For landlords and tenants of commercial property, understanding the difference between interim and terminal dilapidations can be important when managing repairing obligations under a lease.
The key difference is timing and purpose. Interim dilapidations concern breaches of lease obligations while the lease is still running, whereas terminal dilapidations arise at or around the end of the lease and commonly form the basis of a landlord’s claim for damages.
Both can involve significant financial consequences, so landlords and tenants should understand their respective obligations and seek professional advice where necessary.
What Are Dilapidations?
Dilapidations generally refer to breaches of a tenant’s obligations concerning the physical condition of commercial premises. Depending on the wording of the lease, these may include repairing, decorating and reinstatement obligations.
For example, a tenant may be required to keep parts of a property in repair, redecorate at specified intervals or remove alterations before returning the premises to the landlord.
A Schedule of Dilapidations can identify alleged breaches, refer to the relevant lease provisions and set out the remedial work considered necessary.
What Are Interim Dilapidations?
Interim dilapidations arise during the term of a commercial lease, while the tenant remains in occupation. An Interim Schedule of Dilapidations may be prepared where the landlord believes the tenant is failing to comply with repairing or other relevant obligations. RICS defines an interim schedule as one prepared with a view to remedying alleged breaches during the contractual term rather than dealing with yield-up obligations at lease end.
The purpose is therefore generally to address problems before the tenancy finishes rather than waiting until lease expiry.
For a landlord, taking action during the lease can help prevent disrepair from becoming more serious or affecting the condition and value of the property. For a tenant, receiving an interim schedule provides an opportunity to examine the alleged breaches and, where appropriate, carry out necessary works while still occupying the premises.
However, the landlord’s available remedies and the tenant’s obligations will depend on the wording of the lease and the circumstances. An interim schedule should therefore not automatically be treated as a bill that must simply be paid.
What Are Terminal Dilapidations?
Terminal dilapidations relate to the condition in which commercial premises are returned at the end of a lease. A Terminal Schedule of Dilapidations is prepared at or shortly after lease expiry, although the term is also commonly used for schedules prepared in anticipation of the lease ending that include yield-up obligations.
At this stage, the landlord may identify breaches involving matters such as:
- Outstanding repairs
- Failure to redecorate as required
- Alterations that should have been removed
- Failure to reinstate parts of the premises
- Other breaches relating to the condition in which the property should have been returned
Once the tenancy has ended, the focus will commonly shift from requiring the tenant to undertake works to assessing the landlord’s financial loss resulting from relevant breaches.
Terminal claims in England and Wales are also subject to the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at the Termination of a Tenancy, commonly called the Dilapidations Protocol.
Interim vs Terminal Dilapidations: What Is the Main Difference?
The simplest distinction is that an interim schedule deals with alleged breaches during the lease, while a terminal schedule deals with the tenant’s obligations at or around lease expiry.
This difference can significantly affect how the matter is approached.
With interim dilapidations, there may still be time for the tenant to undertake repairs and comply with the lease before leaving the property. A landlord may use an interim schedule to formally raise concerns and encourage compliance before deterioration becomes more extensive.
With terminal dilapidations, the lease is ending or has already ended. Once the tenant has left, they will usually no longer have the right to return to the premises simply to undertake repairs. The dispute may therefore focus on the financial value of the landlord’s loss.
How Does Section 18 Affect Terminal Dilapidations?
An important consideration in terminal claims is Section 18(1) of the Landlord and Tenant Act 1927.
In broad terms, Section 18 can limit the damages recoverable for breaches of repairing covenants to the reduction in value of the landlord’s interest caused by the disrepair. It can also prevent recovery for repairs where the premises would, at or shortly after lease expiry, be demolished or altered to such an extent that the repairs would have no value.
This means the estimated cost of completing every item contained within a terminal schedule does not necessarily equal the amount the tenant will ultimately have to pay.
The landlord’s intentions for the premises can consequently become highly relevant when assessing a terminal claim.
What Should Tenants Do Before Their Lease Ends?
Tenants should ideally consider potential dilapidations liability well before the expiry date rather than waiting to receive a terminal claim.
Reviewing the lease early can establish exactly what is required in relation to repairs, decoration and reinstatement. A building surveyor can assess the physical condition of the premises, while legal advice can help determine the extent of the tenant’s contractual obligations.
Where a Schedule of Dilapidations has already been received, it should be examined carefully rather than automatically accepted. Individual items, proposed works, liability and costs may all require further consideration.
Getting Advice on Interim and Terminal Dilapidations
Dilapidations disputes can involve detailed questions about lease interpretation, the condition of commercial premises and the landlord’s actual financial loss. The appropriate approach can also differ substantially depending on whether the matter arises during the tenancy or at lease expiry.
Fitz Solicitors can advise commercial landlords and tenants on their rights, obligations and options when a dilapidations issue arises. Our dilapidations lawyer can assist with reviewing lease obligations, responding to claims, negotiations and resolving disputes.
Getting advice at an early stage can help identify potential liabilities, narrow areas of disagreement and put you in a stronger position to reach a practical resolution.