The Founder Series: What Is a Dilapidations Clause and How Should It Affect Your Office Fit-Out Plans?

By James Piggott | Founder At Fenway®

QUICK SUMMARY: If you are a commercial tenant in London, your lease almost certainly contains a dilapidations clause. It is one of the most important, but most frequently overlooked, provisions in a commercial lease and it has direct implications for how you plan, specify and deliver your office fit-out. Understanding your dilapidations obligations before you begin a fit-out is not merely good practice. In many cases it is financially material and the decisions you make at the design and specification stage can significantly affect your liability at lease end.

What Is a Dilapidations Clause?

A dilapidations clause is a provision in a commercial lease that sets out the tenant's obligations to maintain and repair the property during the term of the lease and to return it to an agreed condition at lease end.

In the context of an office fit-out, it typically means that when you vacate the premises, you are required to remove all the works you have carried out and return the space to the condition it was in when you took it, fair wear and tear excepted.

In practice, this means stripping out your Cat B fit-out entirely, including partitioning, flooring, suspended ceilings, kitchenettes, electrical alterations and any other works you have undertaken.

The cost of doing so can be substantial and it is a cost that falls to the departing tenant unless it has been negotiated away or settled by agreement with the landlord.

How Dilapidations Liability Arises

Dilapidations liability arises in two main ways.

Terminal dilapidations

Terminal dilapidations are claims made by the landlord at the end of the lease for the cost of works required to return the property to the condition specified in the lease.

They are the most common form of dilapidations claim and can arise even where the tenant believes the property is in good condition, if the standard required by the lease has not been met.

Interim dilapidations

Interim dilapidations can be claimed by the landlord during the term of the lease if the tenant is in breach of its repair and maintenance obligations.

These are less common in practice but can arise where a property has been neglected or where alterations have been made without the landlord's consent.

The Schedules of Condition and Reinstatement

Two documents are particularly important in managing dilapidations risk.

Schedule of condition

A schedule of condition is a detailed photographic and written record of the state of a property at the point a lease is entered into.

If a schedule of condition is appended to the lease and the lease states that the tenant's repairing obligations are limited to no better condition than that recorded, it can significantly limit the tenant's liability at lease end.

Negotiating a schedule of condition at the start of a lease, particularly for older properties or those with existing defects, is strongly advisable.

Once a lease is signed without one, the opportunity to limit liability in this way is lost.

Licence for alterations

A licence for alterations is a formal consent from the landlord permitting specific works to be carried out.

It will typically specify whether the works are to be reinstated at lease end or whether the landlord will accept them as a permanent improvement to the property.

If a landlord agrees in a licence for alterations that specific works need not be reinstated, that agreement is binding and reduces the tenant's dilapidations liability accordingly.

This is worth negotiating for, particularly where the works represent a genuine improvement to the property, such as new mechanical and electrical services or a high-quality fit-out that enhances the lettable value.

How Dilapidations Should Affect Your Fit-Out Planning

The implications of dilapidations obligations for fit-out planning are practical and specific.

Budget for reinstatement from the outset

When you are preparing your overall project budget, include a provision for dilapidations and reinstatement costs at lease end.

A rough rule of thumb is to set aside 50 to 75 per cent of the original Cat B fit-out cost as a reinstatement provision, though the actual liability will depend on your lease terms and what the landlord is willing to accept.

Consider specification choices carefully

The more bespoke and permanent your fit-out, the higher the potential reinstatement cost.

This does not mean you should compromise on quality but it does mean that demountable or reversible solutions, where they meet your operational requirements, can reduce future liability.

Demountable partitioning, for example, can be removed and reused or sold rather than simply demolished.

Seek a landlord waiver for improvements

If your fit-out includes works that genuinely improve the property, such as new mechanical and electrical infrastructure or energy efficiency improvements, it is worth discussing with your landlord whether reinstatement of those works can be waived in the licence for alterations.

Many landlords will accept this, particularly for works that make the space more attractive to future tenants.

Keep records throughout

Maintain a complete set of drawings and records throughout the fit-out process.

At lease end, these will be invaluable in demonstrating what works were carried out, in negotiating a dilapidations settlement and in instructing reinstatement works efficiently.

Take professional advice

Dilapidations is a specialist area of property law and surveying practice.

Before signing a lease, before commencing fit-out works and before vacating a property, we strongly recommend taking advice from a qualified building surveyor or solicitor with experience in commercial dilapidations.

The Dilapidations Settlement Process

In practice, many dilapidations claims are resolved by negotiation and financial settlement rather than by the tenant actually carrying out reinstatement works.

The landlord serves a schedule of dilapidations setting out the works they consider necessary and their cost.

The tenant, usually through a surveyor, responds with a counter-schedule disputing items or costs they consider unreasonable.

The parties then negotiate a settlement figure, which the tenant pays in lieu of carrying out the works.

This approach is pragmatic and often preferable for both parties, as it avoids the disruption and cost of physical reinstatement where the landlord intends to refurbish the space in any case.

Understanding this process in advance means you can plan for it.

Setting aside a dilapidations provision in your accounts from the point of fit-out completion is sensible financial management.

Talking to Fenway About Your Project

Fenway delivers office interior fit-out, refurbishment and alterations projects in Central London and we are experienced in working within the constraints and obligations of commercial leases.

Whilst we are not solicitors or surveyors and cannot provide legal or dilapidations advice directly, we can help you understand the practical implications of your lease obligations for your fit-out design and specification and we work regularly with surveyors and solicitors on behalf of our clients. 

Contact us at https://www.fenway.london/contact-us

Please note: Fenway® is a specialist sustainable office interiors company serving Central London. This article is provided for general information only and does not constitute legal or surveying advice. We strongly recommend taking specialist professional advice on dilapidations before entering into any commercial lease or commencing fit-out works.