The majority of all commercial tenants will, at some time, receive a Schedule of Dilapidations from their landlord. Unless you are the perfect tenant, you can be sure that one is on its way. This article by Richard Pearse, a Chartered Building Surveyor explains what a schedule of dilapidations is and what you, as a tenant, can do to limit your liability when signing a lease.
A schedule of dilapidations is a written document usually prepared by the Landlord's surveyor which details breaches of the lease and requires the tenant to carry out repairs, redecoration and in some cases remove alterations. They may be served during or after a lease has finished. Surprisingly, in many cases tenants are not aware of the full extent of their obligations under the contract they signed.
If you are searching for premises or are about to sign a lease and have not received advice from a chartered surveyor or solicitor - STOP. A lease is a binding contract and you must understand exactly what it says, otherwise you could be committing your company or yourself to repairing someone else's property and significant liabilities. Most leases are different and the exact wording is critical.
Leases may stipulate that the landlord, tenant or both be responsible for the repair of a building. In other cases where the building is one unit in a much larger property the Landlord may be responsible for the cost of works to common elements such as roofs, which can then be recharged to tenants via a "service charge" or "repairs rent". Most leases break these obligations down into repair, redecoration, alterations and removal of tenant's goods. Others, such as keeping the property up-to-date and in line with current laws are also common. These clauses, if not unlimited, can oblige a tenant to improve a building and make it better than it was when they took it! It is this major issue, when not fully appreciated by tenants, which can cause problems.
A typical scenario might be an old building with a leaking roof and rotten windows. Under normal commercial lease terms the landlord could reasonably request the tenant to repair and in some cases replace the roof and windows once the lease has been signed. This hardly seems fair, but comes down to the legal interpretation that "to keep in repair", a term common to most leases, also means to PUT into repair. Most tenants are also obliged to re-decorate the property at the end of the lease whether it was in good condition or not. It is therefore essential that a Chartered Surveyor undertake an inspection of the property before a lease is signed in order to advise the tenant of their liabilities. Where a service charge is to be paid the inspection should briefly consider the entire estate otherwise you might be paying for part of the new roof to your neighbour!
The solution - limit your liability! Unless you are sure that the property is in good condition (how will you know without a survey?) a Schedule of Condition should be attached to the lease. This may simply be a set of photographs, but of far more use is a full written, photographic and even video schedule. It is essential that the schedule is referred to within, and attached to the lease. A set of old photographs will be of no use unless properly documented even if they do show problems! A written / photographic schedule is recommended as photos alone often do not evidence all of the defects present. The effect of the schedule will be to benchmark the condition of the property and ensure that you are not obliged to improve it. You are, however, responsible for any subsequent deterioration. Any repairs, which will be necessary during the lease term should be identified during the survey and raised with the landlord prior to signing a lease. You could also remove an obligation to decorate the property at lease end if the decorations are poor. With multi-tenanted buildings it is common for tenants to cap the service charge.
The majority of all tenants make alterations to their leased properties. After all, they have to be used and new walls for offices are often erected or machinery installed. This is particularly the case when leases are for more than 10 years. In the first instance, care should be taken by solicitors to ensure that the lease allows you to make any alterations and in most cases landlord's permission and a formal Licence will be needed.
A key issue that is rarely considered is that the majority of all alterations must be removed at the end of the lease. What is just right for you is unlikely to be of any use to the next tenant and the landlord may ask you to change the unit back to its original format making good any damage to the building and decoration. An alteration that cost £5,000 to install may cost £5,000 or more to remove. Always consider how the alterations affect the building and how they may be removed. Try to keep them as separate as possible. A more expensive option at day one might be cheaper in the long run. Also find out whether the landlord would want to keep the alteration and if this is the case make sure it is documented. No one will remember or be able to prove a conversation in five years time. Bear in mind also that a period will be needed before the end of the lease to carry out the reinstatement works.
You have been advised, you have been warned. No matter the size and nature of a unit ensure that a chartered surveyor inspects the property and a solicitor checks the lease. You should identify clearly and understand both the Landlords and you own liabilities and consider the impact of any alterations you may carry out at the property. Dilapidations is a specialist field and a schedule should never be taken lightly or ignored. In many cases it is the start of a legal process and Landlords and Tenants should always seek advice from a Chartered Building Surveyor.
Article published with permission. Copyright Richard Pearse