Commercial leases and dilapidations – tenants’ repair obligations explained

If a commercial property isn’t in quite the shape it was at the start of a lease, what can landlords expect of their tenants, and what obligations do tenants actually have? Jane Senior, head of the Dispute Resolution practice at law firm Lodders, explains.

Tenants’ Repairing Obligations at the End of a Lease

What are Dilapidations?

In the context of commercial leases, dilapidations are items of disrepair. If repair is being considered at the end of a lease, they will more formally be known as ‘terminal dilapidations’.

Dilapidations cover repairing covenants, decorating covenants, and reinstatement requirements in relation to alterations carried out to the premises by the tenant.

Tenants’ Obligations

Tenants ought to consider very carefully the liability they are committing to when taking a lease of commercial premises. They should be aware that a covenant to keep premises in repair also means that a tenant must put the premises in repair.

This can be very onerous if the premises are in poor condition. In such circumstances, this may result in the tenant returning the premises to the landlord in a significantly better state than when the tenant initially took the premises subject to the lease.

Should a tenant fail to meet their obligations at the end of a lease, the landlord may be entitled to remedies such as damages, usually amounting to the full cost of repairing the premises to put them in the state of repair required under the lease.

This is likely to be the case if the landlord actually undertakes the work. However, if the landlord does not undertake the work, for example because it wishes to reconfigure the premises, the landlord’s claim to damages is likely to be limited to the amount by which the value of the landlord’s interest in the property is reduced as a result of the disrepair. This loss will often be less than the full cost of repairs the tenant was strictly liable for, so this is an important point for a tenant or their advisers to be aware of as it can significantly reduce the tenant’s liability.
Schedule of Condition – How to Avoid Dilapidations

One method by which dilapidations can be reduced is to rephrase the tenant’s obligation to repair the premises with reference to a ‘schedule of condition’. The schedule usually comprises photographs of the premises prior to the execution of the lease. As such, the tenant’s obligation to repair the premises is limited to the standard of the premises at the time the tenant took pout the lease as shown or stated in the schedule of condition.

This removes the onus on the tenant to return the premises to the landlord in a better condition than it was received in by the tenant and removes what many might consider to be an unfair liability.

“Tenant Beware”

The principal of the caveat “buyer beware” wholly applies to tenants who are considering taking a lease of commercial premises. Just as a purchaser of residential property would consider having a survey of a potential home, it is important that a tenant considers this step.

Think long term

The moral is that whilst it is tempting to focus on moving into the premises in order to get on with the running of the business, it is very worthwhile giving careful attention to longer term liabilities and how to minimise these, well before the lease is signed.

For more information or advice please contact Jane Senior, email: jane.senior@lodders.co.uk Tel: 01789 206149, visit: www.lodders.co.uk.

Lodders’ team of dispute resolution solicitors are experts in finding a speedy and effective solution to problems, working closely with clients to consider the available options and agree the best strategy to achieve the desired goal, keeping the need to protect reputations and relationships at the forefront. Jane Senior is a Partner at Lodders and leads its Dispute Resolution team. An accredited mediator, she is a specialist in property dispute resolution advising on all areas of law relating to property and land, she has substantial experience gained over nearly 30 years of advising companies (including FTSE 100 companies), partnerships and private clients in many areas.

Note: The opinions and views in this article are for information only and do not constitute legal advice.