If you haven’t made plans to move on from your commercial property, you’d be forgiven for not even knowing the term dilapidation costs. However, when you come to the end of your tenancy, this can become a potential financial burden for tenants.
As a small business owner, understanding what dilapidation costs include and how to deal with them is crucial. In this article, we’ll explain what they are, how to estimate them and provide practical advice on dealing with these costs.
What are dilapidation costs?
Dilapidation costs, often referred to as "dilaps," are the costs associated with bringing a leasehold property to the state of condition required by the lease. Dilapidation costs can include repairs, cosmetic work, and even any necessary structural work to make good the property, or bring it back to its pre-lease state, depending on the circumstances and what the terms of the repair covenant require.
Therefore, if you’ve made significant or structural changes to the property, and are required to reinstate it to its pre-lease state, or you have taken on a building in poor repair and condition but with a high-threshold repair covenant, you may be facing significant dilapidations costs.
This doesn’t necessarily mean that you have left the property in a state of disrepair, simply that is it not in the same condition as the start of the lease. It’s important for landlords and tenants to be aligned when it comes to expectations at the end of a commercial lease, so that the dilapidations process is straightforward.
How to estimate dilapidation costs
Estimating the costs requires a careful examination of the leased property. Begin by conducting a thorough dilapidations survey to identify any damages or alterations and the general state of repair and condition. If you have a full repairing lease, this survey should encompass both the interior and exterior of the property, assessing structural elements, flooring, walls and ceilings, paintwork and fixtures and fittings etc.
Once the issues are identified, seek professional advice to determine the cost of rectifying each item.
This process helps in creating an accurate estimate of the total dilapidation costs.
The survey and costs estimate would usually be done by an expert surveyor who is a member of the Royal Institution of Chartered Surveyors (RICS). They will be able to identify the cost of repair and how much it would cost to carry out the dilapidation work. They may need to work in tandem with an experienced builder with regards to the estimates.
What is dilapidation provision?
Dilapidation provision outlines the financial responsibilities of tenants regarding property maintenance and restoration. From an accounting perspective, dilapidation provision is recognised as a liability on the tenant's balance sheet.
The best thing you can do as a business is to put money aside for the cost of dilapidations throughout the term of the lease, so that the money is available when you need it.
How much does a dilapidation survey cost?
The cost of a dilapidation survey can vary based on factors such as the size and complexity of the property. Typically, the costs are likely to range from £500 to £2000 + VAT depending on the circumstances. A chartered building surveyor will be able to give you a quote.
How can I protect myself from large dilapidations costs?
The best way to protect yourself against large dilapidation costs is to limit the repair obligations in the lease when you first take on the premises. You should limit the repair obligations so that you are required to return the property in no better state of repair and condition than it is at present. You then evidence that state by attaching a detailed, photographic Schedule of Condition to the lease.
A Schedule of Condition can also be prepared by a chartered surveyor, but alternatively you could create it yourself by a large series of high-quality digital photographs. The schedule should then be signed as approved by both parties when the lease is signed.
How do I deal with dilapidation costs?
Dealing with the costs at the end of the lease requires a strategic and proactive approach. Here are the key steps to the process:
- Understand your lease terms – review your commercial lease agreement to comprehend the specific requirements regarding property maintenance and restoration. It is advisable to limit your repair obligations via the agreed use of a Schedule of Condition if you possibly can (this is particularly the case if you are taking on a full repairing lease of an ageing building or one in poor overall condition, it can save you thousands of pounds in the long run)
- Conduct regular property inspections – periodic inspections allow you to identify potential issues early on, enabling you to address them before they escalate into significant dilapidation costs
- Seek professional advice – engage with qualified surveyors and legal professionals to assess the property's condition and gain insights into potential dilapidation costs
- Negotiate with landlords – open communication with landlords can be instrumental. Discussing potential issues and negotiating solutions can lead to mutually beneficial outcomes
- Budget for dilapidation costs – establish financial provision for dilapidation costs during the lease term. This ensures that you are financially prepared to meet your obligations when the time comes
- Consider legal assistance – if disputes arise concerning dilapidation costs, seek legal advice promptly. Professional guidance can help protect your interests and ensure a fair resolution
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When it comes to commercial leases, dilapidation costs are a significant consideration for small businesses. Being proactive by understanding lease terms, conducting surveys and regular property inspections, and budgeting for future costs can lower the financial impact of dilapidations.
Engaging with professionals, such as surveyors and legal advisors, ensures a comprehensive approach to managing and negotiating dilapidation costs. If you are concerned about the end of your lease, or feel the dilapidation provisions you’re dealing with are unreasonable, speak to a legal expert.