Dilapidations at Lease End

When a commercial lease ends, it’s not just a matter of handing back the keys. For both landlords and tenants, this moment can trigger one of the most technical and financially significant issues in commercial property – dilapidations.

Put simply, dilapidations are claims made by a landlord when a tenant hasn’t complied with lease obligations around repair, redecoration or reinstatement. These claims can run into tens or hundreds of thousands of pounds, often arriving just as tenants are vacating and landlords are planning for the next occupant or a refurbishment.

At Newmanor Law, we help both landlords and tenants navigate dilapidations with clarity, strategy and legal precision. Here, we set out what the law says, what surveyors and valuers do, and how you can approach lease end with your eyes open.

The Landlord and Tenant Act 1927

Dilapidations claims are based on well-established legal rights. Under section 1 of the Landlord and Tenant Act 1927, a landlord can claim damages if a tenant breaches their obligations to keep the property in repair.

But this right is not unlimited. Section 18(1) of the same Act puts a cap on how much can be recovered. Even if the tenant has failed to carry out repairs, the landlord can only claim for the actual drop in the property’s value caused by the disrepair, and no more. If the landlord was going to redevelop the premises anyway, and the disrepair didn’t really make any difference, the claim may be worth nothing at all.

This “Section 18 cap” is a powerful limiting factor, and a critical area for expert valuation evidence. It also reframes the nature of many dilapidations’ disputes. It’s not always about the cost of repairs, but about what financial loss (if any) the landlord has suffered.

What the lease says

A tenant’s repair obligations are set out in the lease, and some leases are much more demanding than others. The most common, and onerous type is the Full Repairing and Insuring (FRI) lease, which makes the tenant entirely responsible for the entire upkeep of the property, covering everything from the structure, to the exterior as well as internal, cosmetic changes, and, importantly, for reimbursing insurance costs.

The tenant’s repairing obligations are usually spelled out in detail, but the specific wording of the lease will matter enormously. “Good repair” in a brand-new office means something very different from “good repair” in a 1960s warehouse. Tenants are often also required to redecorate periodically, remove alterations they made during the lease, ensure adherence to building regulations, and meet any health and safety or environmental requirements.

It’s not unusual for claims to escalate when multiple clauses overlap. A single cracked tile might be cited as a breach of a repair clause, a decoration clause, and a reinstatement clause. That’s why lease clauses, and how they are interpreted, will form the backbone of most disputes.

Schedules of Condition

One of the most effective ways tenants can limit their liability is through a Schedule of Condition. This is usually a document, with photographs, that shows what the property looked like when the lease began. If the lease says that the tenant must maintain the property in “no better condition” than that shown in the schedule, their obligations are effectively capped.

For example, if a tenant took on a worn-down unit with cracked plaster and faded paint, a Schedule of Condition could protect them from having to return it in pristine condition.

Landlords will not always agree to this, particularly when letting newly refurbished space, but tenants should always try. Even where no formal schedule is agreed, taking detailed photographs and keeping them safely can make a big difference in future negotiations.

Tenants should also consider commissioning a before occupation building survey before lease commencement. While it may not limit liability contractually, it creates a timestamped professional record that can be useful in future negotiations.

Surveys and schedules

Towards the end of a lease, or shortly after expiry, the landlord will often appoint a building surveyor to inspect the property and produce a Schedule of Dilapidations. This document sets out the issues, what needs to be fixed, and how much it will cost.

The schedule is usually accompanied by a Quantified Demand, which may also include loss of rent during void periods, service charge shortfalls, and professional fees.

At this point, the tenant has choices. They can:

• Accept the schedule and pay;
• Appoint their own surveyor to challenge it;
• Carry out some of the work themselves;
• Dispute all or part of the claim, including whether any financial loss was actually suffered.

This is where early preparation pays dividends. A tenant who starts reviewing dilapidations six to twelve months before lease expiry will have far more room to negotiate than one who waits until the landlord’s claim lands.

It’s also worth noting that landlords typically have up to six years from the date of lease expiry to bring a dilapidations claim. But the longer the delay, the harder it may be to justify the extent of any losses, especially if the property has since been re-let or redeveloped.

