Towards the end of a lease, the landlord will instruct a building surveyor to inspect the premises and arrange to serve upon the tenant a schedule of dilapidations, detailing works to be undertaken to ensure compliance with the tenant's repair covenants. At lease-end, a quantified demand may also be served detailing the landlord's likely loss. If the required works are not undertaken, the landlord may seek to claim damages from the tenant in respect of the disrepair.
Establishing the standard of repair owed by the Tenant
A tenant's obligations in relation to repair are generally found within the following lease covenants: repair, decoration, compliance with statute, yield up and reinstatement of alterations.
The standard of repair required will depend upon the lease provisions, which can be quite onerous on a tenant. However, in modern leases the parties may have limited the standard of repair by reference to a schedule of condition, evidencing the state of the premises at the commencement of the lease.
The terms of the lease will always be considered as a whole so, it is important for landlords to also understand their own obligations, which could impact the tenant's repairing duties.
Damage limitation for Tenants
In England & Wales, there is a cap on the landlord's entitlement to claim damages (section 18(1) Landlord and Tenant Act 1927), restricting the level of damages recoverable by a landlord in one of two ways:
- 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').
- Where the landlord intends to demolish the premises shortly after a lease term expires, the landlord will have no claim.
The statutory cap only applies to breaches of the repair obligations, but not for example covenants to reinstate, alterations, etc.
Current position on VAT
VAT is not currently payable on damages relating to dilapidations. However, in recent guidance published by HMRC, if they consider that the value of dilapidations has been manipulated to reduce the amount of rent subject to VAT, they may enquire into specific cases.
If you are a commercial landlord with tenants whose leases are coming to an end or have already come to an end or you are a commercial tenant concerned about dilapidations, or you have any concerns or questions about these matters and how they may impact you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies' contact.
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