At the end of a commercial property lease, a landlord will usually serve a Schedule of Dilapidations on the outgoing tenant which tells the tenant the repairs that landlord requires prior to the property being handed back. This is known as The Dilapidations Claim.
The claim will usually have been compiled by a building surveyor acting on behalf of the landlord, who will have visited the premises and examined them, making a note of defects to the building fabric and, if included within the leased demise, the external areas such as car parks and gardens.
Types of Dilapidations Survey
There are a number of different types of dilapidations survey, based on factors such as timing and intended purpose.
A Dilapidations Appraisal or Assessment can be instructed by either the landlord or the tenant. The main purpose is to provide an overview of the tenant’s potential liabilities at the time of inspection.
This type of survey is useful to tenants considering exiting a lease (at the end of the contracted term or before) and working out the potential expenditure. It also provides cost options for any works that might be required prior to surrendering the premises, so is very useful for budgeting purposes.
A landlord might instruct a dilapidations appraisal in circumstances where a new lease is being negotiated, rather than issuing a formal dilapidations claim, as a less aggressive approach than say a terminal schedule.
Also, a dilapidations appraisal or assessment is useful for potential purchasers of occupied commercial property and this type of survey will generally form part of a broader acquisition survey. The appraisal will provide the potential purchaser with a snapshot of the tenant’s liability and could well be factored into the purchase price.
The Interim Schedule of Dilapidations is a more detailed report and follows a prescribed format. They are usually prepared during the lease term and can be served at any time. There are ruls about when an interim schedule can be served and we will be happy to provide advice on this subject.
The Terminal Schedule of Dilapidations is most commonly used and is prepared and served towards the end of a commercial property lease, but can be served afterwards.
The schedule of dilapidations will include full details of all of the tenant’s breaches of covenants along with associated costs to remedy the same.
The costs included in the schedule may be prepared by the surveyor, using industry-standard tools, or more accurate costs could be obtained by a competitive tendering arrangement with a number of contractors.
The terminal schedule of dilapidations will also include for consequential losses, for example, the landlord’s surveyors and legal costs.
Since January 2012, claims for damages arising from terminal schedules of dilapidations are governed by a Dilapidations Protocol which is recognised by all surveyors and which also provides details to all parties on how the parties should conduct themselves towards achieving a settlement.
A Scott Schedule also forms part of a dilapidations claim and is designed to help the parties with their negotiations. Essentially, it is a recognised format, usually in spreadsheet form that lists all of the breaches and costs individually, allowing each party (usually surveyors on behalf of the landlord and the tenant) to add new columns and comments on an item by item basis.
If there is any dispute about any item, this will be clearly noted in the schedule to allow ease of reference and resolution.
In the event that a dilapidations claim ends up in litigation, the Scott Schedule provides a useful visual reference to how the negotiations have progressed to date.
Sometimes, a Repairs Notice, a less formal document that sets out the any repairs that the landlord believes the tenant is responsible for, is utilised instead of the above, but also, it is commonly used as a colloquial term to embrace all types of schedule that deals with repairing covenants.
How A Dilapidations Claim Works
The defects noted within the schedule of dilapidations will be referred to as “breaches,” since the claim will be based upon breaches to the original lease.
There are four main types of breach in a dilapidations claim:
- Repair – this will identify works required to bring a property (or item) back into repair, or the same condition as it was in prior to the tenant taking occupation
- Decoration – the lease will specify when decoration of the building needs to take place and identify items or areas that require decoration
- Reinstatement – if the tenant has made alterations to the premises, the lease will specify whether they have to be undone – or example, removal of a partition or mezzanine floor
- Statutory Compliance – Works necessary to meet current statute – for example, the provision of an asbestos register
In the case of some smaller dilapidation claims, the tenant might agree the schedule of dilapidations and will either complete the works, which are then examined to ensure they are of a suitable quality defined by the terms of the lease, or will offer a financial settlement in lieu of doing the works.
However, it is rarely advisable for a tenant to undertake dilapidations negotiations without engaging the services of a building surveyor, the cost of which could easily be recouped with savings to the original claim. Most building surveyors will charge a fee based on a percentage of the savings made in larger value settlements.
The building surveyor’s job, when acting on behalf of the tenant is to try to reduce the amount of the claim made by the landlord.
Again, the building will be thoroughly inspected in conjunction with the landlord’s claim, taking into account certain terms and clauses that appear in the lease.
If the tenant had taken the precaution of having a good quality schedule of condition carried out at the start of the lease, it’s likely that the dilapidations claim will be able to be substantially reduced, assuming that the property has been maintained properly throughout the duration of the lease.
The building surveyor will examine all areas of the dilapidations claim and will cost all of the repairs and agree a schedule of repair works with the tenant.
If time permits, the surveyor will put the work out to tender in order to determine the actual market price for the work. It is then up to the client and their surveyors to negotiate a settlement – which will either be a cash settlement or will involve reinstating the property to the condition stated in the lease.
With larger dilapidation claims, it is often better for the tenant to carry out the reinstatement works, since the work will have been tendered and in most cases, managed by the tenant’s building surveyor. This has the effect of reducing or negating the landlord’s claim and will almost certainly be cheaper than trying to do it yourself or paying the landlord in lieu of doing the works (which is what many landlords prefer).
However, the subject of dilapidations is extremely complex and is by far the largest cause of landlord and tenant disputes.
For this reason, whether you are a landlord or a tenant, you should choose your dilapidation surveyor very carefully, since a lot of time and money can be saved by using highly experienced and competent advisers.
With more than 30 years experience of dilapidations, we are true experts in this area and will work hard to maximise the result for either landlords or tenants.
We have many case studies to refer to and will of course, be very happy to provide references from existing clients if required.
If you would like a free initial appraisal of your own unique situation, please call us now on 0121 711 7110 without obligation.