Before signing a lease

The principle of buyer beware holds as true for leases as for any other purchase. Occupiers should familiarise themselves with the repairing obligations under the terms of a lease and, as far as possible, limit their obligations prior to signing the lease. Tenants should consider:

  • Whether the repairing obligation is fair or is the liability potentially onerous?
  • If an occupier has negotiated a rent-free period in a lease to compensate for a building’s poor condition, will the savings in rent be sufficient to meet their repairing obligations?
  • What are the occupier’s liabilities when the lease does expire?
  • What proportion of alterations to the building will need reinstating, if at all?
  • What repairs will need to be undertaken, and when, leading up to lease end?
  • What needs to be redecorated and cleaned, how often and to what standard?
  • What is the potential diminution in the value of the landlord’s reversion at the projected lease end?

Knowing the answers to these questions will enable an occupier to decide how much money they will need to set aside throughout the term of the lease to finance any repairs by lease expiry. It also avoids substantial and unbudgeted dilapidations claims.

During the lease

Dealing with repairs at outset

For an occupier it is important to avoid adopting a potentially onerous repairing liability at commencement of a lease.

The most common way an occupier can limit their obligations is by recording the property’s state of repair prior to the lease commencement in a Schedule of Condition. To be effective, this schedule must be agreed by both parties and annexed to the lease. These schedules provide a snapshot of the condition at commencement and are by no means infallible. The level of detail provided by the Schedule of Condition and subsequent deterioration during the term will determine liability in line with the wording of the lease.

A common misconception is that if a particular part of a property is in disrepair at the start of a lease, repairs are not required for that element. This is rarely the case: a tenant is often required to make good or ‘put into repair’ that element. If repair of the element is not possible, many leases require the occupier to renew it.

Repairs: during a lease

An occupier will also need to decide how much it would be prudent to set aside during the term of the lease to finance repairs on termination. Dilapidations is a relevant matter under International Accounting Standard 37. The Financial Reporting Standard 12 allows for future repairing liability to be treated as an expense, which can be included within the profit and loss account of the firm. It will then be excluded from the company’s tax computation until it is incurred.

Repairs: lease break

Some leases allow tenants the option to exercise a break clause after a specified period of time, but before the lease expires, for example an occupier might be able to break a 10 year lease after five years. Often a landlord will put conditions on a lease break such as vacant possession, payment of rent and full or material compliance with the repair and decorating covenants. If a tenant fails to comply with the break conditions, then the option will be invalidated.

At the end of a lease

Negotiating dilapidations is invariably an adversarial process so developing a strategy for a proactive approach to managing a potential claim, including opening an early dialogue with the landlord can help ensure a smooth exit at lease end.

At lease end, an occupier will need to:

  • Determine what repairs need completing and how these can be implemented in the lead up to exit
  • Understand what the landlord wants done with alterations made to the building by the occupier and whether they need to be reinstated
  • Check the lease to understand what needs to be redecorated and cleaned, and to what standard
  • Assess whether a defence exists with regard to the diminution in the value of the landlord’s reversion (Section 18 of the Landlord and Tenant Act 1927)

Schedules of Dilapidations are typically served by the landlord in the last six months of a lease (a ‘terminal’ Schedule of Dilapidations). These are intended to outline all the alleged breaches of the lease and stipulate the required remedies.

Unless an occupier has completed the work required under their lease obligations in advance of lease end the landlord will usually issue a terminal Schedule of Dilapidations. This schedule will outline the works the landlord deems necessary and include a claim for damages (Quantified Demand).

Disputes frequently arise over whether all items identified by the landlord’s surveyor really are a breach of the tenant’s covenants and over what would be an appropriate remedy.

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Kevin Maddern
National Head of Building Consultancy

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