Dilapidations – Calculating cost and value

By Hemmat Ovaisi, Commercial Property Paralegal, SO Legal Solicitors.

Dilapidations are the repairs which may need to be carried out on a property at the end of a tenancy. Understanding dilapidations is more important now than ever as commercial leases are following a trend of having a shorter length. A 5-10-year lease with a tenant-only break option is quite standard now, and renewals are becoming less frequent.

Consequently, terminal dilapidation claims are increasing in volume. These are “served” by the landlord on the outgoing tenant by way of a schedule usually prepared by a chartered building surveyor, itemising each breach of covenant along with priced remedies. The total, plus fees and potential rent, rates and insurance losses are included within the amount of damages claimed.

The initial total is priced by the surveyor. However, the potential extent the breaches have on the open-market value is assessed by a chartered valuation surveyor. In order to prepare diminution valuations, the value of the property in its covenanted state must be compared against the property in its actual state of disrepair. Calculating the value of the property in its state of disrepair is essentially calculating the value of the covenanted state of the property less the cost of repair. It is important to calculate these values rather than just a breakdown of the cost of repairing as the open market value of the property is likely to have changed and this method of calculation will more accurately establish what the most likely hypothetical purchaser would do with and to the property.

Landlords and tenants will often disagree over the cost of repairs on dilapidations and it is sensible to get early legal advice on their options. Tenants will need to gather evidence prior to the departure of the property should they believe there is a likelihood of dispute over dilapidations. These may be in the form of a surveyor’s report and/or photographic evidence showing the condition on departure.

Landlords will need to establish the tenant’s obligations within the repair, decoration, reinstatement and yielding up covenants of the lease. The repair covenant will need to be checked to establish whether the lease is ‘fully repairing’ or limited to a photographic schedule of condition taken at the commencement of the term. The usual provision that the tenant is to pay the landlord’s legal costs and surveyor’s costs in dealing with dilapidations at the end of the tenancy may also persuade the tenant to resolve the matter swiftly.

For both the landlord and the tenant, it is essential to be well prepared in advance for any potential dilapidation conflicts, where costs can quickly mount up.

For a no-obligation discussion about Dilapidations or any matter relating to your Commercial Lease, contact our Commercial Property team on 01323 407555 (Eastbourne) or 01273 069920 (Brighton & Hove)