Category Archives: Dilapidations

Importance of having a schedule of dilapidations for a commercial landlord

DilapidationsDilapidations is a fact of life in a commercial leasehold property.  As an area of Landlord & Tenant law, dilapidations, as a concept, has been around for hundreds of years allowing the courts to put to test everything from the meaning of repair to valuing the impact of disrepair, and an awful lot in between.  In recent years, the volume of dilapidation claims has been on the increase, but so too have the efforts of those professionals who deal with them in promoting transparency and fairness; the objective being to reduce the number of claims proceeding to litigation and eliminate fraudulent abuse of the process.

The current economic environment  is, of course, a major contributor to the recent uptake in claims, but the trend has been shifting for much longer than this, as landlords have seen it as an end-of-lease ‘bonus’ and tenants have become more savvy about curtailing their otherwise open-ended liabilities.

Over the last few decades, the length of commercial leases has diminished.  The traditional ‘institutional’ 25 year leases, without an option to break mid-term, are all but gone.  These leases have been superseded with 3-10 year terms, usually with an early option to terminate by way of a break clause.  This, of course, is at the behest of nervous tenants who don’t want to over-commit when the longevity of their business cannot be guaranteed.  It also works for those few tenants in the fortunate position of anticipated expansion and not wishing to be saddled with a property they will soon outgrow.   The frequency of dilapidation claims has therefore increased against the general backdrop of falling lease terms and the prevalence of break clauses giving tenants an early opt-out.

However, the economic downturn over the last few years has become a more significant catalyst for the volume of dilapidation claims in circulation.  Struggling tenants who had the foresight to sign a lease with a break clause are opting to use this lifeline now more than ever.  This is much to the detriment of the landlord who perhaps had naively assumed a consistent income stream over the full term.  Those impecunious tenants without the luxury of a ‘get out of jail’ card only have the option of proposing a surrender, which will invariably be at the mercy of the landlord’s terms.  If the tenant is viewed as a strong covenant, then few landlords in the current climate will be agreeable to a surrender unless the deal on the table is too attractive to refuse, and where there is another suitable candidate waiting in the wings.

On the other hand, landlords are faced with a more awkward decision when a tenant they see as a ‘man of straw’ neither has the funds to table a persuasive surrender proposal, nor the means to continue paying rent to the end of the lease term.  If they disappear, the landlord will be left to do some wound licking as a dilapidations claim will be a futile exercise and the landlord will then need to employ a professional organisation such as APT-ICC to the work on their behalf.