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DILAPIDATIONS AT END OF LEASE TERM

Thursday, 6th February 2020 | by: David Whitehouse

A couple of weeks ago I looked at procedures around preparing a schedule of dilapidations during the lease term but today I wanted to focus on how dilapidations are handled at the end of the lease.

Landlords are only able to claim for damages from a tenant at the end of a lease term if the tenant has not complied with the lease obligations and covenants in terms of repairs, redecorations or reinstatement.

Assessing damages is a complex matter although normally damages are assessed to compensate the landlord for its loss.  The amount recoverable by a landlord will normally be the lower of either the cost of the works, that is to say the cost that would be required to remedy the tenant’s breaches, and the diminution in value of the landlord’s reversionary interest (the value of the landlord’s interest at the point it reverts back to them) in the property as a consequence of the tenant’s breaches.

A landlord therefore normally makes a claim prior to the end of a lease or shortly after the end of a lease for what thet believe to be their likely loss in the form of a Quantified Demand.  This summarises the losses or costs the landlord expects to incur and are normally detailed on a Terminal Schedule of Dilapidations, which sets out each breach of the lease covenants and the landlord’s expected remedy in terms of the extent of remedial works that are required and the estimated costs for these works.

A landlord’s claim would also include the cost of preparing the Schedule of Dilapidations, any legal fees in connection with the service of the Schedule of Dilapidations and Quantified Demand, the cost of arranging remedial works and administration of the work, any costs associated with compliance with the CDM Regulations in undertaking the works (if applicable), any statutory fees and allowance for VAT that the landlord is unable to recover.

A surveyor preparing a Terminal Schedule of Dilapidations would also be expected to take into account whether or not the landlord is intending to redevelop the property or undertake any alterations to the property.  This is because the landlord can only claim for the amount lost as a consequence of the tenant’s breaches and not for any items which have been “superseded”.

If, as is normally the case, the landlord intends to re-let the property and go through the normal marketing process, the landlord would be expected to be able to claim for the cost of works which would be required to put the property into the condition the tenant should have kept the property in, or left the property at the end of the lease term, thereby complying with the lease covenants.

Carter Fielding act for a number of landlords and are regularly instructed to prepare Terminal Schedules of Dilapidations for properties.  We would always advise a landlord to have a Terminal Schedule of Dilapidations prepared prior to the end of a lease, preferably four to six months before the end of the lease so the tenant is aware of the landlord’s expectations and is given the opportunity of undertaking the works prior to the termination of the lease.

However, often the tenant is either unable or unwilling to undertake the works and negotiations are then carried out with the tenant to agree on the cost for damages, so the landlord is placed in funds to undertake the works themselves.

These negotiations can sometimes take weeks or months to finalise.  In some circumstances, if the landlord has been unable to agree settlement of his claim for damages and the tenant has not undertaken any works to the property at the end of the lease term, the landlord should, to ensure his position is protected, be in a position to undertake the works immediately the lease term expires.

Carter Fielding are often instructed by Landlords not only to prepare Terminal Schedules of Dilapidations but also to prepare specifications for works to properties where the tenant has not complied with its Lease covenants to repair, redecorate and reinstate. We invite tenders for the work from suitable contractors and then carry out the contract administration for the client when works are being undertaken.

If you require advice on dilapidations matters, you are welcome to call us on 020 8546 7211 or contact us by email.