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Real Estate Update: Mishaps with Dilaps – A Tenant’s Guide to Dilapidations

08 May 2018

A lease will generally place a positive obligation on a tenant to hand back or ‘yield up’ vacant possession at the expiration of the term, having restored the property to the condition it was in at the commencement of the term. In some cases, the property must be yielded up to the landlord in good condition irrespective of its condition at term commencement. Typically, there is no obligation on the landlord to serve a schedule of dilapidations and the tenant should request that the lease contains an obligation on the landlord to:

  • serve a schedule of dilapidations not less than six months prior to lease expiry, and
  • accept a payment in lieu of dilapidation works and confirm a sum that will be acceptable to it

Dilapidations payments

The tenant should consider the issue of dilapidations at an early stage so that it has the option to (i) carry out the required works or (ii) negotiate a dilapidations payment with the landlord. The terms of the yield up clause and any licences for works should be reviewed to confirm whether the tenant is obliged to remove any alterations it made to the property. The tenant should agree a schedule of dilapidations with the landlord well in advance of the expiry of the lease. If a schedule of condition, which details the condition of the property at the commencement of the lease, is attached to the lease then this may limit the tenant’s repair obligations so that it will not be obliged to yield up the property in any better condition than at term commencement.

If there is no specific landlord obligation to accept a dilapidations payment, the landlord may require that the tenant carries out the dilapidations works. If the tenant makes a dilapidations payment to the landlord, then this should be documented in an agreement, executed by both parties, which confirms that the payment is in full and final settlement of all of the tenant’s obligations under the lease, past, present and future.

Third party interests

If the tenant has granted any licences, sub-leases or any interest in the property to a third party, it should ensure that these agreements expire or can be terminated in advance of the expiration of the term of the tenant’s lease.

Overholding

If the tenant overholds and remains in possession of the property after the lease expires or has not carried out the dilapidations works prior to vacating, the landlord might claim additional sums as compensation for the loss of rent which results from the landlord being delayed in re-letting the property. The landlord’s entitlement to compensation or additional rent depends on the circumstances and the tenant should ensure that it has carried out any required works or made a dilapidations payment and vacated the property prior to lease expiry to avoid a dispute.

Conclusion

The yield up provisions in a lease should be examined well in advance of the expiry of the term to ensure that the tenant has sufficient time to carry out any works to the property, remove its fixtures and fittings and ensure that any sub-tenant or licensee removes its property and vacates the building in time. If the tenant does not intend to carry out the works and intends to make a dilapidations payment to the landlord, this should be agreed well in advance of lease expiry and documented in an agreement.

For more information on tenant obligations, contact a member of our Real Estate team.


The content of this article is provided for information purposes only and does not constitute legal or other advice.

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