Supersession

A common argument made by tenants is that the landlord was going to refurbish or redevelop the property anyway – so why should the tenant be liable for, say, repainting the walls or reinstating partition walls?

This is known as supersession. It’s not a formal statutory defence, but it’s widely recognised in legal and surveying circles. If the landlord’s planned works would have made the tenant’s repairs pointless, they may not be able to claim for them.

This argument works best when supported by clear evidence, such planning documents, refurbishment quotes, or a letting brochure showing a different layout. Vague intentions or assumptions usually aren’t enough.

Reinstatement of Alterations

If a tenant has made changes to the property, like installing air conditioning, building meeting rooms, or changing layouts, they may be required to reinstate it to its original condition before leaving.

Some leases say the landlord must request this in writing before lease end. Others impose an automatic obligation. Timing, evidence and lease wording all matter here.

Disputes often arise if reinstatement is demanded late, or if the tenant believes the landlord will strip everything out anyway. Again, supersession arguments may come into play.

The Section 18 Valuation

Even where breaches are proven, the landlord must still show a loss in value as a result. This is the heart of the Section 18 cap. It usually requires an expert valuation surveyor to compare the property’s market value in its current state versus what it would be worth had the repairs been done.

In some cases, that loss in value might be less than the cost of doing the work, meaning the claim is reduced. In other cases, especially where redevelopment is planned or the property has strong letting prospects, the valuation might show no real loss at all.

The Dilapidations Protocol

The Dilapidations Protocol applies to all claims for damages over £10,000 relating to the state of commercial property at the end of a lease, where proceedings may be issued in the High Court or County Court. It requires the timely service of a formal Schedule of Dilapidations and Quantified Demand, full disclosure of supporting documents and surveyor reports, a clear indication of the landlord’s intentions for the property (e.g. refurbishment or re-letting), and a reasonable period for the tenant to respond and engage in settlement dialogue.

Most dilapidations disputes are resolved through negotiation. But where settlement fails, proceedings may be issued in the Technology and Construction Court. Before this happens, both parties are expected to comply with the Dilapidations Protocol – a pre-action protocol under the Civil Procedure Rules that governs how dilapidations claims should be conducted.

The Protocol requires landlords to serve the Schedule of Dilapidations and Quantified Demand within a reasonable period (usually 56 days) of lease expiry. The tenant is expected to respond within a similar timeframe. Both sides are encouraged to disclose relevant documents, clarify legal and factual issues, and consider alternative dispute resolution. Failure to comply with the Protocol can lead to adverse costs orders, regardless of the merits of the underlying claim.

Tax treatment of dilapidations

From a tax perspective, dilapidations present a complex landscape. Tenants may, in some circumstances, claim dilapidations payments as a deductible expense, particularly where the property was used for trading purposes. However, HMRC’s guidance remains deliberately cautious, and the distinction between revenue and capital treatment is not always clear-cut.

For landlords, sums received by way of dilapidations compensation may be treated as income or capital depending on how they are accounted for and used. If used to fund capital improvements or refurbishment works, they may not be subject to corporation tax in the same way as ordinary rental income. Proper accounting treatment and early advice are essential.

Commercial strategy

From a practical perspective, dilapidations should be treated as part of lease planning, not as an afterthought. For tenants, this means:

• Understanding obligations before signing;
• Keeping records during the lease;
• Engaging surveyors well before lease end;
• Negotiating rather than defaulting to works.
• For landlords, the focus should be on:
• Clear evidence of actual loss;
• Early inspection and valuation;
• Realistic expectations about cost recovery;
• Strategic use of the claim, especially if refurb or reletting is already planned.

Avoid surprises, plan ahead

Dilapidations can be complicated, expensive, and contentious, but they don’t have to be. With proper planning, good advice, and a clear understanding of both the lease and the law, parties can manage risk and avoid litigation.

At Newmanor Law, we help both landlords and tenants across the UK navigate every stage of the lease lifecycle. Whether you’re preparing a new lease, approaching lease expiry, or facing a live claim, we’re here to help you resolve dilapidations with clarity, confidence and commercial focus.

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