Lily Meyer, a Solicitor in our Commercial Property team looks at how to avoid an expensive dilapidation claim when renting a property with a few easy steps.
Almost all commercial leases contain an obligation for a tenant to return the property in good condition at the end of the term, even if the property was in disrepair before the tenant took possession.
The damages or defects to a property are known as ‘dilapidations’. A landlord can make a dilapidations claim against the tenant either during or at the end of the lease term. This is often a nasty surprise for a tenant, who, until the end of their lease, probably gave little thought to the repairing obligations under the lease.
A dilapidations claim sets out the repairs required to the property. Usually the tenant can then either rectify the damage themselves or, if not, the landlord will make the repairs and re-charge the tenant for their costs (which can include loss of rent). As a result, a dilapidations claim can become one of the greatest expenses in taking on a commercial property. It is, therefore, important for both tenants and landlords to have potential dilapidations at the forefront of their minds when considering entering into a new lease, even if the end of the term seems a long way away.
Some key points to consider are:
- Ensure repair obligations are considered when negotiating the lease terms – The repairing covenants in a lease are particularly important when considering dilapidations. Whether the tenant is responsible for structural repairs, or simply just interior parts, will have a significant impact on the tenant’s repair bill at the end of the term. Depending on the nature and age of the property, a tenant may want to consider excluding liability for latent and inherent defects from its repairing obligations.
- Prepare a schedule of condition – This is a description of the property supported by photographs. This would usually be prepared by an independent surveyor and be attached to the lease at the time the lease is entered into. A schedule of condition evidences the condition of the property at the beginning of the term. It limits a tenant’s repairing liability as the lease will state that, at the end of the term, the tenant has to make the property match the condition shown in the photographs. Whilst it can help limit the repairing liability, it is always possible that works done during the term will mean that the tenant has put the property into better condition than it needed to. It is important to remember that the schedule may not show up structural defects or issues below the surface. A thorough survey of the property before the lease is entered should be carried out to highlight any such issues.
- Keep on top of the repairs – Many commercial leases contain decoration covenants that oblige a tenant to decorate the interior of the property every 3 years and the exterior every 5 years. If these terms have not been complied with throughout the term, more work will be required at the end of the term and the costs could be significant.
- Think before making alterations – As well as obtaining the landlord’s consent to any alterations (which should be formally documented in a licence to alter), tenants making alterations should consider whether these will need to be reinstated at the end of the term. This could be expensive and time consuming. Tenants should ensure they have made allowances for money and time to be set aside to carry out any reinstatement works before the end of the term.
Dilapidations issues are complex and can result in expensive claims. To discuss this further or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441. For more information on Commercial Property please click here.