Dilapidations
What are Dilapidations?
Whether you are a Landlord or Tenant, when you enter into a Lease, you are effectively entering into a Contract.
This contract contains specific covenants that are the agreed terms of the contractual relationship.
In Dilapidations, the main covenants largely relate to keeping the property well maintained, in good condition and free from any issues that may affect the Landlord’s interest.
When the Lease comes to an end, or is nearing the end of the term, a landlord will typically produce a Schedule of Dilapidations in respect of any breaches of these Covenants that have accrued during the Tenant’s occupation resulting in damages.
Conversely, the Tenant can also issue a Schedule on the Landlord.
A Chartered Surveyor will be instructed to undertake an assessment of the Demised Premises and to provide a report on the condition and breaches of covenant. This is referred to as a Schedule of Dilapidations.
How Lansdown Associates can help
Our team of RICS Chartered Surveyors can assist both Landlord and Tenants with Dilapidations related matters.
The initial stage of any instruction is to assess the terms of the Lease and to then inspect the property to identify pertinent breaches of Covenant.
We will then be able to provide a Schedule for negotiation / settlement purposes.
Our Chartered Surveyors have extensive experience of dealing with Dilapidations related matters and current case law to better facilitate a settlement.
Dilapidations Liability Assessments
Dilapidations Liability Assessments can be a useful tool for both Landlord and Tenant.
A Landlord may wish to procure an Assessment in order to establish their potential position in relation to a future Dilapidations claim.
A Tenant typically procures a Dilapidations Assessment in order to establish their potential exposure in respect of capital expenditure should the lease terminate.
From a Tenant’s perspective, a Dilapidations Liability Assessment can be useful in setting out a likely claim for damages and help to strategise an exit with minimal disruption to core business activities. For example, the lease may require re-decoration within the last 3-6 months of the term and so knowing this, will allow the Tenant to program these works around incumbent business activity so that the residual liability is distilled.
A Dilapidations Liability Assessment can also be utilised to establish potential cost liabilities as a fixed cost for financial reporting purposes.
Dilapidations Liability and Financial Reporting
In relation to commercial leases, the Financial Reporting Standard 102 (FRS102), which has recently replaced FRS12, provides an allowance for future dilapidation liabilities to be treated as an operation-related expense that can be included within the profit and loss account of the operating company.
Until the expenditure has been satisfied (in that the Dilapidations are settled at lease end) the proposed likely liability can be included within the company’s tax computation subsequently reducing tax exposure. Given current market conditions, allied with uncertainty over inflation, fuel costs, restrictions on international business, and the like, utilising this particular method of accounting is an astute way of mitigating tax liability.
A Tenant’s potential dilapidation provision is completely deductible for corporation tax purposes if certain FRS102 criteria are met, those being;
The business is a party to a present legal or constructive obligation – Typically this requires the presence of a signed lease contract, giving rise to a legally binding commitment for the Tenant to undertake specific reinstatement, re-decoration, and repairs for the duration of the term, referred to as covenants.
The incumbent legal obligation is as a direct result of a past event – In respect of occupying a Leasehold property, this would typically be the end of a lease term.
Transfer of economic benefits arising from legal obligation – For this aspect to be satisfied in full, it would need to be fully demonstrable that the proposed expenditure would be required to complete reasonably necessary dilapidation works in order to comply with obligations set out within the Lease or to make a settlement payment to the landlord in respect of damages.
A reliable estimate of the cost – This aspect requires a wholly professional assessment of the likely cost of dilapidation works supported by robust supporting evidence.
Our Chartered Surveyors have extensive experience in dealing with lease-end dilapidations and proposed costs thereof, and regularly prepare FRS102 compliant dilapidations assessments for a variety of accountants, Commercial organisations, and Institutional clients, enabling them to provide a reliable and accurate estimate of their Leasehold Dilapidations capital liability.