Don’t Fall Foul of Dilapidation Liabilities Lease Clauses
The relationship between landlord and tenant is often tricky, but the biggest and most expensive area of likely discord relates to the dilapidations and repairing liabilities under a typical business lease. The problem usually rears its ugly head at the end of the lease. The cost to the tenant can be staggeringly expensive and is often an expense not properly provided for or anticipated.
The UK standard lease of commercial property is usually on what is known as a “full repairing” basis. In simple terms this means that the tenant is required to keep the property in good repair, condition, decorative order and hand it back in that condition at the end of the lease. Depending on the wording of the lease and other circumstances this could for example require the tenant to undertake major and unforeseen repairs. This can apply if the property was in poor condition at the start of the lease unless the liability is limited by the terms of the lease. Even worse, the tenant may even be required to put the property in a better condition.
Problems can follow if only part of a building is leased. Here the tenant’s repairing obligation is usually on the basis of a liability for internal repair and decoration only. However, there are two major potential problems here. Firstly even though they may not be directly liable for, say, major repairs to the structure or the installation of a new lift there is likely to be an indirect liability through a service charge. Secondly the cost of internal repair and decoration, which usually comes to light at the end of the lease, is likely to be considerably more than many might think.
Alterations made to the property
Depending on the wording of the lease, and any licence (consent) for the works to be carried out, the landlord may be entitled to require the tenant to reinstate the property to the condition it was in before the alterations were carried out – this again could be very expensive. Of course if the alterations have improved the letting value of the property the landlord may be happy for them to be retained, but this is an issue which should be discussed and resolved with the landlord well ahead of the end of the lease.
Repairs during the course of the lease
A repairing obligation is usually a continuous one and redecoration is usually required on a periodic basis. A lease might specify internal decoration every five years and external decoration every three years. In practice it is common for a landlord not to enforce repairing covenants strictly until the lease comes to an end. There can be special circumstances where a major issue arises or where it is important to the landlord that the property is maintained and presented to a high order – for example, a shop in a prestige shopping centre. There are, however, statutory limits in the Leasehold Property (Repairs) Act 1938 on the landlord’s ability to forfeit a lease for breach of a repairing obligation where the lease has more than three years unexpired.
Depending on the lease terms, it is possible for a landlord to undertake the work themselves and send the tenant a bill. However, there is usually a procedure which the landlord must follow including giving the tenant a disrepair notice and permitting the tenant a certain time in which to carry out the works himself. There are various technical issues which arise and tactics which can be used to mitigate the problem. If the landlord raises the question of repair or decoration the tenant probably needs to take professional advice without delay. It is generally much more expensive when the landlord carries out works than when the tenant does and also, there are likely to be costly professional bills of the landlord’s lawyers and of surveyors who will prepare a schedule of necessary works and also supervise them. There could be disruption whilst the works carried out. It may be possible to challenge the cost of works or the necessity to undertake them; the amount the landlord can claim can be restricted.
The landlord wants to redevelop the property when the lease ends
A landlord’s ability to recover damages for breach of a repairing covenant is limited to the loss of the value to his reversion. In simple terms, this means that if the landlord does not suffer any loss because the works were not carried out then he cannot recover the cost of those works. Therefore if the landlord intends to knock down the building or substantially redevelop it when the lease ends the claim can be defended by saying that the failure to carry out the repairs has not caused him any loss. Sometimes landlords do not admit that they have an intention to re-develop so it may need to be proved.
Where a tenant and landlord want to renew the lease it is common for any repairing obligations to be rolled over so that they do not have to be carried out or paid for them until a later date, and in practice this often means at the end of the new lease. Tenants need to be aware of whether or not they have a statutory right to renew under the Landlord and Tenant Act 1954 – a solicitor will be able to check this quickly by looking at the lease. If so, this will considerably improve a negotiating position. Tenants may be able to negotiate better terms relating to repairs particularly if market conditions are weak and the landlord is very keen for a new lease to be taken. If the landlord does not want to grant a new lease and wishes to redevelop the property, and the lease is not excluded from statutory protection, the tenant is likely to be entitled to compensation. There may be the opportunity to negotiate extra compensation depending on the circumstances.
Christopher Sykes is a partner and Colin Harvey is a solicitor at Sykes Anderson LLP.