Everything you need to know about dilapidations

Is it worth negotiating an agreement?

In some cases the landlord pushes for way more than what’s reasonable. Unless the money involved is minimal and not worth worrying about, the tenant should never just accept the landlord’s demands. Negotiation should always take place. The eventual settlement can sometimes be miles different from the initial claim.

What is Dilapidations Protocol?

What is and is not allowed is governed by the Dilapidations Protocol, which became law in 2012. The fundamental principles (seeking to be fair to both tenant and landlord) which underlie the Protocol are that:

1. Under the terms of his lease, a tenant has ongoing maintenance obligations, and, if in breach, his landlord is entitled to serve a Schedule of Dilapidations to return the property to the same condition as at the beginning of the lease.

2. The monetary cost of the work required by a landlord is capped. The maximum cost allowable is the difference in market value between the property in its present state and its hypothetical value today if it were exactly the same, in both condition and spec, as at the beginning of the lease.

Seeking professional advice

If negotiation is to take place, it is probably wise not to attempt by yourself. Unless you know the property market inside-out, you are unlikely to be fully conversant with re-instatement building costs, or with property values.

To be sure you are getting a fair deal, it’s best to engage a Chartered Building Surveyor who will be expert in technical matters of eligible re-instatement and the costs thereof. And as for property valuation, if the original lease was signed many years ago, the building quite probably needs an electrical upgrade, not to mention toilet and kitchen refurbs, to attract suitable tenants.

Twenty years ago, it would have been premium office accommodation; now it just looks pretty tired, and its valuation today should reflect that fact. A Chartered Valuation Surveyor’s expertise is probably needed here. If a building was valued 20 years ago at £900k, and at £950k today, the amount of Dilapidations payable must not exceed £50k.

Dilapidation examples

Let’s look at some more end of tenancy scenarios where the outgoing tenant is served a Schedule of Dilapidations:

• Landlord claims tenant has breached lease conditions and demands rectification, but it transpires that on expiry of the lease, or soon thereafter, he intends to demolish the building and re-develop the site. There is absolutely no point in doing work on a building which is about to be flattened. Dilapidations therefore not allowable.
• Landlord issues retail tenant with Schedule of Dilapidations for the whole building, but his plan is to convert the upper two floors to residential, with the ground floor remaining retail. Tenant’s surveyor argues that the reconfiguration of the upper two floors will be so extensive as to render Dilapidations a waste of time and money, so the only possible claim for work inside the building will be on the ground floor.
• Retail tenant is served with a Schedule of Dilapidations for the whole building. The upper floors have been sub-let, so the retailer in turn serves the tenant with a Dilapidations schedule. Negotiations take place, and the upshot is that the retailer, due to smart work by his surveyor, covers his Dilapidations bill with the Dilapidations received from the tenant.
• Warehouse tenant receives Schedule of Dilapidations from her landlord. (Warehouse premises are in short supply in the area.) Negotiations commence, the tenant vacates and a new tenant moves in immediately, paying a higher rent. The landlord has incurred no expenses in re-letting the warehouse and therefore agrees not to pursue her claim for Dilapidations.

Final thoughts

There are many more different “end of tenancy” scenarios. But the common thread is always that both landlord and tenant want to minimise costs. Employing Chartered Surveyors to effect a compromise between the two parties does cost extra money, but it ensures that a fair solution is reached, it stops speculative claims from landlords in their tracks, and it avoids the much higher costs that a court case would entail.

If you find yourselves with a Dilapidations claim lodged on your business, contact Marc Tate at tatesurveyingservices.co.uk to discuss how he can help.