Understanding Dilapidations in Commercial Property Leases: A Complete Guide

My Commercial Building Surveyors handle hundreds of dilapidations cases annually, representing both landlords and tenants in commercial property lease-end negotiations. Dilapidations disputes are among the most contentious and expensive issues facing commercial property occupiers, with claims routinely ranging from tens of thousands to millions of pounds.

This comprehensive guide explains everything property owners and tenants need to know about commercial property dilapidations—from understanding your legal obligations to managing terminal schedules, negotiating settlements, and protecting your interests throughout the lease term.

What Are Dilapidations?

Dilapidations are breaches of lease covenants relating to the repair, maintenance, decoration, and reinstatement of a commercial property. When a tenant fails to fulfil their obligations under the lease agreement, the landlord may pursue financial compensation to remedy these breaches.

Under a typical Full Repairing and Insuring (FRI) commercial lease, tenants are responsible for maintaining the property in good repair and condition throughout the lease term, returning it to the landlord at lease end in the state required by the lease covenants.

Types of Dilapidations

1. Terminal Dilapidations

The most common form—terminal dilapidations relate to breaches identified at or near the end of the lease term. Landlords instruct surveyors to prepare schedules of dilapidations documenting all breaches, then pursue tenants for costs to remedy identified issues.

2. Interim Dilapidations

During the lease term, landlords can serve interim schedules requiring tenants to undertake repairs while still in occupation. This is less common but ensures properties don't deteriorate significantly before lease end.

3. Diminution in Value Claims

If repairing breaches wouldn't benefit the landlord (for example, if they plan immediate demolition or comprehensive refurbishment), they may claim for diminution in the property's value caused by disrepair rather than full repair costs.

Understanding Lease Repairing Obligations

Dilapidations liability stems directly from lease covenants. My Commercial Building Surveyors always advise clients to thoroughly understand their repairing obligations before signing commercial leases.

Full Repairing and Insuring (FRI) Lease

The most onerous tenant obligation—FRI leases make tenants responsible for:

• All structural repairs: Foundations, walls, roofs, floors—complete building fabric
• External and internal decoration: Maintaining decorative condition throughout
• Services maintenance: Mechanical, electrical, plumbing systems
• Statutory compliance: Ensuring building meets all regulatory requirements
• Insurance: Often including buildings insurance costs

FRI leases represent maximum tenant liability. Without a schedule of condition limiting obligations to the documented state at lease commencement, tenants may be responsible for inherent defects existing before they took occupation.

Internal Repairing Lease

Less onerous—tenants responsible only for internal repairs, decoration, and maintenance of demised premises. Landlords retain responsibility for structural elements, roof, external walls, and common areas.

Schedule of Condition

A schedule of condition is a detailed photographic and written record of property condition at lease commencement. When incorporated into the lease, it limits tenant liability—they're only obligated to maintain and return the property in the condition documented, not a better state.

The Dilapidations Process: Step-by-Step

Phase 1: Landlord's Terminal Schedule of Dilapidations (Months 12-18 Before Lease End)

As lease expiry approaches, landlords typically instruct building surveyors to prepare terminal schedules of dilapidations. This comprehensive document details:

• Breaches of covenant: Specific lease clause references showing which obligations have been breached
• Required remedial works: Detailed descriptions of repairs necessary to comply with lease covenants
• Cost estimates: Quantity surveyors' estimates for completing required works
• Photographic evidence: Images documenting each breach
• Legal costs: Recovery of landlord's professional fees (surveyors, solicitors)

Terminal schedules often arrive 12-18 months before lease end, giving tenants time to undertake remedial works rather than paying financial compensation.

Phase 2: Tenant's Response and Negotiation

Upon receiving a terminal schedule, tenants should immediately instruct their own RICS building surveyors to:

• Review the schedule's validity: Assess whether claimed breaches genuinely exist and whether costs are reasonable
• Prepare a response (Scott Schedule): Accept, reject, or partially accept each item with supporting evidence
• Identify defenses: Schedule of condition limitations, supersession (landlord's alteration plans), diminution arguments
• Quantify fair settlement: Realistic assessment of actual tenant liability

My Commercial Building Surveyors routinely reduce landlords' initial claims by 40-70% through robust professional challenge and negotiation.

