Commercial property lease? Dilapidations? Are you prepared?

Tuffin Ferraby Taylor (TFT), the national building and project consultancy, is reporting a 25% increase in dilapidations disputes at the end of commercial property leases following a change in relationship between landlords and tenants of commercial properties, as both move to safeguard their business interests in times of recession. John Newton, head of TFT's Cardiff office, explains.

These disputes frequently arise where tenants fail to recognise or ignore repairing obligations in a lease and leave their buildings in disrepair or in an altered state when they vacate. Landlords will then vigorously pursue a claim on that tenant to recoup any losses incurred in returning the building to a lettable condition.

One can understand the landlords' current predicament as the economic situation continues to show little sign of improvement due to fears and uncertainty concerning the eurozone contagion. If a tenant leaves a property at lease end the landlord is almost inevitably left with a void period until a new tenant is found, or has to offer incentives such as rent free periods or reduced rents to attract a new tenant. This 'void' period, and any incentives have to be funded somehow. And if the building is left by the previous tenant in an untenantable condition, a landlord must pursue the outgoing entity to minimise his business loss as a result.

Dilapidations claims will vary with the size, age, type and location of the building in question. For example our London office has been involved in individual claims on tenants of office buildings in London's West End to the tune of £2 million. In contrast, in Cardiff we are frequently involved in claims on, for example, Valley's industrial units ranging from £30,000 to £500,000.

Such levels of claim can have significant impact on the businesses to which they are directed, as often they represent a sudden and unaccounted call for significant cash from that business in any one accounting year. Tenants must understand the implications of their lease covenants and how these translate into financial commitments. The only way to avoid large claims at lease end is to commit finances to repair/maintenance during the lease term, or to set aside monies over a period of time to deal with these cash calls.

There are options available to tenants at any point in their lease to manage their repair commitments:

Tenants about to take a new lease must ensure they negotiate terms and plan ahead. The current difficult leasing market puts tenants in a strong bargaining position to limit their future liabilities, but they need to be informed and aware of the correct processes at the start. They must take professional advice prior to lease in the form of a Technical Due Diligence Survey to highlight these issues and in the case of existing buildings, should consider the preparation of a Schedule of Condition to attach to the lease to limit liability to no more than the building that they are taking on.

Those already in occupation need not despair. Whilst the terms of the lease cannot be renegotiated, dilapidations liability can be managed and mitigated over the course of a lease by implementing a robust dilapidations strategy. Again, professional advice should be obtained to fully understand the implications.

Those tenants at or near lease end cannot avoid a claim if their building is dilapidated or in an altered state. The current thrust of government legislation is geared toward addressing spurious landlord claims and, therefore, it is important for a tenant to quickly recruit professional advice to help decipher the complexities of dilapidations law and procedure.

Tenants need to be fully aware of their dilapidations liabilities prior to entering into any lease and must understand the implications of the various lease covenants. With the right advice, the process need not be so painful for both tenant and landlord at lease end, and with proper planning the inevitable dilapidations claim will not have such immediate impact on business finances.