Understanding Dilapidation Liabilities: A Complete Guide for Commercial Tenants

So how do you go about defining the premises or property?

Typically this is easy enough to determine by reading the lease and looking for a few key things.

1. Towards the beginning of the lease, there will be a set of ‘definitions’ which will normally have a definition of the ‘property’ or ‘premises’. In some cases this will simply state the whole property or identify a specific part of the property. In some instances it may refer to a separate schedule in the lease which sets out specific areas or parts of the property which the tenant is responsible and not responsible for.
2. The other crucial thing to refer to is the ‘Lease Plan’ this is usually inserted into the lease at the end or around the definitions section. This plan will typically be a high level plan of the property with a red line boundary drawn around the property which illustrates the extent of the property the tenant is occupying and responsible for.

In Full Repairing & Insuring (FRI) leases it is quite easy to determine the definition of the property as it is more often than not the whole property, including the structure, associated external areas and services.

Where it can differ is when a tenant is occupying a single floor in a wider multi-tenanted building which is known as an Internal Repairing & Insuring (IRI) lease. In these instances it is common for the tenant to only have responsibility of the internal parts with the landlord taking responsibility for the external fabric, structure and internal & external common areas (i.e: fire escapes or stairwells).

So knowing what you are responsible for under your lease is a fundamental starting point when assessing dilapidations.

Lease clauses for repairing obligations will typically be found under the ‘Tenant’s Covenants’ section of the lease. These are usually short and sweet and will contain phrases such as “to keep the property in good and substantial repair”.

This is a catch all and makes no reference to the condition of the property before lease commencement. A simple scenario would be if there was a hole in the wall before lease commencement and the tenant signed the lease with the above repairing obligation then it would become their responsibility to fix or repair.

Sometimes onerous wording can be included which may make specific obligation to replace certain elements at lease end. For example some repair covenants may expressly state that the tenant must replace all carpets at lease end.

It is for this reason we advocate tenants to think carefully about the wording of these repairing covenants and whether a schedule of condition would be prudent to have commissioned and included in the lease documents and wording. If a schedule of condition is appended to the lease the the repair covenant wording above will have words tagged on the end such as this “….provided that the tenant shall not be responsible for putting the property in any better condition than evidenced in the schedule of condition”.

So you can see how important a schedule can be in protecting tenant’s commercial interests when it comes to dilapidations claims at lease end.

You can read more around schedules of conditions in our other article by clicking the button below.

These covenants will oblige the tenant to redecorate the property in the lead up to lease end, usually in the last 12 or 6 months. Sometimes there will be wording which means the tenant does not have to redecorate more than once in a 12 month period also. These decoration clauses may also contain provisions on how the works must be conducted, usually within two coats paint and to a professional or good quality standard, meaning that slapping a bit of paint on as you give back the keys won’t cut it.

This will apply to all the previously painted elements of the premises, so externally think render, timber soffits & fascia boards and timber windows. Internally it is likely to include plastered or drylined walls, ceilings, skirting runs and internal doors.

What it doesn’t include is elements which have factory finished coatings, for example aluminium framed windows with a ionised or polyester powder coat would not be captured under a redecoration clause.

It is not common for these covenants to be limited by a schedule of condition but it can be agreed when negotiating the lease.

In our experience decoration costs form a large part of dilapidation claims mainly due to the extent of painted surfaces at any given property and the rising costs in labour and materials.

Modern leases usually have clauses which oblige tenant’s to remove their alterations made during the lease term, predominantly referring to their initial fit out of the space or any other modifications to the original layout.

By referring to licences for alterations and comparing original and current floor plans this can be determined.

In our experience this can lead to a very costly part of the dilapidations claim, especially if the tenant has fitted out a CAT A office with their own bespoke layout, branding and installations.

Crucially, the landlord may be obliged to give the tenant notice before lease end should they wish for alterations to be removed or ‘reinstated’, this is commonly six or three months before lease end. Should a landlord miss any notification period then the tenant can be let off the proverbial hook for extensive reinstatement works. We have argued this successfully when acting for some of our tenant clients, in dilapidation negotiations, saving tens to hundreds of thousands of pounds.

This will extend to building services also. For example if the layout of a floor is changing from a partitioned office space to an open plan office due to tenants removing their fit out then modification of systems such as fire alarms, air conditioning, heating and electrical distribution willing likely require attention.

This usually states that the tenant must return the property to the Landlord in full compliance with the lease terms.

It may contain other more onerous clauses and obligations such as replacing all carpets or returning the property back to a certain specification.

On the latter point we are seeing this more and more in central London office accommodation where landlord’s are letting refurbished or newly built office accommodation in a blank canvas style ‘CAT A’ finish. The lease will then include and refer to a specification which sets out the standard the tenant must return the premises to at lease end.

This leaves little wiggle room for negotiations around reinstatement and yielding up clauses although it does have the benefit of the tenant not having to replace surface finishes such as carpets if they were not there in the first place.

Landlord Costs and Indemnity clauses are usually found at the end of the ‘Tenant’s Covenants’ section in the lease.

The landlord costs section will typically allow for recovery of their surveyors fees in inspecting and preparing any dilapidation schedules before or after lease end along with their solicitors costs with formally serving said schedules.

The indemnity clauses are again catch all clauses which will make reference to the tenant indemnifying the Landlord against all loss from breach of covenants (i.e: the ones listed above). This typically will include for the following:

• Surveyors fees for negotiating the claim.
• Surveyors fees for procuring and managing any works required to remedy breaches.
• Solicitors fees.
• Any other relevant professional fees in connection (potentially structural engineer and other specialists).

These costs usually add up to form a substantial part of the claim.