Phase 3: Undertaking Remedial Works vs. Financial Settlement

Tenants must decide whether to:

Option A: Undertake Physical Repairs

Advantages:

• Full control over contractor selection and costs
• Often cheaper than landlord's inflated cost estimates
• Reduces liability to actual expenditure plus reasonable landlord's costs

Disadvantages:

• Requires access after vacation (if lease ended)
• Time-consuming coordination
• May still face additional claims if landlord disputes work quality

Option B: Negotiate Financial Settlement

Advantages:

• Clean break—single payment concludes liability
• Avoids ongoing involvement after vacation
• Certainty of final cost

Disadvantages:

• May pay more than actual repair costs would be
• Landlords' quantity surveyors often inflate estimates
• Difficult to verify whether landlord actually completes claimed works

Phase 4: Alternative Dispute Resolution or Litigation

If negotiation fails, disputes may proceed to:

• Mediation: Independent mediator facilitating settlement discussions
• Expert determination: Independent RICS surveyor makes binding decision on liability
• Arbitration: Formal dispute resolution outside court system
• Court proceedings: Last resort—expensive and time-consuming litigation

My Commercial Building Surveyors' expert witness experience means we can support clients through formal dispute resolution procedures, providing independent professional opinions that courts and tribunals respect.

Common Dilapidations Issues and How to Address Them

1. Decorative Repairs

The Issue: Leases typically require periodic redecoration (every 3-5 years internally, 5-7 years externally). Failure to maintain decoration standards creates significant dilapidations claims.

Solution: Implement rolling decoration programs ensuring compliance with lease covenants. Final year redecoration before lease end dramatically reduces exposure.

2. Alterations and Reinstatement

The Issue: Tenant alterations—even with landlord's consent—often require reinstatement at lease end unless lease specifically permits retention. Reinstatement costs for fit-outs can exceed £100-£300+ per m².

Solution: When requesting landlord's consent for alterations, negotiate that works may remain at lease end. Alternatively, budget for reinstatement costs from the outset.

3. Mechanical and Electrical Systems

The Issue: Aging M&E systems failing at or near lease end create substantial liability. Boiler replacements, air conditioning renewals, and electrical upgrades cost £50,000-£250,000+ for typical commercial properties.

Solution: Commission professional M&E surveys 2-3 years before lease end. Address deteriorating systems proactively before complete failure occurs.

4. Structural Repairs

The Issue: Under FRI leases without schedules of condition, tenants may be liable for structural defects including roof failures, facade deterioration, or foundation issues—even if these existed before their occupation.

Solution: Always commission professional schedules of condition at lease commencement. For existing leases without schedules, maintain comprehensive photographic records and service history documentation proving defects pre-dated occupancy.

Dilapidations Defenses and Limitations

1. Schedule of Condition

The strongest defense—properly incorporated schedules limit liability to maintaining documented condition. Landlords cannot claim for improvements beyond the state recorded at lease commencement.

2. Section 18(1) Landlord and Tenant Act 1927

This crucial legislation caps dilapidations liability at the diminution in the landlord's reversion (the reduction in property value caused by disrepair). If repairs wouldn't add value—for example, if the landlord plans immediate demolition—tenants' liability is limited accordingly.

3. Supersession

If landlords intend works that would supersede claimed repairs, tenants cannot be liable for those specific items. For example, if the landlord plans comprehensive refurbishment removing and replacing elements subject to dilapidations claims, those costs cannot be recovered.

4. Quantified Demand

Under the Dilapidations Protocol 2016, landlords must serve quantified demands within 56 days of lease end, detailing intended works and costs. Failure to comply weakens their position and may affect cost recovery.

5. Betterment

Tenants cannot be required to leave properties in better condition than required by lease covenants. If repairs would create improvement, costs should be adjusted proportionally.

Proactive Dilapidations Management

For Tenants: Minimizing Liability from Day One

Smart tenants implement dilapidations management strategies throughout their lease term:

At Lease Commencement:

• Commission professional schedule of condition before taking occupation
• Photograph property comprehensively
• Understand repairing obligations precisely
• Negotiate alterations consent including retention rights

During Occupancy:

• Implement planned preventative maintenance programs
• Maintain comprehensive records of all repairs and maintenance
• Address building defects promptly before deterioration accelerates
• Comply with decoration covenant timescales
• Keep photographic records of maintained condition

18 Months Before Lease End:

• Commission interim dilapidations assessment identifying breaches
• Obtain cost estimates for remedial works
• Budget and plan repair programs
• Complete major works before final 12 months

Final 6 Months:

• Complete outstanding decoration and minor repairs
• Remove tenant alterations requiring reinstatement
• Prepare comprehensive handover documentation
• Photograph property condition comprehensively

For Landlords: Protecting Your Asset Value

During Lease Term:

• Conduct periodic property inspections (annually or bi-annually)
• Serve interim schedules if significant disrepair develops
• Maintain property service history and records
• Photograph property condition regularly

