Dilapidations in commercial property explained

Dilapidations are the breaches of a tenant's repairing, decorating and reinstatement obligations under a commercial lease, and the landlord's right to have them remedied or to be paid for the failure. For industrial property let on full repairing terms, dilapidations are where the repairing covenant is finally settled, usually at or near the end of the lease, and they can represent a significant sum for both sides: a hidden capital cost for an investor inheriting a building handed back below standard, and a real liability for a departing tenant who has not budgeted for it.

This guide explains what dilapidations are, the three main types, the schedule of dilapidations and the protocol that governs terminal claims, how claims are valued and the statutory cap that limits them, and how the dilapidations position feeds into the value and financing of an industrial asset. We arrange finance on industrial property as a broker and introducer, not a lender, and we are not building surveyors or solicitors. Dilapidations are a specialist surveying and legal field, so take advice from a building surveyor and a solicitor on any specific claim; this is general information only.

What are dilapidations in commercial property?

Dilapidations are the state of disrepair or the breaches of covenant for which a tenant is liable under a commercial lease, together with the landlord's claim arising from them. They flow directly from the repairing, decorating, reinstatement and yielding-up obligations the lease imposes, which on a full FRI lease are extensive. When a tenant has failed to keep, or put, the premises in the contracted state of repair, decorate as required, or reinstate alterations they made, the landlord has a dilapidations claim.

Claims arise at two points. Interim dilapidations claims can be made during the term, where disrepair is serious enough that the landlord acts before lease end, though these are less common. The great majority are terminal dilapidations, assessed at or shortly after the end of the lease, when the landlord inspects the returned building against the lease obligations and quantifies the breaches. For an industrial unit, the big-ticket items are usually the roof, cladding, the floor slab, loading doors, mechanical and electrical services, and the reinstatement of any tenant fit-out such as mezzanines or partitioning.

What are the three types of dilapidations?

Dilapidations are conventionally grouped into three types, which together make up most schedules. Wants of repair are the failures to keep or put the premises in the repairing standard the lease requires: a leaking roof, corroded cladding, a cracked slab, defective doors or services. Decorations are the failures to redecorate as the lease requires, often at set intervals and in the final year of the term. Reinstatement is the failure to remove tenant alterations and return the premises to their original layout where the lease requires it, which on an industrial unit can mean removing a mezzanine, partitions or process installations.

The three types are quantified together in a schedule of dilapidations, but they behave differently. Repair and reinstatement items are usually the largest and most contested, because they turn on the precise covenant and the building's condition. Decoration items are generally smaller and more formulaic. Reinstatement can be the sharpest, because a tenant who installed valuable improvements may face a bill to remove them, unless the landlord wants them retained, in which case the obligation may fall away or be negotiated.

The three types of dilapidations and what they cover

Type	What it covers	Typical industrial items
Wants of repair	Failure to keep or put in the contracted repairing standard	Roof, cladding, floor slab, doors, services
Decorations	Failure to redecorate as the lease requires	Internal and external decoration in the final year
Reinstatement	Failure to remove alterations and restore the original state	Mezzanines, partitions, fit-out and process installations

What is the schedule of dilapidations and the protocol?

A schedule of dilapidations is the document, usually prepared by a building surveyor, that lists the alleged breaches of covenant, the works said to be required to remedy them and the cost. A terminal schedule is served at or near lease end and forms the basis of the landlord's claim. The tenant's surveyor responds, often item by item, disputing the existence of breaches, the works proposed or the costs, and the two sides negotiate towards settlement, which is how the large majority of dilapidations claims resolve without litigation.

Terminal dilapidations claims in England and Wales are governed by the Dilapidations Protocol, a pre-action protocol that sets out how the parties should conduct a claim before any court proceedings. It requires the landlord to serve a properly particularised schedule, usually endorsed by the surveyor, and crucially to provide a quantified demand that reflects the landlord's genuine loss, not simply the cost of every item of work. The tenant must respond substantively. The protocol is designed to encourage early, evidenced settlement and to discourage inflated claims.

1. Inspection and schedule

   The landlord's surveyor inspects the returned premises against the lease and prepares a schedule of dilapidations setting out breaches, remedial works and costs.

2. Quantified demand

   The landlord serves the schedule with a quantified demand reflecting the genuine loss, in line with the Dilapidations Protocol.

3. Tenant response

   The tenant's surveyor responds, item by item, agreeing, disputing or reducing the claim, supported by evidence.

4. Negotiation and settlement

   The parties negotiate, taking account of the statutory cap and the landlord's actual intentions for the building, and most claims settle without court proceedings.

How are dilapidations claims valued and capped?

The most important point in valuing a dilapidations claim is that the landlord cannot simply recover the cost of every item on the schedule. Section 18 of the Landlord and Tenant Act 1927 caps damages for breach of a repairing covenant at the amount by which the value of the landlord's reversion has been diminished by the disrepair. If the breaches have reduced the property's value by less than the cost of the works, the cap bites and damages are limited to the diminution in value. If the landlord intends to demolish or substantially redevelop the building, the disrepair may have caused little or no loss, and the claim can fall away almost entirely.

This is why the landlord's genuine intentions for the building matter so much. A landlord who is going to refurbish and re-let a unit may recover close to the cost of the necessary works, because the disrepair has genuinely cost them. A landlord who is going to knock the unit down has usually lost little from the tenant's failure to repair, and the cap reflects that. A departing tenant should always ask what the landlord actually plans to do, because it can transform the realistic settlement figure.

A dilapidations claim is capped at the loss to the landlord's reversion, not the cost of the works, so the landlord's real intentions for the building drive the settlement.

How does the dilapidations position affect value and finance?

For an investor, the dilapidations position is a real but often overlooked part of an industrial asset's economics. Buying a let estate with leases near expiry means inheriting both the prospect of dilapidations recoveries from departing tenants and the cost of any disrepair the recoveries do not cover. A well-advised buyer models the dilapidations position on acquisition: a strong recovery can help fund the refurbishment that re-lets a unit, while a building handed back well below standard, against a weak or insolvent covenant, can be a hidden capital cost that the headline yield never showed.

Lenders take the same view in reverse. On investment lending against an estate with imminent lease expiries, a lender will consider the condition the units are likely to be returned in, the strength of the covenants behind any dilapidations claim, and the capex needed to re-let, because all of it bears on future income. A clean, well-maintained estate let to strong covenants presents a simpler story than one facing a wave of expiries, uncertain dilapidations recoveries and significant refurbishment, which our guide to how to buy an industrial unit sets in the wider context.

Where dilapidations recoveries or the works that follow them need funding, the routes are the same as for any industrial capex: a refinance or capex facility on an income-producing estate, or shorter-term funding where a unit must be refurbished between tenancies before it is re-let and the debt re-based. Our commercial mortgage and development finance pages set out the options, and our multi-let industrial estates page covers the asset class where dilapidations come up most. Use a building surveyor and solicitor on any actual claim; this is general information, not surveying or legal advice.