In the current climate where occupier demand is weak, the issue of dilapidations has become ever more prominent. For those not familiar with the term, dilapidations is the phrase generally used in the commercial property world to describe the disrepair that exists within leased premises. In a standard landlord/ tenant scenario, you would expect the tenant to have some liability for rectifying items which are out of good repair and for the landlord to have the ability to enforce this obligation.
The obligation to repair usually applies throughout the life of the lease, however it is common for the issue to be addressed only upon its expiry or earlier termination. One would expect that it would be as straightforward as the landlord requiring the tenant to carry out the necessary works, however as is often the case the position is not quite as straightforward.
That’s because a practice has developed whereby landlords do not normally require tenants to carry out the works, but rather they seek to agree a sum for carrying the works with the tenants which is then paid by the tenants in settlement of their liability. Often this suits both parties as the tenants can then use their premises right up until the end of their lease without the need to vacate early and carry out works (which the tenant is often not experienced in doing in any event), and landlords often don’t have to expend the full amount received in effecting the works. There can therefore be a financial benefit to them. Indeed for this reason amounts are often agreed which result in a cost saving to the tenant too which increases the attractiveness of this practice even more.
The difficulty faced by landlords now however is that in a slow market there is often a void period once a tenant has vacated. The savings I refer to above which landlords often make in settling dilapidations claims often arise from the fact that an incoming tenant will carry out its own works, negating the need for the landlord to do some or all of the dilapidations works. Instead the landlord might only need to make a contribution to the incoming tenant’s works from the ‘dilapidations pot’. Where there is no incoming tenant the landlord may be unable to make this saving.
More significantly, where a financial settlement is reached this is, strictly speaking, an estimate of the landlord’s loss arising from the fact that the tenant has failed to fulfil its obligation to repair in full. A well advised tenant may be able to argue that in certain circumstances no such loss arises. This is particularly so where in the void scenario a landlord opts not to take the financial risk of carrying out the repair works speculatively, an exercise which would allow it to establish its loss.
Repair and dilapidations provisions within leases vary significantly, and often the strength of the respective parties’ positions can rest upon the precise wording used. One type of clause which is worthy of specific mention is that which seeks to oblige the tenant to pay a sum of money in lieu of dilapidations, irrespective of whether or not the repair works are actually carried out by the landlord. While at face value it might seem that the tenant is obliged to pay this sum, on occasion it can be argued that such a clause is of no effect. Scots law generally does not allow clauses which operate as penalties to be given effect to and in certain circumstances it can be argued that such a clause is penal in nature and not related to the actual loss suffered by the landlord.
Hence even with the benefit of such a clause, in the current climate landlords may well wish to consider whether there is merit in enforcing dilapidations clauses during the lifetimes of leases. Tenants on the other hand may have grounds for avoiding the full cost of dilapidations works, even where there are specific obligations to pay. There is value for both in seeking the right advice early.