Dilapidations: Put yourself in the driving seat for negotiations

As a tenant, you can’t steer negotiations properly if you aren’t in the driving seat, and this is particularly important at the end of a lease when dilapidation costs are on the horizon.

There are essentially two options for settling landlord costs to restore the space to a lettable state. 

One is to pay a cash settlement to the landlord so they can carry out the work after you’ve vacated; the other is to do the redecoration, repair and reinstatement work yourself.

“It is often preferable for tenants to pay the cash settlement because this means you can use the property right up until the end of the lease, rather than having to vacate early so the work can be done,” says Matthew Reading, Partner, Carter Jonas. 

Doing the work yourself means you have control over the costs, but there are steps you can take to make sure the cash settlement you pay is appropriate.  

Let’s reverse back a bit in your lease timeline, as there are many benefits to engaging early with the dilapidations process. 

“Don't wait until you receive a dilapidations schedule from the landlord, which may be in the last couple of months of your lease term,” says Reading. “Start planning about it 12 months before lease end to give you time to budget correctly and maybe get costs for the work, that way, you won't be firefighting.” 

Important first steps for tenants 

The first step is gathering all the relevant information, such as your lease and licence to alter. Documentation like your asbestos management plan and electrical and fire alarm certificates are also important as if these aren’t kept up to date, they can be included in the dilapidations claim. 

A professional dilapidations assessment includes a building survey and checking the lease for legal obligations for repair, redecoration and reinstatement.

This allows you to calculate the costs and budget for that expense. “It also allows you to plan for doing the work if the landlord won’t take a reasonable cash settlement for the dilapidations,” says Reading.

Landlords generally opt for cash settlements, which means the challenge then is to negotiate a fair settlement fee. There are sometimes certain procedures and criteria for returning the building to a lettable state, such as the timing of the reinstatement notice.

“If the landlord doesn’t provide the correct notices, it can give the tenant leverage in their negotiation,” says Reading. “And the difference in costs can be stark. I've seen cases where a £800,000 claim has been reduced to £50,000 because the right notices weren’t served.” 

Look out for unnecessary fees

It’s important to look out for areas where there may be unnecessary fees being claimed by the landlord. 

Minimum Energy Efficiency Standards (MEES) is probably the biggest change to be aware of when negotiating dilapidation costs.
The work a landlord undertakes to bring a building to the appropriate standards can’t be claimed from the tenant through the dilapidation fees. 

For example, if a tenant has added some light fittings that are no longer available to buy, the cost of replacing all the lights may be added to the dilapidations claims. However, if all the lights have to be upgraded and replaced to satisfy MEES, then t may not be a cost the tenant has to bear. 

If it is a multi-let building, it’s worth looking at what refurbishment work has been done to other floors to get an idea of what might happen to your space after it’s vacated. 

“Exposed services are in vogue at the moment, so you don’t want to end up being billed for replacement ceiling tiles if the landlord is going to remove them,” says Reading. “We’ve got a few examples where that has happened.”

Similarly, a professional surveyor will also be able to investigate any bigger plans for the building. 

In one instance, a dilapidations claim was reduced from £1.2m to about £30,000 because the landlord was converting the building into a residential use which was not initially disclosed to the tenant. The tenant only paid strip-out fees and did not pay any reinstatement or redecoration. 

Improvements to the space

If the tenant has made genuine improvements to the space, then early engagement with the landlord allows time to negotiate a potential reduction in the cash settlement, if the landlord sees a benefit in keeping the alteration. 

An example might be if a mezzanine has been added to an industrial building or high quality kitchen break out space installed in an office.  
Leaving these alterations saves the tenant the cost of removal and the landlord the cost of re-installing.

It’s also worth checking if the landlord is registered for VAT. Small landlords who may have put their property in their pension may not be registered, which means any dilapidation fee will have 20% VAT on top, which the tenant can’t claim back if agreeing a cash settlement. 

Dilapidations can be complex negotiations but understanding your obligations and planning puts you in pole position for negotiations.

How can Carter Jonas help

Our building consultancy professionals are able to provide advice on all aspects of dilapidations, including liability throughout the lease process – from agreeing the lease terms through to lease end.

To find out more about this topic, read now our Dilapidations guide for tenants, or get in touch with one of our building consultants.