Dilapidations in Commercial Property: What Landlords and Tenants Need to Know

**Definition**:

Dilapidations refers to a landlord's claim against a tenant (or former tenant) for breach of repairing, decorating, and reinstatement covenants in a commercial lease. The claim is a civil damages claim — the landlord is claiming compensation for the cost of remedying the breach (putting the property into the condition it should have been maintained in under the lease), or for the diminution in the value of the landlord's reversion (see below).

Dilapidations claims arise from three types of lease covenant:

*1. Repairing covenant*: The lease obliges the tenant to keep the premises in repair — to maintain the structure, finishes, services, and fabric of the demised premises in the condition required by the lease (variously described as 'good repair', 'good and substantial repair', 'tenantable repair', or 'repair and condition as at the date of the lease'). The repairing covenant defines the standard — the tenant must maintain the property at that standard throughout the lease term.

*2. Decorating covenant*: Many leases require internal and external decoration to be carried out at specified intervals (typically internally every 3–5 years and externally every 5 years) and in the last year of the lease term. Failure to carry out the required periodic decoration is a breach of the decorating covenant, and failing to decorate in the last year of the lease is a very common basis for a dilapidations claim at lease end.

*3. Yielding up / Reinstatement covenant*: The lease typically requires the tenant to yield up the premises at the end of the lease in repair and decorated, and (commonly) to reinstate any alterations made during the tenancy. Where a tenant has installed a mezzanine floor, partitions, raised access floor, suspended ceiling, or fit-out during the lease, the reinstatement covenant requires these to be removed and the original fabric made good before the lease ends.

**The timing of dilapidations claims**:

Dilapidations claims can be made by the landlord during the lease term (an 'interim schedule' served under the Leasehold Property (Repairs) Act 1938 — see below) and/or at the end of the lease (a 'terminal schedule'). The terminal schedule is the most common form — a schedule of dilapidations served by the landlord at or after lease expiry (or within a specified period after lease end) setting out all of the items of disrepair and the estimated cost of remediation.

**The Scott Schedule**:

In litigation over a dilapidations claim, the parties' respective positions are typically set out in a Scott Schedule — a tabular document that lists each alleged item of disrepair, the landlord's expert's proposed works and cost, and the tenant's expert's response (whether the item is admitted or denied, and if admitted, what works and cost are appropriate). The Scott Schedule allows the judge (or arbitrator) to assess the issues item by item and to make findings on each item individually.

**The RICS Guidance Note on Dilapidations (7th edition)**:

The RICS Guidance Note on Dilapidations (Property Management, 7th edition) sets out the recommended professional practice for the preparation of schedules of dilapidations, the responses to schedules, and the negotiation and settlement of dilapidations claims. Both parties to a commercial lease dilapidations claim should engage a RICS-qualified surveyor experienced in dilapidations to provide expert advice and to negotiate on their behalf.

**The Leasehold Property (Repairs) Act 1938**:

• The Leasehold Property (Repairs) Act 1938 (LPA 1938) restricts a landlord's ability to claim damages (or forfeit the lease) for breach of a repairing covenant in a commercial lease where:
• •The lease was granted for 7 years or more, AND
• •The lease has at least 3 years left to run at the time of the claim

Where both conditions are met, the landlord must serve a Section 146 Notice (under the Law of Property Act 1925) before bringing a claim, and the tenant can serve a Counter-Notice claiming the benefit of the 1938 Act. If the tenant serves a Counter-Notice, the landlord must apply to the court for leave to proceed with the claim — and the court may refuse leave unless one of the grounds specified in the 1938 Act is satisfied (e.g., that immediate remedy of the disrepair is necessary to prevent substantial diminution in the value of the reversion; or that the disrepair gives rise to substantial risk to the health or safety of any occupant or person in the neighbourhood).

In practice, the LPA 1938 protects tenants during the lease term — it restricts interim dilapidations claims by the landlord to circumstances where the disrepair is of immediate concern. Towards the end of the lease (with less than 3 years to run), the Act's protection no longer applies and the landlord can proceed with a claim more freely.

**The terminal schedule and the damages cap: diminution in value**:

At the end of the lease (or after the lease has ended), the landlord brings a terminal dilapidations claim. The measure of the landlord's damages is the cost of carrying out the works required to remedy the breach — BUT this is capped by Section 18(1) of the Landlord and Tenant Act 1927:

'A right to damages for breach of a covenant or agreement to keep or put premises in repair... shall be damages not exceeding the amount (if any) by which the value of the reversion in the premises is diminished owing to the breach of such covenant or agreement.'

This is the 'diminution cap' — the landlord's damages are capped at the diminution in the value of the landlord's interest (the reversion) caused by the disrepair. In practice:

*Scenario A — The landlord is going to refurbish or redevelop*: If the landlord intends to refurbish or redevelop the property regardless of the tenant's condition (so the tenant's disrepair will not actually cost the landlord anything, because the landlord would have carried out the works anyway for redevelopment), the diminution in value caused by the tenant's disrepair may be nil — because the landlord's reversion is not diminished by the disrepair if the property is being redeveloped. In this case, the landlord's dilapidations claim may result in a nil or very low settlement, even if the theoretical cost of repairs is substantial.

