Lees Solicitors - Dilapidations and the Commercial Tenant - Mike Read

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Dilapidations and the Commercial Tenant - Mike Read


Dilapidations and the Commercial Tenant - Mike Read

Dilapidations are a complex and sometimes contentious aspect of the relationship between a landlord and the tenant of commercial premises. But what are dilapidations? Dilapidations are essentially breaches of the covenant to repair contained in the lease of a building. A breach of the covenant to repair can take many forms and could relate to something as simple as a broken window or some minor rising damp but could equally concern something as serious and expensive as a damaged roof or a faulty electrical system.

Many commercial tenants fail to take the issue of dilapidations seriously and see the possibility of a dilapidations claim by their landlord as insignificant compared to say the rent, rates and service charges that will be payable throughout the term of the lease. However a liability to repair can have serious financial implications which should never be underestimated, and there are opportunities to avoid, limit or mitigate a dilapidations claim which should be considered, not only when a lease is entered into or when purchased from an existing lessee, but also when the lease itself comes to an end and the opportunity arises for a Landlord to serve a formal Schedule of Dilapidations.

Under the Landlord and Tenant Act 1927 it is provided that a landlord cannot recover damages which exceed the sum by which the value of his investment has been reduced by the tenants breach of covenant and that can mean, in certain circumstances, that the damages which a landlord might recover in respect of a breach of the covenant to repair could be less than the actual cost of the repair works, even though the fact of disrepair is not disputed by the tenant. The 1927 Act also provides that no damages can be recovered by a landlord in respect of a Schedule of Dilapidations served at the end of a lease term if there is an intention on the part of the landlord to either demolish or carry out such structural alterations to the premises as would make, in reality, the tenants breaches of the repair covenant irrelevant.

It is therefore most important for prospective tenants to consider the question of a potential dilapidations claim at the very outset, when actually negotiating the terms of a new lease. A tenant may therefore, particularly when negotiating a lease for a relatively short-term, insist that any repairing liability is restricted to leaving the building ‘in no worse condition than at the commencement of the lease' and if that provision can be agreed then it is important for the tenant to arrange for a Schedule of Condition to be prepared which will set out, and become the document or record, of the state and condition of the premises at the commencement of the lease term.

A Schedule of Condition might also be important if the tenant is taking an assignment of an existing lease because it is likely that the new tenant will become liable for any previous breaches of the covenant to repair, with potentially serious financial consequences. If a premium is being paid in respect of an existing lease then a Schedule of Condition will enable the new tenant acquiring the lease to renegotiate and possibly even obtain a reverse premium from the tenant selling the lease in order to compensate for the damages which the landlord might be entitled to at the end of the lease term following the preparation and service of a Schedule of Dilapidations.

It is important that anyone considering taking on a new commercial lease or acquiring an existing lease instructs a solicitor to check the provisions of the lease carefully so that the extent of the repairing covenant can be ascertained and then, if appropriate, a Chartered Surveyor should be instructed to prepare a Schedule of Condition. Following service of a Schedule of Dilapidations at the end of a lease a Surveyor might also be instructed to advise whether the scope of the Schedule of Dilapidations is accurate, whether the standard of repair required is justified and how and when any repairs should be conducted or whether a financial settlement should be negotiated in lieu of damages. The dilapidations claim at the end of the lease can take many tenants by surprise and whilst no tenant will want to incur any more cost than is necessary in either acquiring a new lease or taking over an existing lease, a professionally prepared Schedule of Condition should always be considered as money well spent.

If you would like more information concerning this particular issue or if you are a landlord or a tenant dealing with leasehold commercial property then the Business & Property Services Department of Lees Solicitors LLP will be pleased to advise on any aspect of the proposed lease or the negotiations relating to it.

Mike Read
Principal
Business & Property Services Department

 

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.

 


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