18 Months Before Lease End:

• Instruct RICS building surveyors for terminal schedule preparation
• Serve schedule on tenant with reasonable time for response
• Engage constructively in negotiations

At Lease End:

• Serve quantified demand within 56 days of lease determination
• Comply with Pre-Action Protocol for Dilapidations
• Consider diminution valuations if planning alterations
• Document actual losses caused by tenant breaches

Typical Dilapidations Costs

Dilapidations liability varies enormously based on property size, condition, lease terms, and duration of tenant occupation. My Commercial Building Surveyors regularly assess claims across these typical ranges:

Small Commercial Units (100-500 m²)

• Minor breaches: £5,000-£25,000 (decoration, minor repairs)
• Moderate breaches: £25,000-£75,000 (some structural, M&E issues)
• Significant breaches: £75,000-£150,000+ (major systems failures, structural repairs)

Medium Commercial Properties (500-2,000 m²)

• Minor breaches: £25,000-£75,000
• Moderate breaches: £75,000-£200,000
• Significant breaches: £200,000-£500,000+

Large Commercial Buildings (2,000+ m²)

• Minor breaches: £75,000-£200,000
• Moderate breaches: £200,000-£750,000
• Significant breaches: £750,000-£2,000,000+

Case Study: Successful Dilapidations Negotiation

A client approaching the end of a 15-year FRI lease on a 3,500 m² office building received a terminal schedule claiming £845,000 in dilapidations plus £65,000 professional fees—total £910,000.

My Commercial Building Surveyors' analysis revealed:

• Schedule of condition from lease commencement proved 35% of claimed defects pre-existed tenancy
• Landlord planned comprehensive refurbishment superseding 25% of claimed works
• Cost estimates were inflated 20-30% above market rates
• Several claimed breaches didn't actually violate lease covenants

Through robust professional negotiation, we achieved settlement at £285,000—a saving of £625,000 (68.7% reduction) from the initial claim.

Frequently Asked Questions

Can landlords claim for betterment in dilapidations?

No—landlords cannot improve their position through dilapidations claims. If repairs would leave the property better than required by lease covenants, costs must be adjusted proportionally to reflect only the repairing obligation.

What happens if I can't afford to pay a dilapidations claim?

Dilapidations are contractual debts that landlords can pursue through court proceedings. Early professional advice and negotiation are essential. Many cases settle through payment plans or reduced lump sums rather than full claimed amounts.

Can I be charged for fair wear and tear?

No—normal fair wear and tear during occupancy is excluded from repairing obligations unless the lease specifically states otherwise. However, "fair wear and tear" has a narrow legal definition—it doesn't excuse neglect or failure to maintain.

How long after lease end can landlords claim dilapidations?

Landlords have up to six years from lease determination to pursue dilapidations claims under limitation rules. However, the Pre-Action Protocol requires quantified demands within 56 days of lease end to preserve cost recovery rights.

Should I appoint my own surveyor when I receive a dilapidations schedule?

Absolutely—appointing experienced RICS building surveyors to review landlords' schedules and represent your interests is essential. Professional challenge routinely reduces claims by 40-70%, delivering returns many times greater than surveyors' fees.

The Pre-Action Protocol for Dilapidations

Since 2012, parties must comply with the Dilapidations Protocol before commencing court proceedings. The Protocol encourages:

• Early engagement: Landlords serving schedules with reasonable time for response
• Quantified demands: Within 56 days of lease end, detailing intended works, costs, and losses
• Tenant responses: Scott Schedules addressing each claimed item
• Without prejudice negotiations: Good faith discussions attempting settlement
• Alternative dispute resolution: Considering mediation before litigation

Courts can impose cost sanctions on parties failing to comply with Protocol procedures, making adherence essential for both landlords and tenants.

Conclusion: Expert Guidance Through Dilapidations

Commercial property dilapidations represent one of the most significant financial exposures facing tenants at lease end—and a critical asset protection issue for landlords. Understanding your obligations, implementing proactive management strategies, and obtaining expert professional advice dramatically reduces disputes and achieves fair outcomes.

My Commercial Building Surveyors bring decades of combined dilapidations experience, representing both landlords and tenants in negotiations worth millions of pounds. Our RICS chartered surveyors understand lease interpretation, building pathology, construction costs, and negotiation tactics that achieve optimal results for our clients.

Whether you're a tenant facing a dilapidations claim, a landlord protecting your property investment, or approaching lease end and wanting proactive assessment, our expert team provides the professional guidance that makes the difference between excessive liability and fair settlement.