UPDATED – Dilapidations in Commercial Property – LandlordZONE

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Dilapidation or disrepair often gives rise to landlord-tenant disputes. The only way to avoid this is to thoroughly document the condition of the property at the beginning and end of the lease.

Most commercial leases required the tenant to maintain the property and make any necessary repairs. Under what is known as a full repair and insurance (FRI) lease, this typically includes interior and non-structural repairs and, where the property is detached, may also include structural repairs.

If the tenant fails to maintain the property in its pre-rental condition, often referred to as “rentable condition,” the landlord can file a claim by issuing a Blight List to the tenant. This describes the work required to return the property to its pre-rental condition.

Key points

• Deterioration claims can be substantial, so tenants should fully understand their obligations before signing the lease.
• Tenants must have the building inspected for pre-existing defects before signing a lease and these must be incorporated into a condition schedule.
• Landlords should ensure that a schedule of conditions is drawn up at the outset and incorporated into the lease so that both parties can agree.
• Final dilapidation schedules are generally prepared by a licensed appraiser at the time the lease is terminated.

Dilapidations – Commercial Leases

Dilapidations is a term used to refer to the condition of a commercial property during the term of the lease or when the lease ends. means the same as disrepair and is linked to the repair and decoration obligations in the lease.

Dilapidations and schedules of dilapidations have serious financial implications for commercial (business) tenants and homeowners, so both should make sure they fully understand these implications and take steps early on to minimize misunderstandings before signing a contract. commercial lease.

Full repair lease and insurance

It is of particular relevance to landlords and tenants when the property has been leased under the terms of a standard commercial contract. Complete repair and insurance (FRI) rent where the tenant is responsible for repairs, both internal and external, sometimes including the structure of the building. The FRI lease is the norm rather than the exception in commercial property rentals, particularly with longer leases, eg more than 5 years.

In the case of multi-occupancy buildings, external and structural repairs, such as periodic painting and roof repairs, are generally performed by the owner and billed to the tenant through the annual service charge.

Tenants, in their rush to start trading, are often negligent when it comes to blight and accept leases, even short-term leases, that have full repair and redecoration obligations, and fail to record the current condition of the property.

Landlords and tenants should always ensure that commercial property leases include a conditions schedule, ideally supported by photographic evidence.

Initial building survey

Before assuming lease obligations, tenants should consider starting a construction survey carried out by a registered surveyor. Through this exercise, the surveyor will produce a schedule of conditions that will be incorporated into the lease document.

At the end of a lease, the tenant is almost always required to leave the property in a good state of repair and decoration, and this would in most cases be in better condition than it is at the end of the lease. .

Tenants often do not appreciate this obligation and do not take into account this additional cost. Even when they have recognized their obligations, their budget is often far from adequate.

Landlords and tenants with a blight claim should be aware that there are legal limits to the amount the landlord can claim from the tenant.

The provisions of the Landlords and Tenants Act of 1954 can lead to certain tactics being employed in the dilapidation process and the time to review these tactics is several months (at least 6 months) before the end of the lease.

Thinking ahead in this way means that necessary work can be planned or negotiations carried out that could significantly reduce the owner’s claim.

Schedules and Tactics

The landlord can deliver a List of Dilapidations on the lessee at different stages of the lease:

1. A schedule served during the fixed term of a lease is known as intermediate hours.
2. A schedule served within the last three years of the term is a terminal hours.
3. A schedule served at the end of a lease term or later is a final deterioration program.

A provisional or terminal program will specify both the disrepair alleged by the lessor and the remedial work that the lessor requires the lessee to perform. This gives tenants the opportunity to arrange for necessary repairs to be completed, rather than the landlord doing this and receiving a large bill.

The difference with a end time is that although it contains the same alleged breaches of the agreement and details of the required repair work, here the lessee will not have the option to carry out the work himself since his right of occupation has ceased.

With end time therefore, the homeowner’s remedy is claim damages which will cover the cost of repair works, AND loss of rent, service charges, fees, professional fees and VAT during any period during which the property is off the rental market.

The squandering schedule:

The Deterioration List is simply a list of all items due for repair, maintenance, and decoration that a landlord (or more likely their surveyor) has determined to have arisen under the terms of the lease and to be repair and maintenance obligations of the landlord. tenant.

The lessee is obligated to carry out the repair work listed in the schedule or to pay the lessor damages equal to the cost to the lessor of carrying out the work.

Wasted Schedules are often the cause of disputes between landlords and tenants, the result of which can mean legal action. Ultimately, a court will decide what is relevant and what is not on the Impairment List, but going to court adds significantly to the costs, usually for both parties. It is much better to avoid disputes and come to a mutual agreement.

Legal relief for the tenant

With an interim schedule, the lessee can get relief from confiscation proceedings (eviction) under the Leased Property Repair Act of 1938. This is provided the original term of the lease exceeds 7 years, of which 3 or more years must remain in force.

In some situations, the tenant may be entitled to relief. In the event of a final schedule and corresponding claim for damages, the tenant may be protected by Section 18(1) of the Landlord-Tenant Act 1927. This is on the condition that:

1. The landlord cannot recover damages in excess of an amount by which the value of the landlord’s investment is reduced by the tenant’s breach of the agreement.
2. Where a landlord intends to demolish the building or make structural alterations in such a way that the tenant’s breach of the repair agreement becomes irrelevant, then if the tenant can absolutely prove its case, the landlord will not be able to recover the damages.

How can the Tenant Limit his Liability for Dilapidation?

There are some practical steps tenants can take to limit liability for deterioration. For example, in initial negotiations for a new lease, particularly with short-term leases, the tenant may insist that the responsibility to repair be limited to leaving the building in no worse condition than it was in at the start of the lease. lease, as an alternative to accepting full responsibility.

The word fix in a lease sometimes includes a responsibility to renew, for example, where a roof was so dilapidated that renovation was the only practical option. Therefore, to limit any liability for repair, the tenant must instruct a Chartered Building Surveyor to submit a Condition List, recording the condition of the décor and any pre-existing items in disrepair.

These precautions are also very relevant on assignment where a new tenant assumes the obligations of an existing tenant. In this case, the lessee must also carefully consider alterations and deterioration when considering the purchase (assignment) of the lease from another lessee.

If breaches and alterations are identified prior to purchase of the lease, the lessee may be in a position to negotiate a reverse premium of the outgoing lessee.

Professional help in dilapidation matters

Owners and tenants will almost certainly need professional help, ideally from a licensed surveyor when dealing with these matters, especially if there is likely to be a dispute.

In the case of the landlord, the hours must be accurate and suitable for legal scrutiny.

In the case of the lessee, the acting advisor must determine:

1. Is the deterioration schedule accurate?

2. Is the standard of repair required by the schedule justified?

3. Are there appropriate legal exemptions that may apply?

4. Should the lessee arrange for repairs and, if so, in what terms, or is it preferable to pay for damages?

Prior action protocol

The Rules of Civil Procedure – Prior action protocol – covers all civil disputes, including impairment claims and covers pre-action behavior in cases not covered by a specific protocol.

The Prior Action Protocol for Claims for Damages Relating to the Physical Condition of Commercial Property Upon Termination of a Lease (the ‘Dilapidation Protocol’