Kate Hallifax, Real Estate Disputes Partner at HCR Law, shares what retailers need to know about dilapidations if their lease is coming to an end.

 

When a lease is coming to an end, or shortly thereafter, a tenant will almost always find itself on the receiving end of a dilapidations claim. Whilst these claims can be significant and are almost always unavoidable, a well-advised tenant will rarely pay what a landlord initially demands.

Dilapidations claims can be particularly nuanced. In this article, we have sought to demystify them and set out the typical process for terminal dilapidations claims, together with some arguments that can be used to defend them.

What are Dilapidations Claims?

A dilapidations claim (commonly referred to as “dilapidations”) is a claim by a landlord against a tenant for failing to return the premises in the physical condition required by the lease.

Dilapidations Protocol

Dilapidations claims are subject to a protocol (“the Dilapidations Protocol”), which sets out the steps the parties need to take and associated timescales.

A claim commences by a landlord serving a Schedule of Dilapidations (“the Schedule”) on a tenant, which sets out the alleged breaches relating to the physical condition of the premises on a line-by-line basis. A tenant needs to respond to the Schedule within a reasonable time, which is generally considered to be 56 days, so tenants should act quickly when a Schedule is received.

The Protocol encourages the parties to narrow the issues in dispute with a view to reaching settlement. A tenant should appoint a specialist dilapidations surveyor to assist with this process and lead on the negotiations, together with a solicitor who can advise on the interpretation of the lease and address any legal queries the surveyor may have. Whilst this comes with an associated cost, more often than not, tenants save more in the long run.

Tenant’s Liability

Understanding what you are physically responsible for repairing and what that standard of repair is is the first step to navigating a dilapidations claim.

• Physical Extent

Tenants should carefully consider the physical extent of their premises in the lease, as they are only obligated to repair what they are physically responsible for.

• Standard of Repair

Terminology in a lease can have a different meaning in law. For example – an obligation to keep a premises in repair does not limit the standard of repair to what it was at the start of the lease, it includes (as a matter of law) an obligation to put it into repair.

If a tenant does want to limit its liability to the condition of the premises at the start of a lease, it should tie its liability to a Schedule of Condition, which is a document recording the condition of the premises at the start of the lease and can reduce a dilapidations liability. This is done before the lease is entered into and demonstrates the importance of considering dilapidations not only when a lease is ending, but before it is entered into.

Even if there is no Schedule of Condition, the standard of repair a tenant needs to adhere to is (in addition to the lease) dictated by the age, nature and locality of the premises. For example, as a retailer, if you occupy an old building on a high street, you are unlikely to have to hand this back in the same standard of repair compared with a new unit in a shopping centre.

Defending a Claim

Once the physical extent and standard of the repair obligation have been established, tenants should consider whether there are any grounds on which they can seek to minimise their liability further.

Diminution in Value

• If the premises is not in the required standard of repair but that has not caused the value of the landlord’s premises to be reduced, this can act as a cap on the figure the landlord is claiming in the Schedule of Dilapidations. A specialist valuer needs to be appointed to assess this, which can be invaluable.

Supersession

• Consider the landlord’s future plans for the premises. If certain aspects of the dilapidations claim will be superseded by works carried out at the end of the lease (or shortly after), this could impact the landlord’s ability to claim for these items.

Genuine Loss

• Question the landlord’s intentions. Does it genuinely intend to carry out the works? If, for example, a landlord is claiming the cost for reinstating changing rooms but the next tenant will be keeping these “as is” then this can be used as a point in negotiations.

Consulting professionals at an early stage can be invaluable in navigating these arguments and presenting the best defence.

Other

A tenant can seldom avoid a dilapidations claim, it is normally a question of “how much” a tenant should pay rather than “should it” pay, but understanding the standard of repair from the outset can help minimise it.

Forewarned is forearmed. If, as a tenant, you are particularly concerned about your dilapidations liability, you can seek input from a surveyor at an early stage (even before a Schedule of Dilapidations is received). There may be some “easy wins” you can carry out yourself before the lease ends.

Dilapidations claims are fact-specific, no premises are the same. Do not assume that what you needed to do for one premises is the same for another.