Dilapidations Survey

What is a Dilapidations Survey?

A dilapidations survey, more commonly referred to as a 'Schedule of Dilapidations', can take many forms.  In essence, it is a report usually drafted by the landlord's surveyor to list and quantify the tenant's breaches of covenant arising out of a lease.  This principally concerns business leases in commercial property.

The 'breaches' generally fall in to four categories:

1. Repair - identifying works necessary to remedy disrepair;

2. Decoration - setting out what decoration works are required;

3. Reinstatement - highlighting alteration works carried out by the tenant;

4. Statutory Compliance - works necessary to meet current statutes and byelaws.

Types of Dilapidations Survey

There are several types of Dilapidations Survey based on the intended purpose and timing:

Dilapidations Assessment - This is an informal type of dilapidations schedule which may be prepared on the instruction of either the landlord or tenant.  The primary purpose of a Dilapidations Assessment is to provide the instructing party with a realistic overview of the tenant's accrued liabilities at the time of inspection; this is usually supported with outline costs. 

For tenants, this is a useful tool for budgeting purposes.  It may also be used to formulate a Schedule of Works for contractor use in implementing the necessary works ahead of lease expiry.  For tenants looking to take new premises on a full or internal repairing lease, a Dilapidations Assessment will also assist in providing a realistic overview of the likely liability that will be inherited upon occupation.  This will enable further negotiations or the engrossment of a Schedule of Condition to protect the incoming tenant against the former tenant's breaches existing at lease commencement.

For landlords, a Dilapidations Assessment will assist in identifying the extent and value of the tenant's liability, which may serve as a general basis for negotiation in the event formal dilapidations proceedings are not intended.  Where the formal process is to be adopted, an Interim or Terminal Schedule of Dilapidations will be prepared and served.  Dilapidations Assessments are also invaluable for potential purchasers of commercial properties with existing tenants.  The assessment value (being the extent of the tenant's liability) may then be factored in to the acquisition value.  This will also take in to account how strong the tenant's covenants are in order to adduce how far they can be relied upon by the new landlord.  This may, of course, affect the purchase price.

FRS12 Dilapidations Assessment - This is a modified version of a standard Dilapidations Assessment designed for large corporate occupiers filing accounts under FRS12.  Under FRS12 rules, dilapidations liabilities (referred to as provisions) may be treated as an 'expense' and therefore offset against profit for taxation purposes.  This is subject to the 'expense' meeting certain provisions, failure to do so will mean the dilapidations provision is treated as a contingent liability and, as such, will not enjoy the tax benefits of a genuine dilapidations provision.  It is also a requirement of HMRC that Dilapidations Assessments for FRS12 purposes are accurate and prepared by a suitably qualified Third Party (an FRS12 Dilapidations Assessment is often referred to as a 'Third Party Valuation').  Failure to observe this may result in the assessment being rejected by HMRC.

Interim Schedule of Dilapidations - This is a detailed report in a recognised format.  Interim Schedules of Dilapidations are traditionally prepared during the lease term and can be served at any time.  Where it is intended for the Interim Schedule to be served upon the tenant in accordance with section 146 of the Law of Property Act 1925, this approach can only be taken where the lease was granted for 7 years or more and where at least 3 years remain unexpired.  The tenant will then have protection against forfeiture pursuant to the Leasehold Property (Repairs) Act 1938 unless the landlord can prove to the court that the tenant's breaches satisfy certain conditions.  Since the intention of an Interim Schedule is to enforce the tenant's implementation of the claimed works, it is not usual to include budget costs.  An Interim Schedule would not include details of all breaches, only those of a material nature which have a negative impact on the reversionary value of the subject premises.  Where served under section 146 of the Law of Property Act 1925, the tenant can counter-claim against the inclusion of internal decorations, thus the Schedule should not include for this.

Terminal Schedule of Dilapidations - This is the most common type of Schedule of Dilapidations and is generally prepared and served towards the end of the lease term, more commonly in the final few months and occasionally after the expiry date (often referred to as a 'Final Schedule of Dilapidations').  A Terminal Schedule will provide a detailed account of all the tenant's breaches of covenant together with costs; these may be either the landlord's surveyor's estimate or competitively tendered contractor quotations.  A Terminal Schedule will also identify consequential losses, professional fees incurred by the landlord and VAT (where applicable); this is summarised in a 'Claim Summary' or what is now termed a 'Quantified Demand' which sets out the landlord's financial claim in damages.  The tenant has the option to undertake the necessary remedial works prior to the end of their lease; once the lease expires the claim is usually resolved as a settlement in common law damages.  Since January 2012, claims for damages arising out of terminal dilapidations claims are governed by a 'Dilapidations Protocol' which has been adopted under the Civil Procedure Rules (CPR).  This provides detailed guidance to the parties as to how the schedule, and resultant claim, should be prepared and how the parties should conduct themselves towards achieving settlement.

Scott Schedule - This is an adopted version of an Interim or Terminal Schedule of Dilapidations designed to facilitate negotiations between the parties.  The provision of additional columns enables the parties (via their instructed surveyors) to insert their comments and associated view on cost on an item-by-item basis.  This assists in clearly setting out those items in agreement in order to clearly identify those items in dispute.  This helps the parties visualise the disparity in their respective positions, which will become a necessity should the parties reach an impasse resulting in litigation.

Repairs Notice - This is a report of no prescribed or recognised form setting out the repairs the landlord considers the tenant is responsible for remedying.  Often used as a colloquial term to embrace all types of schedule dealing with repair.

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