Everything you need to know about dilapidations assessment reports

Whether you are a landlord or tenant, the process of dilapidations is a crucial part of your contractual agreement.

In the traditional course of events, a dilapidations claim is prepared at lease end, whereby a terminal schedule of dilapidations will normally be prepared and issued in the last year of the term.  In certain circumstances however, a Landlord may prepare and serve a claim in the currency of the lease – an interim schedule of dilapidations – typically, this is when there may be a concern on how the Tenant is performing against its lease obligations.

In addition to this however, dilapidations assessment reports can be produced for business strategy purposes; most commonly, in acquisition or merger situations where a company looking to acquire a business may be seeking to assess its potential position when it takes on the role of either Landlord or Tenant, to a lease in progress.

Sometimes a diligent Tenant will commission an assessment so that it is armed with the relevant knowledge to be able to fulfil its obligations under a lease.  This is often carried out as part of a financial provisioning process, whereby a Tenant is allowed to make a provision in its accounts for dilapidations matters, which can offset their tax liability.

What is a dilapidation assessment report?

A dilapidations assessment report is compiled following a detailed review of the relevant documentation pertaining to the lease – i.e. a lease (and any relevant head or sub leases), a Schedule of Condition, Licence(s) to Alter (and accompanying drawings / specifications), Deeds of Variation and relevant side letters.  This process enables the surveyor to establish the extent of the Tenant’s obligations in relation to repair, decoration, reinstatement, compliance with statute and yielding up (giving back) the property at lease end.

The dilapidations survey records the current condition of the property as defined by the lease documentation.  It focuses on the building fabric, fixtures and fittings and service installations.  The surveyor will typically take detailed notes, measurements and record photographs to illustrate their findings and support their advice.

The final report will set out the accrued dilapidations liabilities incurred by the Tenant from the lease commencement up to the report date, and forecast liabilities expected between the report date and lease end.  These will be costed to present the client with a reasoned overall assessment of the Tenant’s financial liability under the terms of the lease (accrued + forecast).

Do I need a dilapidations assessment?

Although there is no legal requirement to carry out a dilapidations assessment, it is often a cornerstone of any due diligence process relating to a business merger / acquisition.  Furthermore, a professionally prepared assessment would be expected to be in place to support any financial provisioning made in a set of business accounts.  The benefits of the assessment are:

  • A prospective landlord can quickly establish the likely extent of its Common Law claim against its Tenant and, in the process will establish a true, up-to-date picture of the current state of the property, measured against the Tenant’s obligations set out in the lease.
  • The report will clarify any protections afforded to the Tenant as a result of the wording of the lease and associated documentation.
  • From this, they can make strategic decisions on the basis of the hard evidence supporting the performance of the Tenant.
  • A prospective Tenant will be able to establish the true position of the dilapidations liability accrued by its predecessor, as well as a forecast of its financial liabilities for the remaining period of the lease. This will assist in financial negotiations relating to the proposed business transaction.
  • A well-advised Tenant can use a professionally produced dilapidations assessment to accurately mitigate their tax position during the currency of their lease.

Who conducts the assessment?

A Chartered Surveyor will carry out the document review, property inspection and compile the report.  They will have experience in dilapidations procedures and ensure their reports are thorough and accurate.

Who pays for the report?

Who is responsible for the costs of the survey and report will come down to the instructing party.  Costs will depend on the size, type of property and complexity of the lease arrangements.

General tips on dilapidations protocol

Landlords:

  • Provide a Terminal Schedule of Dilapidations in a timely manner before the lease end date, whenever possible.
  • Be transparent in your intentions for the property at lease end. Any proposed improvement or redevelopment works must be disclosed to the Tenant under the principle of supersession.
  • Instruct an experienced Chartered Surveyor to carry out any dilapidations work on your behalf, so that your expectations can be managed from an informed viewpoint.
  • Be reasonable in your negotiations with the tenant when it comes to repair work.

Tenants:

  • Be proactive. Read the lease and make sure you are aware of your obligations – some of these will be ongoing during the lease term, and not just confined to lease-end.
  • Understand your responsibilities when it comes to property maintenance.
  • Look after the property according to your agreement for the duration of the lease.
  • Engage a Chartered Surveyor experienced in dilapidations matters as you advisor upon receipt of a schedule of dilapidations at the end of the lease, to ensure your legal position and potential exposure to costs is protected.
  • Make adequate financial provision for, and uphold your responsibility to your lease obligations, to avoid potential legal proceedings.

Get in touch

At Trinity Rose, our team of experienced Chartered Surveyors are experts in dilapidations protocols and here to help with your dilapidations requirements.  If you have any questions or would like to find out more, please get in touch.