What are Dilapidations?

Whether you have a lease of a pub, restaurant or coffee shop, dealing with disrepair is a major issue for landlords and tenants. Our Hospitality & Leisure solicitors are here to guide you.

The term dilapidations refer to items of disrepair that are covered by the repairing covenants within a lease. Dilapidations can be “interim dilapidations”, referring to breaches of the repairing obligations during the term of the lease, or “terminal dilapidations”, which cover breaches of the tenant’s covenants relating to the physical state of the property when the lease has ended.

The covenants referred to are normally contained within the lease, but they can also be found in separate documents such as a deed of variation, schedule of condition or a licence to alter. It is important to consider these documents carefully.

The lease will dictate the standard of repair, which can sometimes be onerous for a tenant. For example, the lease may require a tenant to put the premises in repair, even if they were not in repair at the start of the lease. However, some leases refer to a schedule of conditions which evidences the state of the premises.

Breaches of covenants can relate to:

  • Repair covenant;
  • Decorating covenant;
  • Any statutory obligations;
  • Reinstatement requirements that relate to alterations carried out by the tenant; or
  • Covenant to yield up and any specific requirements that require the tenant to leave the premises at the end of the term.

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Remedies Available to the Landlord

The remedies available to the landlord will depend on the terms of the lease and whether the lease has expired.

  • Damages – a tenant’s failure to comply with the repair covenant in the lease will entitle the landlord to damages. However, the landlord’s right to claim damages for breach of a repairing covenant may be restricted (further information detailed below).
  • Forfeiture – this is only available to the landlord if the tenant has breached the covenant and the landlord has a specific right of re-entry in the lease. The landlord must then serve a section 146 notice on the tenant, and this will specify the breach in question, require the tenant to remedy the breach and require the tenant to pay compensation for the breach.
  • Self Help – many leases contain a provision whereby it entitles the landlord to enter the property during the term of the lease to carry out any repair works and then recover the cost of doing the works from the tenant.

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Damage Limitations for Tenants

If a landlord has spent money on repair costs or lost out on rent due to the condition in which the premises were left, they will have a damages claim against the tenant. This crystallises on the expiry of the lease.  

However, the common law position is modified by section 18 of the Landlord and Tenant Act 1927. This statutory cap restricts the level of damages the landlord can recover in two ways:

1. Where the value of the landlord’s reversionary interest has been reduced due to the tenant’s breach, the landlord’s claim for disrepair will be limited to that loss in value (known as the ‘diminution in value’). Effectively the landlord’s claim is limited to either the cost of the repairs or the diminution in value of the property as a result of the repairs.

It involves completing two hypothetical valuations:

  • In the first, the valuer assumes an auction sale of the property in repair – they identify who will pay the most and the amount the bidder will pay for the property in repair.
  • In the second valuation, the valuer assumes an auction sale of the property in disrepair in which the tenant has left the property and identifies what a bidder would be prepared to pay for the property in that disrepair.

The difference between these two values is the diminution in value which the tenant is responsible for.

2. The second limb protects a Tenant where the landlord proposes to substantially alter or demolish the premises. If the landlord intends to do works to the property which would make any repair works undertaken by the tenant a complete waste, the landlord cannot recover damages for that disrepair.

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What Else to Consider?

When considering dilapidations, it is also necessary to consider the leasehold market, trends in the rental market, development, refurbishment or alterations that would enhance the marketability and value of the property.

Landlords should be proactive and produce a schedule of dilapidations early to try and ensure that the tenant makes a provision for dilapidations in their accounts.

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