Dilapidations Claims at the End of a Commercial Lease

When a commercial lease comes to an end, the landlord usually wants the property back in the condition the lease promised. If it isn't, you can expect a dilapidations claim. These catch a lot of tenants off guard, partly because the opening figures look alarming, and partly because the rules that actually govern what a landlord can recover are not obvious from the lease itself.

This article explains how terminal dilapidations claims work in England and Wales, what landlords typically ask for, and why the final settlement is often a fraction of the opening demand.

What a terminal dilapidations claim is

A terminal dilapidations claim is a claim for breach of the tenant's covenants as at the end of the lease. It usually covers repair, decoration, and reinstatement of any alterations the tenant made during the term. The landlord's remedy is damages, not an order forcing the tenant back in to do the work.

The claim is normally set out in a Schedule of Dilapidations, prepared by a building surveyor on the landlord's behalf. The schedule lists each alleged breach, the clause in the lease it relates to, the remedial work proposed, and the cost. At the end of the lease it becomes a terminal schedule, and the surveyor's figures are bundled into what is called a Quantified Demand.

Claims are governed by the Pre-Action Protocol for Dilapidations Claims, which sits under the Civil Procedure Rules and sets out what both sides should do before issuing court proceedings. In outline:

• The landlord serves the schedule, ideally within a reasonable time of lease end, along with the Quantified Demand showing the sums claimed.
• The tenant has 56 days to respond, usually through their own surveyor, agreeing, disputing or offering alternative figures item by item.
• The parties are expected to meet, narrow the issues, and try to settle before anyone goes near a court.

Missing the 56-day window does not automatically lose the case, but it weakens the tenant's position. A landlord who has heard nothing may proceed straight to issuing proceedings, and the court can take a dim view of a tenant who ignored the Protocol when costs are assessed later.

Good practice, though not a strict requirement of the Protocol, is for both surveyors to endorse their schedules, confirming that the works and costs are a genuine pre-estimate of the landlord's loss. That endorsement carries weight. Inflated or speculative schedules tend to unravel once challenged.

Common heads of claim

Most schedules cover three areas.

Disrepair. Broken fittings, damaged ceilings, worn floor coverings, defective M&E, roof problems, and general wear beyond what the lease allows. What counts as disrepair depends on the repair covenant, and on the schedule of condition (if any) attached to the lease recording the state of the property at the start.

Reinstatement of alterations. If the tenant put in partitions, a kitchenette, cabling, signage, or took out original features, the lease usually allows the landlord to require reinstatement at the end. Whether reinstatement is actually required often depends on whether the landlord served a valid notice within the time the lease specifies.

Redecoration. Leases typically require redecoration in the final year of the term, done in a specified manner. If it hasn't been done, or not to the standard required, it goes on the schedule.

There will often be additional items: professional fees, loss of rent while works are carried out, rates and service charges during that period, and VAT where it applies.

The Section 18(1) cap

This is the single most important point for any tenant facing a claim. Section 18(1) of the Landlord and Tenant Act 1927 limits damages for breach of a repairing covenant to the diminution in the value of the landlord's reversion caused by the breach. Put more simply, the landlord is limited to the amount by which the disrepair lowers the market value of their interest in the property.

Two things follow from that.

First, the cost of the works in the schedule is only a starting point. Take a tired office where the repair bill comes in at £200,000, but a surveyor values the building at £1.5 million in disrepair and £1.55 million once repaired. Damages are capped at £50,000, regardless of the schedule total.

Second, the section has a second limb. If the landlord is going to demolish the building, or carry out structural alterations that would make the repairs pointless, damages for disrepair are nil. This is the redevelopment defence, and it can kill a large part of a claim on its own.

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Tenant defences

Beyond Section 18(1), tenants commonly raise supersession, where the landlord's own intended works would override the tenant's repairs. If the landlord is going to rip out and replace the ceiling anyway, charging the tenant for patching it makes little sense. Linked to this is intention to redevelop, which ties back to the second limb of Section 18(1). Evidence might include planning applications, marketing material, or a sale to a developer shortly after lease end.

Scope and standard is another common one. Many schedules go beyond what the lease actually requires, and a tenant is only liable to the standard set by the covenant, taking account of the age and character of the building and any schedule of condition. Betterment runs alongside it: the landlord cannot use the tenant's money to put the property in a better state than the lease required.

These are the main reasons landlords so often settle well below the opening figure. Once Section 18 valuation evidence and the landlord's actual plans for the property are on the table, the gap between the schedule total and the eventual settlement is usually substantial.

Two wider issues are worth keeping in mind. Energy efficiency rules (MEES) now require most commercial properties to meet a minimum EPC rating before being let, and landlords sometimes try to fold upgrade costs into dilapidations claims. They rarely belong there, since they go beyond the repair covenant, but the argument crops up. Post-Grenfell fire safety work is similar: landlord improvements to cladding or compartmentation are not usually a tenant's responsibility under a standard repair clause.

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Limitation and insurance

Dilapidations claims are subject to the general six-year limitation period under the Limitation Act 1980, running from the date of the breach (commonly lease expiry for terminal claims), or twelve years if the lease is executed as a deed. Landlords who sit on a claim for years lose the ability to bring it. Tenants who think they are in the clear should still keep records until the period has run.

On the tenant side, it is worth checking whether any existing insurance responds. Some commercial policies include legal expenses cover that will fund surveyor and solicitor input on a dilapidations dispute, and occasionally parts of the claim itself may be covered. It is an easy thing to overlook in the stress of a lease ending.

Choosing a surveyor

Both sides need a building surveyor who does dilapidations work regularly, ideally a member of the RICS and familiar with the Protocol. For anything other than a very small claim, a separate valuation surveyor may also be needed to deal with the Section 18(1) cap, because building surveyors do not generally give valuation evidence.

Ask any surveyor how often they act on the other side of these claims, and how they approach Protocol endorsements. Someone who only ever acts for landlords, or only ever for tenants, may be less useful than someone who does both.

Practical steps for tenants

The most useful work happens before a schedule ever arrives. Read the lease carefully well before the end of the term, including any licences for alterations and the schedule of condition. Work out what your actual obligations are, and where you may have problems. Where it is realistic, consider doing the works yourself before lease expiry. It is almost always cheaper than paying the landlord damages plus fees.

When you do vacate, keep photographs and records of the state of the property on the day you leave. If a schedule then arrives, do not pay the Quantified Demand at face value. Instruct your own surveyor and respond within the 56 days the Protocol allows. Ask early what the landlord actually plans to do with the property, because redevelopment or significant refurbishment changes the picture entirely.

Dilapidations claims look intimidating because the opening numbers are usually large and the documents technical. In practice they are a negotiation, shaped by the lease, the Protocol, and Section 18(1). A tenant who engages properly, with sensible professional advice, is rarely paying anything like the figure on the front of the schedule.

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