Dilapidations Explained: What Commercial Tenants Need to Know

Dilapidations is one of the areas of commercial property law that tenants most frequently misunderstand — not because it is especially complicated, but because most commercial tenants do not think about their repair and reinstatement obligations until they are handing back the keys. By that point, the opportunity to manage cost has largely passed.

Whether you are a small business tenant, a property investor acquiring commercial premises, or a homeowner who has leased a commercial unit, understanding how dilapidations works will protect you from claims you did not expect and costs you could have avoided.

What Are Dilapidations?

Dilapidations are the breaches of a tenant's repairing and reinstatement obligations under a commercial lease. When a lease ends — whether by expiry, surrender, or break clause — the landlord is entitled to bring the property back into the condition required by the lease and claim the cost from the tenant.

Dilapidations claims typically arise from three types of obligation:

Repair and decoration — most commercial leases impose a full repairing and insuring (FRI) obligation, which means the tenant is responsible for all repairs to the property, inside and out, structural and non-structural, regardless of the state it was in when they took it on
Reinstatement — many leases require the tenant to remove alterations they have made during the tenancy and return the property to its original configuration
Yielding up — the obligation to return the property in the state required by the lease at the date the tenancy ends

A terminal dilapidations claim is served at or after lease end. An interim dilapidations notice can be served during the lease if a tenant is in breach of their ongoing repair obligations.

Your Repair Obligations Under the Lease

The extent of your repairing obligation depends on the specific lease wording. Three common formulations in UK commercial leases are:

Full repairing and insuring (FRI) — the tenant is responsible for all repairs, including the structure, roof, and exterior. This is standard for whole-building leases. FRI obligations can be extremely onerous if the building was in poor condition when the lease was granted.

Internal repairing only — the tenant is responsible for internal repairs and decoration but not the structure or exterior. More common in multi-let buildings where a service charge covers shared repairs.

Schedule of condition-limited obligation — the repairing obligation is qualified by a schedule of condition (see below) so that the tenant is only required to return the property in the condition it was in at the outset. This is the most favourable position for tenants.

The Schedule of Condition: Your Most Important Protection

If you are negotiating a new commercial lease, the single most valuable protection against a dilapidations claim is a schedule of condition attached to the lease at the outset.

A schedule of condition is a photographic and written record of the property's state on the day the lease is signed. Where the repairing obligation is qualified by a schedule of condition, the tenant is only required to return the property in the same condition — not better.

Without a schedule of condition, you may be required to remedy defects that existed before you took on the lease. In an older commercial building, this can be extremely expensive.

The cost of commissioning a schedule of condition — typically £500–£2,000 depending on the property size — is almost always recovered many times over in reduced dilapidations exposure at lease end. Do not sign an FRI lease without one.

Terminal Dilapidations and the Section 18 Cap

When a lease ends, the landlord will typically appoint a chartered surveyor to inspect the property and prepare a schedule of dilapidations — a document that sets out every alleged breach and the estimated cost of remedy. For a typical commercial unit, a dilapidations schedule can easily run to £20,000–£100,000 or more.

However, the amount a landlord can actually recover is capped by Section 18(1) of the Landlord and Tenant Act 1927. This is the most important legal protection available to commercial tenants.

Section 18(1) provides two limbs of protection:

First limb (the diminution cap): The landlord's damages are capped at the diminution in the value of the landlord's reversion caused by the breach. In plain terms, the landlord can only recover the amount by which the disrepair has actually reduced the property's value — not the full cost of repairs if those repairs would have cost more than the value lost.

Second limb (the supersession defence): If the landlord intends to demolish or carry out works that would have rendered the repairs pointless anyway, the tenant's liability is reduced to nil or a minimal sum. This is known as supersession.

The Section 18 cap is assessed by a surveyor instructed by the tenant. On properties being redeveloped or significantly refitted by the landlord, the supersession defence can eliminate most or all of a dilapidations claim.

How Landlords Calculate Dilapidations Claims

A landlord's surveyor will typically produce a Scott Schedule — a document that sets out each alleged item of disrepair in a structured table, with columns for the landlord's claim, the tenant's response, and any agreed position.

Landlords frequently claim for:

Redecoration to a standard that was never contractually required
Repair of defects that pre-dated the tenancy (without a schedule of condition, this is hard to resist)
Reinstatement of alterations that the landlord informally consented to and may not actually want removed
Items that are within normal wear and tear and therefore not actionable

Tenants should respond to every line of a dilapidations schedule through their own surveyor rather than accepting the landlord's valuation without question. RICS guidance (the RICS Dilapidations in England and Wales guidance note) provides a framework for how both sides should prepare and present their cases.

Negotiating a Settlement

The majority of dilapidations disputes are resolved by negotiation rather than litigation. Once both sides have exchanged Scott Schedules and surveyor reports, the gap between them is usually significant — but rarely impossible to close.

Practical steps for tenants facing a dilapidations claim:

Appoint a surveyor early. Do not wait for the landlord to serve their schedule before acting. A proactive tenant who commissions their own condition report before lease end — and carries out the most obvious and cost-effective repairs before vacating — will be in a far stronger position than one who hands back the keys without doing anything.

Carry out repairs yourself where cost-effective. A landlord who has to engage their own contractor to carry out repairs will claim the full cost, plus survey fees and management charges. The same works carried out by the tenant's own contractor will typically cost less and demonstrate good faith.

Invoke the Section 18 cap. If the landlord's claimed cost exceeds the diminution in value, challenge it. Obtain evidence of comparable property values, letting prospects, and any intended works by the landlord.

Consider a lump-sum settlement. Cash settlements — where the tenant pays a negotiated sum in full and final settlement of all dilapidations liability — are extremely common. Landlords often prefer certainty and speed over a prolonged dispute; tenants get closure. RICS guidance recommends that any settlement include a full release of all claims under the lease.