8 Dilapidations Top Tips for Commercial Landlords and Tenants

8 Dilapidations Top Tips for Commercial Landlords and Tenants

From one economic challenge to the next, tenants have been weighing up their options as leases end or their break clause notice approaches. At the same time landlords are poised to hear from their tenants on whether an agreement on dilapidations can be reached.

The pandemic has truly been a challenge for commercial property and when it comes to conversations on dilapidations, our advice is to start as early as you can. Sometimes, this can be up to a year before the lease ends. We have seen some significant change in all sectors. Operators, be they retail, offices, logistics, data centres or leisure have been trading places to suit the needs and expectations of their customers – for example libraries converted into primary care centres, old court-houses into retirement villages, high street shops into local offices – whatever the change, leases and their contents have played a key role.

Difficult claims can be a severe drain on resources – so appointing experienced negotiators who understand how to get the best for both landlord and tenant is a critical success factor. Over the past 12 months we have seen some of the most challenging landlord and tenant negotiations, and here are some top tips to help landlords and tenants:

1. Landlords – Be prepared at least six months in advance

As a landlord, begin forming your intentions for the property and appoint a chartered building surveyor to prepare a schedule of dilapidations at least six months in advance of the end of lease, or as soon as the tenant serves a break notice. Depending on the lease, certain obligations should be carried out by the tenant. It is important to understand whether the tenant intends to carry out these obligations, so landlords can make a reasonable assessment on what works will be required or what financial settlement could be achieved.

2. Tenants – Prepare a budget for dilapidations

For tenants, understanding the legal and financial exposure to dilapidations is critical. If significant change has been made, a landlord could ask for these to be reinstated or removed even if they are perceived to be an improvement. The cost of reinstatement can vastly increase the landlord’s claim, the tenant should appoint a chartered building surveyor to assist them in mitigating their loss approximately 12 months before the lease end date. We recommend that an assessment should be undertaken prior to serving a break notice on a landlord.

3. Landlords – Dilapidations supersession

If a landlord decides to re-let the premises in the configuration as previously altered by the tenant, it may be that the landlord is not able to claim for dilapidations from the previous tenant. This is known as supersession. In addition, if the tenant completes reinstatement / end of lease works, they may be able to nulify a claim from the landlord. A landlord cannot reasonably prevent a tenant from carrying out works they are required to carry out during their lease term. A landlord may wish to appoint a surveyor to negotiate early, to reach a settlement and deter physical action from the tenant.

4. Legal advice is essential

In all instances, crucial to a successful dilapidations process, correct legal advice is essential. A solicitor will be able to advise their own parties and work with surveyors to ensure all documents and protocols are carried out properly and aid with lease scrutiny. If matters between surveyors breakdown, your solicitor should be able to advise on proceedings or alternative dispute resolution.

5. Ensure all accompanying documents are taken into account

Accompanying documents are critical to the meaning and interpretation of the lease. A schedule of condition can limit a tenant’s repair and redecoration liability, however, if the tenant makes significant alterations they may need to repair and redecorate as well as reinstate. Licences for alterations and wayleave agreements should be reviewed as part of the landlord / tenant assessment as they may change the requirements or conditions of reinstatement.

6. Landlords – Be diligent when carrying out dilapidations works

If a tenant has left their demise in disrepair and an agreement has not yet been reached, a landlord who has decided to carry out the dilapidations should undertake the works properly and be prepared to disclose all project information to the tenant. A chartered building surveyor can manage this process to make sure appropriate contractors are tendered to, variations are recorded and works are compliant as well as advising the landlord on the impact on dilapidations. Should a landlord choose not to do the works, the landlord should notify the tenant and be prepared to forego some if not all of the dilapidations claim.

7. The landlord’s intentions matter

As a tenant, it is reasonable to challenge the landlord of their intentions. In the current market, commercial factors will drive the landlord into making decisions that may negatively impact a dilapidations claim. Current market trends are for landlord to create cellularised Cat A+ products in good condition. This could negate a claim on the tenant. It remains important for tenants to budget for dilapidations, but they should also be patient as decisions by a landlord could greatly benefit a tenant. A tenant should also seek to recover rent deposits as soon as possible, as they are usually detached from the matter of dilapidations – even if a landlord insists the deposit is connected.

8. Take advice from experienced professionals

In our experience at HartDixon it is in both party’s interests to appoint surveyors early. The dilapidations process is a quantification of loss resulting from damages to the landlord caused by the tenants occupation of a premises. The more adversarial landlord and tenants can be with one another, the more likely it is for costs to exceed expectations. Qualified building surveyors should be able to reasonably quantify and negotiate a settlement which benefits both parties, e.g. a settlement for a tenant that is lower than the cost of works, and a settlement for a landlord who can do enough works to re-let the premises. We pride ourselves in our ability to reach settlements for our clients and in nearly all cases we have finalised agreements before the need for litigation.