- What are dilapidations?
- How landlords can be proactive and avoid disputes
- The common pitfalls when handling dilapidations
- The importance of a lease
- Formal reports and a schedule of condition
- What tenants need to be aware of
- Dealing with dilapidations on a commercial lease
- Can tenants alter a commercial property?
- What happens at the end of a commercial lease?
- Some common areas of dispute in a commercial lease
Leases typically include a clause for the tenant which states that they must keep the property in good repair, but the extent of those obligations can often depend on the size of the property, the location and the rent payable.
The cost of repairing a property can be significant for tenants, and depending on the extent of the damage found, the liability may not end when the contract comes to a close, such as when a Schedule of Dilapidation is prepared. It’s a complex area that can be rife with challenges.
Here’s how landlords and tenants alike can overcome these hurdles when renting properties.
What are dilapidations?
Dilapidations refers to the disrepair of a property, and it covers both the maintenance and repair needed during and at the end of a lease.
In tenanted properties, disrepairs that tenants are obligated to put right and pay for at the time they leave the property they have been leasing can take many forms. Generally speaking, common examples, include:
- leaking roofs
- broken windows
- scratched walls or scuppered floors, and
- burns or scald marks that are impossible to remove.
The disrepairs enforced under the term ‘dilapidations’ might not extend to anything else beyond the plaster on structural walls, or perhaps to floorboards and ceilings, but never really to any more overriding supporting structures within the property.
At the time a tenant comes to vacate their rented property or in the weeks leading up to this date, it is normal for a landlord to serve notice to tenants requesting them to carry out any due repairs or reinstatement to damaged interiors. In formal terms, such a list of works is known as a ‘Schedule of Dilapidations’.
Depending on the lease, however, some cases can be argued but disputes surrounding what disrepair are classed as dilapidations normally come about in multi-tenanted buildings. In larger tenanted properties, there will be service charge arrangements in place to manage larger disrepairs that affect any of the building’s major exterior structures.
In addition, the state of the property market actually dictates the approach property owners take to dilapidations. If there’s a downturn, an oversupply of properties can result in occupiers negotiating higher incentives and lower rents, as well as more flexible lease terms, but when the property market is more buoyant, supply may be more limited and landlords will be in a stronger position to negotiate better terms.
How landlords can be proactive and avoid disputes
Leases can be complex and if both landlords and tenants don’t adhere to the stipulations stated in the Schedule of Dilapidations or contract, they can become even more challenging. The most important point is that a property is worth protecting from damage. This is why putting in place those contracts and completing a formal reference at the start of any tenancy is vital to avoid signing up a tenant who might be liable to fall into rent arrears or damage your property.
Taking a proactive approach can be incredibly effective in minimising conflicts when a lease comes to an end, and ensuring that both parties are protected against costly bills and repairs. Agreeing a planned maintenance programme at the start of the lease can help landlords in developing their asset and minimising potential void periods at the end of the lease.
Landlords can also serve an interim Schedule of Dilapidations at any point, which is why regular inspections can be so useful in identifying issues early on so that tenants can take responsibility while still occupying the property, rather than leaving everything until the end of the lease.
Another way to avoid conflict is by considering the market requirements that may supersede some or all of the tenant’s repair obligations. Tenant’s often dispute breaches of covenant identified by surveyors and what is considered an appropriate remedy. Since business demands constantly change, it’s natural that a commercial space that’s been occupied for many years will need to be updated to meet future tenant needs.
The common pitfalls when handling dilapidations
One of the major pitfalls property owners make when dealing with a rental property is leaving it too late to get clear on what’s required. According to Commercial Dilapidations Surveyor specialists, dilapidations should be considered at an early stage so that a strategic approach can be developed, and any strengths and weaknesses can be identified and managed. Neglecting this aspect of the lease could land you in expensive trouble later on.
Another challenge is not understanding the landlord’s intentions when the lease comes to an end, which can result in an unrealistic schedule and delays to the process. It’s far more efficient to verify the intentions for the property early on, so that a schedule can be served that’s in keeping with these demands.
The importance of a lease
Landlords are far more likely to have success handling dilapidations if the lease is worded properly, just as is the case with any legal document. If there are ambiguities, it can cause serious problems and delays when it comes to resolving any conflicts that might arise with tenants. The lease should be the starting point for any rental property, but pay attention to the wording – there should be no room for interpretation, but it should also leave some compromise in the favour of the tenant.
Your tenant may request a Schedule of Condition to be added to the contract, so the terms won’t require them to leave the property in a better condition than when they first started their lease. It’s also important to allow for reasonable wear and tear, but the wording should be clear as to what this is considered to be, and what is regarded as damage.
