Is your tenant coming to the end of their commercial lease? Here's what you need to know about dilapidations

As a commercial lease approaches its end, the associated procedures, timelines, and legal protocols can feel overwhelming.

At Porter Dodson, our experienced Property Litigation team is well-versed in navigating the complexities involved in lease expirations. To help demystify the process, Abbey, a Solicitor Apprentice within the team, has put together a helpful overview addressing some of the most frequently asked questions we receive.

Key Terms

What are Dilapidations?

The term 'dilapidations', in the context of a commercial lease, tends to refer to items in a state of disrepair that are covered by specific covenants contained in the Lease.

What is a schedule of dilapidations?

A schedule of dilapidations is a document typically served by a landlord on their tenant either before the lease expiry or within 56 days of the tenancy's termination (in accordance with the Dilapidations Protocol). It outlines the works required due to the tenant's failure to meet its repairing, decorating and/or reinstatement obligations under the lease. The works required under the schedule will likely be accompanied by the monetary sums sought for each of the works.

What is a Quantified Demand?

A Quantified Demand (sometimes referred to as a Summary of Claim) groups the individual costs of works into categories such as: professional fees, dilapidations works, loss of rent, and supervision fees. The total cost of the claim is then found at the end of the document. This is the starting figure for negotiations with the tenant and/or their surveyor.

What is the Dilapidations Protocol?

The Dilapidations Protocol is the pre-action protocol for claims concerning the condition of a commercial property at the end of a tenancy. This protocol should be followed for any commercial tenancy as it outlines the conduct that the court would expect to be followed prior to any proceedings being commenced. This Protocol details the steps and timeframe for landlords and tenants to exchange relevant information.

The aims of the Dilapidations Protocol are as follows:

1. Encourage the exchange of information concerning the dispute;
2. Avoid litigation by reaching an agreement before Court proceedings are needed;
3. Where litigation cannot be avoided, adhering to the Protocol will allow for the
   efficient management of proceedings.

What is the difference between 'interim dilapidations' and 'terminal dilapidations'?

When a Property is in 'interim dilapidations', the Property is in a state of disrepair during the lease term and ongoing occupation. Whereas, a Property in 'terminal dilapidations' is a Property left in a state of disrepair following the termination of a lease once the tenant has vacated.

A Guide to Dilapidations - FAQs

What should a Landlord do if their property is in disrepair towards the end of a commercial lease?

1. Instruct a surveyor to establish the degree of disrepair and prepare a schedule
   of dilapidations and a Quantified Demand
   i. The surveyor will need to carry out an inspection of the Property in order
   to identify any breaches of the tenant's covenants.
   
   
2. Serve the schedule of dilapidations on the tenant. We would recommend
   seeking legal advice and representation when doing this to help ensure
   compliance with the protocol.
   
   
3. Negotiations with the tenant regarding disrepair and settlement. The majority of
   claims will be settled between the respective surveyors/solicitors without the
   need for Court proceedings.
   
   

How should a schedule of dilapidations and Quantified Demand be served?

Many leases contain specific service provisions within them detailing how certain documents must be served on the parties. Typically, a solicitor will be instructed to serve a schedule of dilapidations and Quantified Demand as the costs of service can often be recovered under the lease. We recommend you take independent legal advice if you are contemplating serving a schedule of dilapidations as to the service provisions and cost recovery implications.

How is a claim for damages negotiated with the tenant?

Under the Dilapidations Protocol, the tenant must have a reasonable amount of time to respond to the schedule once served. The Protocol allows for 56 days, but the lease may specify differently. The tenant may look to enter into negotiations or dispute the claim of damages. In this situation, a landlord may elect to enter into negotiations to agree a monetary sum as settlement of the claim of damages. Once agreed, a dilapidations settlement agreement should be drawn up to document the settlement; this is typically drafted by a solicitor.

What should a landlord be aware of during this process?

1. Timing of the inspection
   
   i. If the lease has not yet expired…
   
   a. Ensure that the lease reserves a right of entry for the landlord (or those authorised by the landlord, such as a surveyor). This right should be relied on to inspect the premises. If there are any conditions to this right, ensure that they are complied with to avoid a breach of the lease.
   
   ii. If the lease has expired…
   
   a. As the claim relates to the Property’s condition at lease end, an inspection should take place promptly after termination.
   
   b. If an inspection was carried out before lease expiry, a follow-up inspection should be done after termination to document any additional disrepair.
   
   
2. Relevant lease terms for service and timing
   
   i. Section 196 of the Law of Property Act 1925 governs the service of notices. These regulations may be incorporated into a commercial lease or the lease may provide for a different method for sufficient service. The lease should be reviewed to confirm this either way.
   
   ii. The lease may contain specific terms pertaining to when the schedule should be served. This may be longer or shorter than the Protocol sets out.
   
   
3. Where the schedule of dilapidations is served prior to lease expiry:
   
   i. This gives the opportunity for the tenant to elect to carry out the repair works themselves. This may or may not be welcome and should be considered prior to serving.
   
   ii. Additional disrepair may arise following the service of the schedule of dilapidations but prior to the lease expiry, meaning that a landlord would need to serve another schedule of dilapidations to account for this further disrepair.

Top Tip

The schedule of dilapidations will be heavily based on any schedule of condition undertaken at the commencement of the lease in respect of the condition of the Property at that time. It is therefore crucial for tenants to ensure that the schedule of condition at the outset is thorough and accurate, otherwise it can be difficult to disprove any allegations of disrepair at the expiry of the lease.

Can the costs involved for the preparation and service of the schedule of dilapidations and Quantified Demand be recovered?

Recovery of costs will depend on the specific lease terms of which we can advise you
on following a review of the Lease.

Specialist advice

Please note that advice in respect of schedules of dilapidations is case-specific, and therefore the above is strictly a guide as to an overview of the process and frequently asked questions that we receive. We recommend that you seek specialist legal advice if you have a question concerning a schedule of dilapidations. 

Porter Dodson's specialist Property Litigation team would be happy to assist with any such enquiries. Our team is well-versed in the procedures involved with the Dilapidations Protocol. If you have any questions please feel free to get in contact with Will Bartley on will.bartley@porterdodson.co.uk