Dilapidations: Top Legal Expert Shares Advice On How To Best Handle Disputes
A legal expert has shared his advice on how to best deal with dilapidations disputes – which are becoming an increasing issue for landlords and tenants in the commercial property sector.
Oliver Maxwell, a Senior Associate Solicitor at law firm Smith Partnership specialising exclusively in property-based disputes, said a “proactive approach” is key to ensuring disputes don’t become drawn out and expensive.
“Dilapidations disputes are becoming increasingly common,” Oliver said. “The law in this area is complex, and can create real problems for both landlords and tenants, particularly when commercial leases come to an end. Having a strategy in place, and getting quality advice at an early stage is essential.
“A property is probably the most valuable asset you’ll ever own, and so if you let it out to a commercial tenant, you need to make sure that they look after it to avoid it depreciating in value.
“Ideally dilapidations should be addressed and monitored throughout the course of the lease, and not just dealt with at the end of the term. Most modern leases will contain mechanisms to address breaches of repairing covenants throughout the term to ensure that the property can be kept in an appropriate state of repair and condition. Where these mechanisms are utilised, it can reduce the likelihood of a dispute arising when the lease comes to an end.
“When it comes to settlements, a proactive approach is important. This can allow the process to be more cost-effective, rather than completing extensive repairs.”
Here, Oliver explains what dilapidations are, how disputes arise and the best tactics for dealing with them.
What are dilapidations?
The term “dilapidations” refers to items of disrepair to commercial property caused by a breach of a tenant’s repairing covenants. In other words, where a tenant fails to maintain or repair the property in accordance with their lease obligations, dilapidations can arise.
Before any repair obligation can “bite”, the property (or some part of it) must be in disrepair. This means that the physical condition of the item in question must have deteriorated in some way.
The principal source of a tenant’s repairing obligations will be their lease, but they can also be found in documents that are supplemental to the lease, such as licences to alter or deeds of variation. Some tenants will want to record the condition of the property at the start of their lease, and seek to limit their repairing obligations by reference to that schedule.
Why do dilapidations disputes happen?
When a tenant fails to maintain or repair the property in accordance with their lease obligations, this can cause damage to the landlord’s reversionary interest. Put more simply, where a tenant fails to maintain or repair the landlord’s property, the value of the property can decrease.
During the term of the lease, the landlord generally has more options available. They can sue for damages, may be able to forfeit (that is, bring to an end early) the lease, or exercise what are known as “step in rights” (if the lease allows it) where they can carry out the work themselves and re-claim the costs from the tenant as a debt. These are known as “interim” dilapidations remedies. At term end, the landlord’s options are generally limited to damages only. These are typically referred to as “terminal” dilapidations claims.
Dilapidations disputes arise where the parties disagree about whether the tenant has complied with their repairing obligations under the lease, and to what extent. The starting point will almost always be the preparation and service of a Schedule of Dilapidations, setting out a list of allegations of breach with the costs of remedying them.
There are many reasons that disputes arise, but some of the most common are:-
- Disputes as to the scope of the works: Each lease will be different, and disagreements can arise as to whether (and to what extent) an obligation to repair applies to any given area of a property and the standard of repair that is required. There may also be obligations upon a tenant to reinstate alterations if any licence to alter and/or the lease dictates this. There may also be a requirement for the landlord to serve a notice to reinstate before this obligation is triggered. That notice may or may not be time-limited.
- Disputes as to the cost of the works: Even where the scope of the works is agreed, disputes can still arise as to what the true cost of the works will be. Very often, landlords will want to present their “best case” in any Schedule of Dilapidations. In response, the tenant may (quite legitimately) argue that the works the landlord is requiring are excessive and will result in a windfall.
- Lease interpretation: Following on from the above, words in commercial leases are often very deliberate and have very specific meanings. Sometimes, the obligations upon a tenant (depending on their wording) can mean that they are required to return the property in a “better” state of condition than when they were leased to them.
- Statutory safeguards: There are several pieces of law that can limit the landlord’s interim remedies and operate to reduce (or, in some cases, entirely extinguish) a landlord’s terminal claim for damages.
Oliver added: “Each lease will vary, but a tenant might have an obligation to repair all of the structure or it could be limited to repairing the inside of the property only. They might have to decorate it. They might have to do things to it in order to put it in a more tenantable condition than when they took the lease on, depending on what the lease covenant says. The devil here is in the detail, and what the parties’ intentions were at the time that the lease was entered into.”
Advice on handling dilapidations disputes
“A solid understanding of the repairing obligations contained in a commercial lease is essential. Both landlords and tenants should be aware of what the obligations mean before a lease is entered into. If you are unsure about any of the clauses, ask your legal advisor.
If you are a tenant, consider trying to limit your obligations by reference to a schedule of condition and/or consider setting up a contingency fund throughout the lease term, which can be used to cover any likely repairs when it comes to terminating the lease.
Parties to a commercial lease should be considering the position on dilapidations both during and in contemplation of the end of the term. Plan ahead, and take advice in contemplation of key events happening. Regular inspections might help both parties to understand where they currently are and what (if anything) might be required at lease end. Do not ignore a Schedule of Dilapidations if it is served on you. Depending on whether it is received during or at the end of the term, you may have different options and safeguards available to you.”
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