Formal reports and a schedule of condition
For a tenant, however, the recommended thing to do is to make sure that there is a formal inventory and Schedule of Condition. This will also protect the landlord and, at the time of any adjudication, the landlord might have to show evidence that the tenant is responsible for the incurred damage and therefore liable for any works, repairs or remedies needed to either be claimed for or paid for.
A tenant might attempt to argue that their particular property was already in a bad condition and in disrepair at the time of letting, and that the amount of deposit left to the landlord should be sufficient to pay for any damage incurred, but in reality, this may not be the case. Each party must have a formal understanding in place to know exactly what they are claiming and be able to prove something was damaged after the tenancy ended, it was the fault of the tenant, and that any compensation claim is fair and reasonable.
In which case, the landlord needs to show proof of an inventory or schedule of condition that clearly states that the property and items were in a good condition at the start of the tenancy. These are normally covered by official ‘check-out’ reports that are undertaken at the end of tenancies.
What tenants need to be aware of
Tenants need to be sure that all lease covenants are checked carefully before entering into any lease, and that they are clear on what is meant by each aspect of the terms. If your lease states to ‘keep in repair’, this means that you have to first put the property in repair and that can be an expensive task to undertake. When it comes to negotiations around dilapidations, the condition of the property before the lease commences is largely irrelevant unless it’s agreed upon before the lease starts, which is why a Schedule of Condition should be sought out as part of the lease to protect both parties.
Seeking out dilapidation advice prior to signing on for a lease is also good advice, because the financial implications of dilapidations can be huge if you don’t have a specialist working with you. Similarly, a building survey can minimise risks and will serve as assistance in lease negotiations. Tenants would be wise to also commission a Dilapidations Liability Assessment to give them an idea of the costs that are likely to be incurred, so they can budget ahead of time or carry out the necessary works while they’re still renting the property.
Dealing with dilapidations on a commercial lease
As dilapidations are a complex area when it comes to property leasing, getting it right from the start is essential to avoid costly disputes when the lease comes to an end. If the drafted lease is done badly, then tenants and landlords can be left with a nasty and expensive surprise in the future or spend a great deal of time and effort on consuming legal wrangles. Most importantly, tenants and landlords or residential and commercial properties would be advised to stay well informed on all that is involved and the various issues to consider.
For a commercial lease, the budget is vital and will allow for expenses such as rent, business rates and utilities. But one cost that is neglected is the potential for dilapidations to be a problem when the lease in question comes to an end. It is better to account and be aware of these expenses earlier on so you aren’t in for that shock when you least expect it.
There are several factors which enter the equation of estimating liability for repairs, from the age and size of the property, to the length of the lease, who is responsible for different aspects of the property – for example, is the tenant only responsible for the interiors and who handles redecoration at the end of the lease? – and what materials the building is constructed from.
Can tenants alter a commercial property?
Any work that a tenant carries out on a property to alter it needs to be allowed by the stipulations in their lease. Some leases may require the tenant to ask for permission from the landlord prior to starting the tenancy while some might request that even upon approval, the property will have to be put back to its original state once the lease reaches its end. It might be one thing that the tenant believes they are ‘improving’ the property with any additional work or renovation, but according to the legal rules of dilapidations, the landlord will rightfully be able argue that such ‘improvements’ actually constitute as damage, although this is rare!
What happens at the end of a commercial lease?
As your commercial lease is still a contract, when it comes to the end of a lease, both parties will have their own set of obligations to follow in relation to whatever was previously stated in that contract. This is when the lease typically permits the landlord to serve the Schedule of Dilapidations. This schedule is proffered as the end of the lease approaches and, for commercial landlords, it is normally compiled by a professional surveyor.
The payment options will then vary once the schedule has been created. The tenant will have an option to do any works required at their expense, or alternatively, a landlord will undertake and organise any works and pass the cost onto their tenant
Some common areas of dispute in a commercial lease
There are several common areas of dispute between commercial landlords and tenants, such as:
- if the areas identified by the landlord’s surveyor is a breach of the lease
- what actually constitutes an appropriate repair
- defining the areas to be cleaned, updated or repaired
- can any of the tenant’s changes be put back to the state they were at the start of the tenancy
- How much value has been deemed to be lost through it being in disrepair
- any estimates for the repair or restorative works required
- If the case is argued and a tenant has the right to exercise a break clause and if they did comply with the contracts..
When it comes to damage and repairs, getting a headstart to minimise the impact it can have, both financially and in terms of the time taken to rectify issues, can help enormously. This means getting clear on the terms of the lease, having support from specialists and doing all you can while the tenant is in occupancy to minimise the risk of surprises when the lease comes to an end.