Commercial Lease Disputes: Dilapidations Claims Explained

When a commercial lease comes to an end, landlords often serve a schedule of dilapidations setting out repair, decoration, and reinstatement works they claim the tenant has failed to carry out. These claims can easily run to tens of thousands of pounds, and many are inflated or unjustified. Understanding your obligations and the rules that govern dilapidations claims is essential to protecting your position and challenging an unreasonable claim.

What are dilapidations?

Dilapidations are breaches of the repair, decoration, and reinstatement obligations contained in a commercial lease. Most commercial leases require the tenant to keep the property in good repair and condition throughout the term and to reinstate or decorate before vacating. When the tenant fails to do this, the landlord can serve a schedule of dilapidations claiming the cost of remedial works.

These obligations are strictly construed and heavily litigated. The question of whether particular works fall within the scope of "repair" rather than "improvement" is often contentious, and the courts have developed a substantial body of case law on this issue.

Terminal and interim schedules

Landlords can serve two types of schedule of dilapidations. An interim schedule is served before the end of the lease and sets out works the tenant should carry out before vacating. A terminal schedule is served after the tenant has vacated and sets out the cost of works the landlord claims it has incurred or will incur to remedy the breaches.

The interim schedule serves an important purpose: it gives the tenant the opportunity to remedy breaches before the lease ends. If a tenant receives an interim schedule and fails to respond or remedy the works, this strengthens the landlord's position and can make it harder to challenge the subsequent terminal schedule.

The Dilapidations Protocol

In 2017, the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (the Dilapidations Protocol) came into force. This protocol sets out the steps parties must follow before issuing proceedings, and it has significantly changed how dilapidations disputes are handled.

The protocol requires the landlord to serve a schedule of dilapidations in a prescribed format, supported by evidence of the breaches and the cost of remedial works. The tenant then has a period to respond with a counter-schedule, and the parties may exchange Scott Schedules (a tabular format comparing the landlord's and tenant's positions on each alleged breach).

Following the protocol is not optional in most cases, and failure to do so can result in cost penalties even if you win the dispute. The protocol has made it more difficult for landlords to rely on vague or unsubstantiated claims.

The statutory cap on damages

One of the most important protections for tenants is Section 18(1) of the Landlord and Tenant Act 1927. This provision caps the damages a landlord can recover for breach of repair covenants to the diminution in value of the landlord's reversion caused by the breach. In other words, if remedial works would cost £50,000 but only reduce the property's value by £10,000, the tenant's liability is limited to £10,000.

This protection applies automatically and is a powerful tool in challenging inflated dilapidations claims. Many landlords ignore this cap, serving schedules that far exceed the actual diminution in value. Expert evidence from a surveyor on diminution in value is typically required to prove this.

Supersession and demolition

Where a landlord intends to demolish the property or carry out substantial alterations that would require remedying all the breaches regardless, the concept of supersession may apply. If the landlord's post-lease plans mean the breaches are made good anyway, the tenant's liability should be limited or extinguished entirely.

Demonstrating supersession requires clear evidence of the landlord's intentions at the time of serving the schedule. If the landlord later claims supersession was not an issue, this can be used to undermine their credibility.

Common landlord tactics and how to challenge them

Several tactics are commonly used by landlords to inflate dilapidations claims. These include serving schedules with vague descriptions of works, inflated costs obtained from preferred contractors rather than competitive quotations, including improvement works that go beyond repair, and failing to mitigate loss by sourcing competitive quotes.

A robust response requires obtaining your own surveyor's report documenting the actual condition of the property, obtaining competitive quotations for any necessary works, and comparing these to the landlord's figures. Many claims collapse when the actual cost of remedial works is properly investigated.

Your response to a schedule of dilapidations

If you receive a schedule of dilapidations, the first step is to instruct a surveyor to inspect the property and report on the alleged breaches. The surveyor's report should address whether each item constitutes a breach, whether it is within the scope of repair, and what the reasonable cost of remediation would be.

You should then serve a detailed counter-schedule addressing each item. Avoid being defensive; instead, provide evidence that contradicts the landlord's claims. If the works are not breaches, explain why. If they fall outside the scope of repair, set out the legal authority for this. If the costs are inflated, provide alternative quotations.

Throughout this process, keep detailed records and ensure all communications are in writing. If the dispute proceeds to litigation, these documents will be critical evidence.

The role of surveyors and Scott Schedules

Expert evidence from a qualified surveyor is almost always necessary in dilapidations disputes. The surveyor's role is to report on the condition of the property, whether particular defects constitute breaches of the lease, the reasonable cost of remedial works, and the diminution in value of the landlord's reversion caused by any breach.

The Scott Schedule is a tabular format that sets out, for each alleged breach, the landlord's case and the tenant's response side by side. This format has become standard in dilapidations disputes and greatly assists in identifying the real issues in dispute and narrowing the scope of any litigation.

If you are facing a dilapidations claim, obtaining early advice from a solicitor and appointing a surveyor should be among your first steps. These are technical disputes that require specialist knowledge and careful handling.