Dilapidations explained: who pays when a commercial lease ends?

Dilapidations are frequently one of the most contentious issues arising at the end of a commercial lease. It is not uncommon for tenants to underestimate the extent of their obligations during the term, only to face difficult discussions with landlords once lease expiry approaches.

Understanding how dilapidations work can help both parties manage expectations, minimise disputes, and protect their financial position.

What are dilapidations?

Dilapidations are claims arising from a tenant’s failure to comply with obligations contained within a lease. Most commonly, they relate to repairing, redecorating, or reinstatement obligations.

A landlord may seek compensation where the condition of the premises falls below the standard required under the lease.

Why do dilapidations disputes arise?

A common source of disagreement is the difference between what tenants believe they are required to do and what the lease actually requires. For example, a tenant may assume that returning premises in broadly reasonable condition is sufficient; however, the lease may require comprehensive repairs, redecoration, or removal of alterations before expiry.

In practice, disputes often arise because the parties have very different expectations about the standard to which the premises should be returned. The answer will usually be found in the lease itself rather than in what either party considers reasonable.

The importance of repair obligations

Repair covenants largely determine the extent of a tenant’s liability. Some leases require premises to be kept in good repair throughout the term, while others impose more limited obligations. Where a schedule of condition was agreed at the outset, this may significantly affect the scope of any claim.

For example, a tenant occupying older premises may assume it is only required to maintain the property’s existing condition. Depending on the wording of the lease, however, there may be an obligation to remedy disrepair that existed before occupation began.

Understanding these provisions from the beginning of the lease can often prevent disputes later.

In many cases, the groundwork for a dilapidations dispute is laid years before lease expiry, when repair obligations are not fully considered at the outset of the term.

Reinstatement of alterations

Many businesses carry out fit-out works during their occupation. These alterations can range from partition walls and specialist equipment through to extensive refurbishment projects.

Leases frequently allow landlords to require alterations to be removed at the end of the term. Businesses are sometimes surprised to discover that the cost of removing alterations exceeds the cost of carrying out the works in the first place. The financial impact can be particularly significant where specialist fit-outs have been installed.

How claims are assessed

Towards the end of the lease, landlords commonly instruct surveyors to inspect the property and identify breaches.

The resulting schedule of dilapidations sets out alleged defects and the estimated cost of remedial works. However, the schedule is usually the starting point for negotiation rather than the final amount payable.

A schedule of dilapidations should not automatically be treated as the amount that will ultimately be paid. The parties will often have differing views on both the existence of breaches and the cost of remedying them.

Surveyors involved in dilapidations negotiations will often find that the largest disagreements arise not from major structural issues, but from differing interpretations of relatively routine lease obligations.

Are landlords entitled to recover everything?

Not necessarily. A landlord’s recovery may be limited where the claimed losses exceed the actual reduction in value suffered by the property. In addition, proposed redevelopment or demolition plans can sometimes affect the scope of recoverable damages.

As is often the case with commercial property disputes, the outcome will depend heavily on the facts, the lease wording, and the landlord’s intentions for the property once it is returned.

Reducing the risk of disputes

By the time a lease is close to expiry, some options may already have been lost. Tenants who review their obligations early are generally in a better position to budget, carry out works where appropriate, and avoid the pressure of resolving issues at the last minute.

Landlords similarly benefit from planning early and ensuring any claim is properly evidenced.

Key takeaway

Dilapidations are often one of the most significant financial issues arising at the end of a commercial lease. By understanding repair obligations, reinstatement requirements, and potential exposure from the outset, both landlords and tenants can reduce the likelihood of costly disputes.

For further advice on dilapidations claims and commercial lease disputes, please contact Property Litigation partner Thomas Djan-Krofa.