Dilapidations : Know Your Lease
The Impact of Repair and Refurbishment Obligations in Long Term Commercial Leases
- Dilapidations should be at the forefront of every landlord and tenant’s mind from the outset of leasehold negotiations.
- Dilapidations often arise when a lease comes to an end, in cases of assignment of leasehold interests or where a break clause is exercised and when a tenant receives a Schedule of Dilapidations setting out its obligations under the lease vis-à-vis repair, refurbishment and decoration, etc.
- Landlords should ensure that they document the condition of the premises at the outset of the lease by way of photographic evidence to support any dilapidations claim they intend to make against their tenant and tenants should do so also to support their defence to any such dilapidations claim.
What are dilapidations?
Dilapidations are items of disrepair or defects which tenants are required to rectify or pay to have remedied under repairing covenants contained in their lease prior to an exit, break or natural ending of a lease as tenants have an obligation to keep the premises as they find it.1
Landlords seek to impose as broad a repairing obligation as possible on their tenants thereby reducing their exposure to financing repairs and to ensure that they receive a clear rent free from any deductions.
The nature of the letting will determine the extent of a tenant’s obligations under the lease for example, in the case of a single let of an entire premises occupied by one tenant only with no shared common areas, landlords will seek to impose full internal and external repairing obligations on the tenant making them liable to repair the entire building.2 Such lettings are commonly referred to a Full Repairing and Insuring ("FRI") Lettings.
In multi-let premises cases, landlords will generally be responsible for the structure and the exterior and tenants will be responsible for the internal non-structural elements.
Limiting Repair Obligations – Equity & Fairness
Repair obligations may be limited to a Schedule of Condition reflecting the condition of the premises at the start of the lease. The important thing to note in such cases is that tenants are not obligated to return the premises to the landlord in any better state of repair then existed at the start of the lease. Furthermore, landlords seek to ensure that the premises is retuned in the same condition it was received by the tenant.
Prudent tenants will try to negotiate for the exclusion of
fair wear and tear, which would ensure that they are not obliged to repair anything which would deteriorate over the course of the term of the lease.
A pragmatic approach in such negotiations would be for both parties to agree upon a clause to keep the demised premises
in good repair which would benefit both parties.3
The issue of tenant fit-out works can be contentions and tenants should ensure that they are not required to re-instate the premises to the condition that they found it in thereby imposing an obligation on them to remove all fit-out materials at the end of the term. In the interest of equity and fairness, landlords will often appreciate that such fit-out works can add to the future marketability of the premises and will be agreeable to the fit-out remaining intact at the end of the term.
Decoration, covenants and cleaning
It is important for a landlord to include provisions in the lease which impose an obligation on the tenant the keep the premises clean tidy and decorated and leases often provide for internal and external decoration years whereby the tenant is obliged to paint the interior and exterior of the premises at set intervals, usually every four or five years during the term of the lease.4
Commercial leases usually contain a covenant on the part of the tenant to comply with statutory requirements, to ensure that the tenant is obliged to carry out certain works required the statutory authority for example, fire safety matters and landlords are entitled to enquire that such covenants are complied with by tenants.
The Balance of Power
Market conditions determine the level of negotiating power tenants and landlords have when negotiating commercial leases and the improvement in economic circumstances and the rise in commercial rents in the last couple of years has seen a noticeable shift in power in favour of landlords since the recession hit in 2007. The Dublin commercial property market is looking bright for the foreseeable future and the Dublin office market in particular has performed steadily for the last few years benefitting from high levels of Foreign Direct Investments (“FDI") since 2008 from the likes of Google, Microsoft and Mastercard to name but a few and according to JLL research, close to 70 per cent of the take-up of office space in the first half of 2015 was by new and existing FDI companies.5 Demand for prime commercial properties remains steady according to Lisney and rents have remained stable across the industrial and retail sectors, while increasing in the office sector. Prime vacancy rates remain at low levels however supply issues remain a concern.6
Dilapidation Claims – Who pays?
A tenant may well be responsible for the landlord’s professional fees in dealing with dilapidation claims including legal and surveying fees. Tenants should complete dilapidation works in a timely fashion because if landlords are prevented from letting the premises at the end of the lease because dilapidations works have not commenced or been concluded by the tenant, then the tenant may be liable for such loss of rent, etc., depending on the terms of the lease.
Know your Lease
Tenants are often advised to physically examine and defend dilapidations claims and landlords should not be put in a better position than they would have been had the tenant complied with their dilapidations obligations and it is crucial for tenants to budget for dilapidations claims made by their landlord when exiting their lease. It is worth noting that there is no clear procedure for dealing with dilapidations claims in this jurisdiction like that of England and Wales and in the absence of agreement between the parties or provisions in the lease the ultimate remedy is litigation in the Irish Courts however rare these cases are.
Given the improvement in the Irish economy and the current level of activity in the commercial landlord and tenant arena, dilapidations will continue to play and important role in the commercial sector and landlords and tenants alike need to be fully aware of their obligations under their lease from the outset.
Copyright © McKeever Solicitors, 1 September 2016.
This article is a general review of the law on the subject and is not intended to be a complete statement of the law. Specific legal advice must be sought on a case by case basis. For further information, please contact Helen Sweeney
1 Accountancy Ireland – “Don’t be Blindsided by Dilapidations”.
2 Complex Conveyancing, 2008, Tottel Publishing.
4 Brief mention should be made about ‘improvements’ under the heading ‘alterations’ and landlords need to ensure that any alterations made by a tenant do not constitute “improvements” under Section 45 of the Landlord And Tenant (Amendment) Act 1980 and if they do proper procedures need to be followed. If works such as additions or alterations have been made to the existing premises constitute “improvements” then the tenant will be entitled to compensation when the tenancy ends provided the tenancy has not been terminated for non-payment of rent. A prudent tenant will apply for the landlord’s prior written consent and enter into a licence for works before undertaking such alterations. – Complex Conveyancing, 2008, Tottel Publishing.
5 ESRI Research Note – “FDI and the Availability of Dublin Office Space”.