Commercial Dilapidations: Complete Guide for Property Owners

Understanding Dilapidations

Dilapidations are breaches of lease covenants relating to the repair, maintenance, decoration, and reinstatement of commercial property. When tenants fail to comply with lease obligations, landlords can pursue financial compensation for resulting losses.

The dilapidations process involves technical surveying expertise, legal knowledge of landlord and tenant law, and understanding of property valuation principles. Getting expert advice early prevents disputes escalating into costly litigation.

Types of dilapidations claims include terminal dilapidations (claims at lease end for accumulated disrepair), interim dilapidations (claims during lease term for ongoing breaches), Section 18 valuations (diminution in property value assessments), and yield-up condition disputes over acceptable property condition at handback.

Lease Repair Obligations

Full Repairing and Insuring Leases (FRI)

Most commercial leases are FRI leases where tenants bear full responsibility for all repairs to the demised premises, external and structural repairs (unless landlord retains), maintenance of all building services, internal and external decoration, and insurance premium reimbursement.

FRI obligations are onerous. Tenants must maintain properties in condition consistent with lease covenants, which typically require maintaining properties in "good and substantial repair" or similar standard.

Internal Repairing Leases

Some leases limit tenant responsibility to internal repairs only, with landlords retaining structural and external obligations. These reduce tenant exposure but are less common for modern commercial leases.

Schedule of Condition

Schedules of condition attached to leases can significantly limit tenant liability by establishing that property need only be maintained in condition at lease commencement, not improved to "good repair" if it wasn't in that state initially.

We've seen countless cases where lack of a schedule of condition cost tenants tens of thousands in terminal dilapidations for inheriting properties in poor condition and being obliged to return them in "good repair."

Terminal Dilapidations Process

Stage 1: Schedule of Dilapidations

Landlords serve a schedule of dilapidations itemizing alleged breaches of lease covenants. Schedules detail required repairs, reinstatement works, redecoration requirements, and often include cost estimates.

Initial schedules are frequently inflated. As Expert Witness RICS surveyors, we regularly reduce claims by 40-60% through proper technical analysis and application of relevant legislation.

Stage 2: Tenant Response

Tenants typically commission surveyors to prepare responses challenging excessive or inappropriate items, arguing diminution in value limits, highlighting supersession issues, and making settlement proposals.

Stage 3: Negotiation and Settlement

Most dilapidations disputes settle without litigation through negotiation between surveyors, alternative dispute resolution methods, expert determination, or sometimes mediation.

Section 18 Landlord and Tenant Act 1927

Section 18(1) limits dilapidations claims to the diminution in property value caused by breaches. If repairs wouldn't increase property value, landlords cannot recover costs.

This particularly applies when landlords intend refurbishment or redevelopment, or the property market changed such that repairs wouldn't increase value. Section 18 assessments require expert valuation evidence comparing property value as-is versus in full repair.

Supersession

Supersession applies where landlords' intended works would supersede claimed repairs. If landlords plan to strip out and refit premises, they cannot claim for decorations or minor repairs that their works would remove.

Proving supersession requires evidence of landlords' intentions at lease end. This significantly reduces recoverable claims in many cases.

Expert Witness Role in Dilapidations

Expert Witness RICS professionals provide independent technical opinions on appropriate repair standards required by lease covenants, whether claimed items constitute genuine breaches, reasonable costs for remediation, Section 18 diminution assessments, and supersession arguments.

Our role includes preparing detailed reports, attending mediations and expert determinations, meeting jointly with opposing experts, and providing court evidence if cases proceed to litigation.

Costs and Timescales

Dilapidations claims are expensive to pursue and defend. Surveyor fees for preparing schedules typically cost £3,000-£15,000. Legal costs can reach £20,000-£50,000+ for litigated disputes. Expert witness fees add £5,000-£20,000 depending on complexity.

Timescales vary but typically involve schedule service 3-6 months post-lease, tenant response within 2-3 months, negotiation period of 3-6 months, and litigation (if settlement fails) taking 12-24 months.

Preventing Dilapidations Disputes

Prevention is better than cure. For tenants, commission schedules of condition at lease commencement, maintain properties throughout tenancy, document all repairs and maintenance, commission pre-exit surveys 12 months before expiry, and engage with landlords early about exit condition.

For landlords, conduct regular property inspections, serve interim schedules if breaches develop, document property condition comprehensively, and communicate maintenance expectations clearly to tenants.