Dilapidations; the sting in the tail of a commercial lease

At the end of a commercial lease, the landlord usually carries out an inspection of the property and then issues a Schedule of Dilapidations. Dilapidations are essentially a claim for damages based on the repairing obligations as set out in the lease.

Under common law in Scotland, the tenant’s obligations are largely limited to liability for fair wear and tear, and repairs needed due to their negligence. However, in a full repairing and insuring lease, which is commonly the type of lease a landlord will insist on, clauses addressing repairing obligations usually cause the obligations in common law to transfer from the landlord to the tenant. This is the first stumbling block for the uninitiated. Tenants taking on a new lease in Scotland are likely to be faced with a clause stating that they “accept the property in good order and repair” or they “accept the property in a tenantable condition”. This wording causes the transfer of the liability for certain common law obligations from the landlord to the tenant in different ways. For example, accepting the property in good repair implies that it must be returned to the landlord in that condition when the lease comes to an end. Accepting a property in tenantable condition is not quite as straight forward because age, character and locality could be considered as reasons to rebut any schedule of dilapidations in a case of that type.

A final schedule of dilapidations will identify items of disrepair to be made good by the tenant.  Where the tenant fails to comply with the repairing obligations set out in the lease, the schedule of dilapidations will often form the basis of a financial claim by the landlord.
From the tenant’s perspective, a schedule of dilapidations is normally at or very near to the expiry of a lease.  When this happens, the validity of the landlord’s claim should be investigated. Reference must be made to the specific terms of the repairing obligations contained in the lease. The landlord’s future plans for the premises must also be considered.  When a claim is submitted in good time before the end of the lease, it usually benefits tenants to have any legitimate repair works carried out less expensively themselves rather than leave these for the landlord to complete.

It is very important to understand what the repairing clauses in the lease mean. Even leases where there is a relatively short term can have serious repairing implications. A tenant who enters into what are considered reasonable repairing obligations can quickly learn that this is not the case.

It is very important that due diligence is carried out before entering into a full repairing and insuring commercial lease. It makes sense to obtain a report on the condition or repair of the property. If the tenant does not do this and it transpires that the building has a significant structural problem, then the tenant will become responsible for the cost of carrying out repairs to remedy the problem.

This can mean that the value of the dilapidations claim is many times more than the annual rental for the premises and that would represent a significant unforeseen and unbudgeted expense for the tenant. If a proper review of the condition of the building has been carried out before entering into the lease, then this would have helped the tenant avoid such expense.

“Interim” and “Terminal” dilapidations terminology is used in Scotland although the courts do not recognise a difference between the two types of schedule. In England and Wales, it is not unusual for a landlord to serve an interim schedule on a tenant at, say, the mid-term point of the lease as a reminder to the tenant to undertake repairs. However, in England and Wales, there are limits to what can be included in this – not so in Scotland.

During the last recession, there was a significant increase in the number of schedules of dilapidations being served during the term of a lease. This was seen as an effort by landlords to avoid being left with an empty property in poor condition in the event that the tenant became insolvent. The end result of this was that as landlords seek to enforce the repairing obligations in the lease and tenants seek to minimise their liabilities, more disputes have arisen.

The starting point in resolving any dispute will be the scope of the repairing obligations – in particular whether the common-law position has been supplanted by the repairing clauses in the lease. A key issue in some major dilapidations disputes, argued before the Scottish courts, is whether the landlord’s common law liability for extraordinary repairs has been transferred to the tenant. Resolving this issue can require careful analysis of the wording of the repairing obligation, and its outcome can have significant implications for the respective liabilities of the parties.

If you are considering entering into a commercial lease of premises, it makes very good sense to obtain expert dilapidations advice from the outset. Waiting until the approach of the end of the lease is never a cost-effective option.

Contact Us

Landlords and Tenants of property must appreciate the nuances in dilapidations law and how these affect liability.

If you would like to discuss a liability issue you have regarding dilapidations or otherwise wish to discuss the terms of a commercial lease, please call Cecilia Miller on 0141 887 5271 or click here to email Cecilia.