*Scenario B — The landlord is re-letting the property*: If the landlord intends to re-let the property and the disrepair will prevent or delay the re-letting (reducing the rental income during the void period and the re-letting value), the diminution in value is more closely linked to the cost of repairs and the void period cost — the tenant's liability may approach the cost of works.

*Scenario C — The schedule of condition at lease start*: If the lease was entered into with a schedule of condition attached (showing the condition of the property at the start of the lease), the tenant's repairing obligation only extends to maintaining the property in no worse condition than shown in the schedule of condition. This limits the tenant's liability — any disrepair present at the start of the lease is not the tenant's responsibility.

**The RICS Pre-Action Protocol for Dilapidations**:

The RICS pre-action protocol (reflecting the Civil Procedure Rules pre-action protocol for dilapidations) sets out the expected professional conduct before litigation:

1. The landlord serves a quantified Schedule of Dilapidations with an accompanying Costings Schedule (estimated costs for each item) 2. The tenant (or their surveyor) responds within a reasonable period with a Point-by-Point Response 3. Both parties (through their surveyors) participate in a without-prejudice meeting to negotiate settlement 4. A surveyor's joint statement of agreed and disputed items is produced 5. If not settled, the matter proceeds to court or arbitration

The pre-action protocol discourages litigation as a first resort — most dilapidations claims are settled between the parties' surveyors without going to court.

**The dilapidations works contractor's role**:

Building contractors are involved in dilapidations work in two ways:

*1. Landlord's works (remediation works instructed by the landlord after the tenant vacates)*: After the tenant leaves, the landlord may instruct a contractor to carry out the works set out in the schedule of dilapidations — to return the property to lettable condition. These works are then used to quantify the landlord's actual expenditure for the purpose of the dilapidations claim (actual cost incurred is often stronger evidence than a surveyor's estimate).

*2. Tenant's works (works carried out by the tenant or their contractor before vacating)*: In many cases, the tenant has an obligation to carry out the repairs and reinstatement before the lease ends (rather than paying the landlord to do the works after). Carrying out the works before vacating is typically more cost-effective for the tenant — a competent contractor can carry out the works at market rate, whereas a landlord's contractors may charge premium rates. The tenant should agree the scope of works with the landlord's surveyor before starting (to avoid a dispute about whether the works carried out are sufficient), and should obtain written sign-off from the landlord's surveyor on completion.

**Typical dilapidations works scope**:

The scope of dilapidations works varies enormously depending on the size and type of the premises, the length of the lease term, and the extent of disrepair and alterations. Common work items in a commercial dilapidations schedule:

• *Decorations*:
• •Internal redecoration — emulsioning walls and ceilings, gloss painting woodwork, staining or repainting doors and door frames, repainting skirting and architrave
• •External redecoration — if within the demise (applicable to some commercial leases where the tenant was responsible for the external)

• *Structural and fabric repairs*:
• •Repair or replacement of damaged floor finishes (vinyl, carpet tiles, raised access floor panels)
• •Repair or replacement of damaged suspended ceiling tiles and grid
• •Repair of damaged plasterwork — filling holes, patches, cracks
• •Repair or replacement of damaged internal doors and hardware
• •Repair of damaged WC facilities (leaking sanitary ware, damaged cubicles)
• •Roof repairs or gutter clearing where within the demise

• *Services and M&E*:
• •Repair or replacement of damaged or non-functional electrical outlets, light fittings, and switches
• •Repair of air conditioning systems (service, clean, repair)
• •Removal of tenant's fixtures and equipment (including cabling, brackets, conduits installed by the tenant)

• *Reinstatement of alterations*:
• •Removal of tenant's mezzanine floor structure (steel frame and decking)
• •Removal of tenant's partitioning (demountable or fixed)
• •Removal of tenant's fit-out (kitchens, showers, furniture if fixed)
• •Removal of tenant's raised access floor (if installed by the tenant)
• •Reinstatement of floors and ceilings to their original condition after removal of tenant's alterations

**Programme and budgeting for dilapidations works**:

Dilapidations works are often required on a short programme — the landlord wants to re-let the property as quickly as possible, and the tenant who is carrying out the works before vacating may have a tight schedule before the lease ends. Programme considerations:

• •Asbestos survey (R&D survey) before any demolition or strip-out — required before removing partitions, ceilings, floor finishes
• •Reinstatement works first (removing tenant's alterations to expose the base building condition) — then repair and decoration
• •Electrical test and certification on completion
• •Landlord's surveyor sign-off before final payment to tenant's contractor

Budgets vary enormously: a small commercial unit (1,000 sq ft) with a short lease may produce a dilapidations schedule in the £5,000–£20,000 range; a large office floor (10,000 sq ft) with 10+ years of lease term may produce a schedule in the £150,000–£500,000 range before negotiation to the diminution cap.