Pitfalls or Windfalls: dilapidations can go either way

Many landlords and tenants will forget to plan adequately for dilapidations, dismissing the process as just a haggle over costs at the point of lease expiry. But, in fact, dilapidations are far more complex and, if not handled properly in advance, can lead to complicated disputes that could otherwise be avoided.

Put simply, dilapidations are unexpected exit costs prior to lease expiry, whereby a tenant must return the property to its pre-let state. For example, if the tenant has put in a kitchen where there was not one before, it must be removed. And, if there has been any damage to the property, this must be repaired.

To what extent is a property in disrepair?

A lease on a second-hand space typically comes with a schedule of condition. A poor schedule, containing low-quality images, or poor annotations, will make it difficult for both landlord and tenant to prove what repairs need to be done — making the schedule somewhat ineffective.

When it comes to dilapidations, a common mistake is for key clauses in the lease to inadequately reference the schedule of condition. Not only should the schedule be referenced in the repairs and yield up clauses, but also the rent review and decorating clauses.

Examples of properly referenced leases are hard to come by, but we recently struck gold when we negotiated dilapidations for the tenant of a modern building in Gracechurch Street EC3. The lease contained unambiguous descriptions of general condition, and photos annotated and with a supporting plan. To our delight, the lease even included the ultimate mitigating words, “…no better condition than…” — a phrase we would like to see more often!

A quality schedule of condition and well-referenced lease will leave little room for ambiguity during dilapidations negotiations, ensuring the process is wrapped up as swiftly as possible.

Preparing for dilapidations

Whether you are a landlord or a tenant, it is important to be prepared for dilapidations. Indeed a tenant may seek an estimate of potential dilapidations liabilities three to four years before the end of the lease, for tax or balance sheet purposes. Generally, dilapidations advice should be sought at least six months before the end of the lease.

“…advice should be sought at least six months before the end of the lease”

For the landlord, proper preparation can reduce the risk of the dilapidations process running beyond the lease expiry date, extending the void prior to reletting. For the tenant, where a landlord’s costs for the scope of works is much higher than that of the tenant’s contractor, then sufficient time must be factored in before the expiry date deadline for the tenant to vacate and carry out the works themselves, if this is their most cost-effective solution.

Can premises be left dilapidated?

Section 18 of the 1927 Landlord and Tenant Act puts a cap on the cost of dilapidations repairs. Using this clause, a seasoned dilapidations surveyor with good negotiating skills and local market knowledge may be able to extinguish a dilapidations claim.

In essence, dilapidations is a landlord’s claim for damages: a dilapidations surveyor can deploy a Section 18 valuation to illustrate this, highlighting the relevance or magnitude of a landlord’s legitimate claim.

For example, Allsop recently acted for Rhinegold Publishing Limited, a tenant in Shaftesbury Avenue, London, which received a dilapidations claim from the landlord for £180,000. Rhinegold initially instructed a building surveyor, who negotiated the claim down by half, by the usual methods and recommended settlement. At this point, Allsop was approached by Rhinegold to provide a second opinion: we insisted on a Section 18 valuation and demonstrated that the hypothetical landlord would not repair and re-let the building. Instead, they would probably change the building’s use to residential, in which case, any repairs would only be ripped out again. In the end, we negotiated the claim down to just £22,000.

The key to successful dilapidations negotiations

Remember: dilapidations negotiations can be complex, so be sure to leave plenty of time to iron out the issues and ensure the schedule of condition is well-referenced in the lease.

The key to successful negotiations is seeking advice from an industry specialist with both knowledge of the 1927 Landlord and Tenant Act and a finger on the pulse of the property market — especially for Section 18.

Allsop is more than happy to navigate dilapidations and bring our negotiation skills, our grasp of case law legislation, and market intelligence to help you dodge the common dilapidations pitfalls.