from the expenditure. There are many items which the tenant could undertake during the lease and derive some benefit from the expenditure, for example older industrial units, particularly with asbestos cement or single skin roofs may be in such disrepair that the only repair is replacement of the roof. Should this be the case, the tenant is potentially liable for the full replacement of a roof, which depending on the extent of the roof being replaced may mean a previously uninsulated roof may be required to be insulated. Undertaking the work during the lease would have provided the additional benefit of an insulated premises with reduced heating costs and potentially the avoidance of the ongoing costs of ad hoc repair during the period of the lease to a roof that is in poor condition.

Reducing a Tenant’s Dilapidations

Dilapidations is a complex subject with a mixture of technical and strategic advice required. As indicated, the route to reducing a tenant’s dilapidations is to consider their intentions in using the property prior to entering into a lease and making an assessment of their liabilities relating to the repair and condition of the property and their intended use, alteration and adaptation of it. During the lease it may be beneficial for a tenant to undertake certain repairs and gain the benefit from the capital expenditure and towards the end of the lease be clear on their best exit strategy both in terms of their intended relocation and the landlord’s intention.

When exiting a building the tenant often is moving to an alternative premises and must consider the costs of occupying two buildings simultaneously if they wish to undertake repairs to the property they are leaving.

A landlord needs to be aware of the implications of not undertaking repair at the end of a lease and that incoming tenants may require a schedule of condition to be annexed to the lease to limit their liabilities. The landlord should also be aware that they may not recover the full cost of repairs, particularly if they do not undertake the repairs at the end of the lease should a tenant claim the loss to the landlord’s reversion is less than the repairing costs.