As the UK emerges from the pandemic, the focus in the real estate sector has naturally been to address the question of lease arrears. 

Kim Clifford

Kim Clifford

But as we move towards a ‘new normal’, many tenants have been right-sizing their real estate footprint by exercising break options, seeking to negotiate surrenders, deciding not to renew their leases or renewing for a shorter term in order to reduce liabilities.

While landlords are no doubt primarily concerned with re-letting the space in the short term, terminal dilapidations claims – a claim by a landlord for breach of lease obligations in respect of the repair and condition of a property following expiry of a lease – do give a landlord an avenue to offset some of the costs they are facing.

Dilapidations claims can be significant, especially where the tenant has been in occupation for several years or has made alterations. Both landlords and tenants should therefore factor dilapidations into their decision processes and strategy.

With a likely resurgence of dilapidations claims, both parties should carefully review their lease documentation to ensure that any notice provisions for reinstatement of service are satisfied.

Even where agreement is reached between the parties, careful consideration and legal advice should be obtained to ensure that any settlement is recorded sufficiently. This includes seeking advice on the tax position in relation to any payments to be made by a tenant, with HMRC draft guidance very recently helpfully being updated to confirm that true dilapidations payments will usually be outside the scope of VAT.

In terms of new leases being entered into, many parties are commercially agreeing to enter into schedules of condition to record the state and condition of the property at the current time and to limit any repair obligations on the tenant going forward.

This will require careful consideration by landlord entities as to the liability being released. We are also likely to see a shift in dilapidations claims going forward, focusing on the detail recorded in these schedules in contrast to ‘traditional’ dilapidations claims.

Kim Clifford is a senior associate at Ashurst