How to avoid a dilapidations disaster

The principle with dilapidations is that the tenant signs a lease at the beginning of their occupation and they make a promise to look after the landlord’s building in some specified way. 

In most leases that covers all of the external and internal repairs and decorations. 

However, you can see the landlord thinking that here is an opportunity for his pub to be upgraded before the next tenant moves in.

Here is how you can remain on top of dilapidations throughout a lease and avoid a hefty dilapidations bill at the end of it.

When you take the lease, work out your potential problems​

The tenant should try to understand if there are any fundamental problems with the building they’re about to take on. What condition are the roof, the floor and all the unseen parts of the property in?

Most people can see the visual things that need repairing, but it’s the things behind the scenes that need to be looked into. For the sake of a building surveyor’s fee, that may well feel like money
well spent.

It would be a disaster to take over a pub, realise you have dry rot in the floor and then have to shut the pub for six weeks while you have the floor replaced.

If you have signed a lease saying that you’re going to look after the building, then it’s your responsibility as a tenant from when you take on the tenancy.

What if you have a put-and-keep agreement?​

A put-and-keep agreement is for when you take over a building that already has some level of dilapidation. You would agree to give it back in pristine condition, rather than the same condition that it was left in.

The tenant should negotiate some kind of discount; either by way of rent-free capital contribution or discounted rent to compensate for the repair work that has got to be done to put the property into a good state of repair.

When occupying the pub, look after it​

Looking after your pub will invariably help the trade of your business.

If your customers see that the pub is in a terrible state of repair, they will go somewhere else, your business will deteriorate and you will have less money to do your repairs. Then the pub will deteriorate more and the whole thing will spiral down.

Keeping the pub in good order is going to serve two purposes: looking after the dilapidations liability and keeping your customers.

A patch job on something is not the answer. If there is something fundamentally wrong with the roof and it is leaking, and you just put a bit of tarpaulin over it, you will then be liable for all the damage that happens from water coming through the building.

Doing the work​

While the tenants are in occupation, they have the choice of doing the work themselves or handing over the money for the landlord to do it himself when the lease comes to an end. Quite often the tenant would regard his ability to do the work as potentially cheaper than the landlord’s, so would choose that option.

You are only required to give back the modern equivalent of what you took. If a pub has a carpet and the carpet is the cheapest form of flooring, you are only required to give back a carpet that is in good order, as opposed to wood or stone, which might be more expensive. You don’t have to give back the property to a specification that is better than when you took it over.

However, it does need to still be a modern equivalent and not a straight replacement. Therefore, if you took a pub 25 years ago and it had single-glazed metal-framed windows, you would have to give back a modern equivalent of that by replacing them with double-glazed windows.

What about assigning the lease midway through the tenancy?​

Lease assignors have to guarantee the performance of the assignee, so the assigner ought to remain interested in the pub.

The assignor can tell the landlord that they have left the property in good order and as part of the assignment process, aim to only guarantee the terms that are remaining. In that situation, anything that the assignee fails to do in terms of repairs, the assignee rather than the assignor is liable for.

Start talking to the landlord from the start of the final year of the lease​

If it is your intention to leave at the end of the lease, you should be looking to agree the dilapidations well before the end of the lease. That gives you the option of agreeing what work should be done and you have the opportunity to find the tradespeople to do the work and negotiate the best price with them.

Once you have agreed with the landlord what needs to be done, get that in writing and then in an ideal world, do the work. If you can’t do the work, be aware that you are going to be paying the landlord some money – likely to be more then it would have otherwise cost yourself.

The way in which a dilapidations claim is measured is to serve on the tenant a schedule setting out all of the things that the landlord believes the tenant needs to do to get the property back into good repair. That is usually served with six months to run on a tenancy.

It is really important that this negotiation process starts well before the end of the lease. You are not going to get the same opportunity to negotiate with a landlord at the end of the lease.

At the end of the lease​

Once the lease comes to an end, there are only two options. To pay the dilapidations claim to the landlord or to contest the claim on the basis that the cost of dilapidations is greater than what the landlord has lost in value.