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Dilapidations When You Take Over a Shop Lease: How Much Repair Liability You Inherit and How to Find It Before You Buy

By Provenance Diligence team · .

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Contents

  1. What you take on when the lease is assigned to you
  2. The lease clauses that create the repair bill
  3. Four ways a landlord can turn disrepair into money
  4. The cap: what the landlord can actually recover

What you take on when the lease is assigned to you

Short answer: Taking an assignment of the lease makes you the tenant, bound by every repairing covenant (a promise in the lease to repair, decorate or hand back the premises in a stated condition). The 1995 Act does not tell you who pays for disrepair that began before you arrived, so price it as yours.

The Landlord and Tenant (Covenants) Act 1995 says the burden of every tenant covenant attaches to the premises and passes when the lease is assigned (s.3(1)). On an assignment, you become bound by the tenant covenants and gain the benefit of the landlord covenants (s.3(2)). That is the legal route by which a buyer of a business inherits the seller's repair obligations.

The Act also stops a landlord's informal comfort from helping you. A waiver or release that is expressed to be personal to the seller is disregarded when the covenants pass (s.3(4)). A landlord who told the seller "I will not chase you for the shopfront" has not told you anything. Ask whether any such statement was written down, and what it said.

Section 3 does not apply to every lease. Sections 3 to 16 of the Act apply only to "new" tenancies. Those are tenancies granted on or after the day the Act came into force, and not those granted under an earlier agreement or court order (1995 Act s.1(1) to (3)). A tenancy granted after that date under an option granted before it is also not new (s.1(6)). The Act's changes took effect from 1 January 1996.

For you, the date test has a practical consequence. A variation of a lease can count as a new grant if it amounts to a surrender and regrant (s.1(5)). So the date on the lease is not enough: you need the date of any agreement for lease, any option, and every deed of variation. A lease that looks old can be treated as new, and the reverse can also hold.

Now the point many buyers misread. Section 23(1) says that where an assignment makes someone bound by a covenant under the Act, they have no liability or rights under it for any time before the assignment "by virtue of this Act". The words "by virtue of this Act" limit what the section says. It does not say that disrepair already in the shop on completion day is the seller's problem alone.

The reason it matters is how the claims work. A forfeiture notice must specify the particular breach complained of and require it to be put right (Law of Property Act 1925 s.146(1)). A damages claim measures the harm to the landlord's building at the point the landlord claims (see section 4). Both look at the premises as they stand when the landlord acts. Neither asks who let the roof deteriorate.

The Act does allow rights from before the assignment to be expressly assigned to the person taking the lease (s.23(2)). That is the mechanism for any indemnity or price adjustment you negotiate. It also cuts the other way: if the seller holds rights against a previous tenant for disrepair, those rights move to you only if the paperwork says so.

When the seller assigns the whole premises lawfully, the seller is released from the tenant covenants from the date of assignment and loses the benefit of the landlord covenants (1995 Act s.5(2)). That rule sits inside sections 3 to 16, so it covers new tenancies only. If the assignment breaches a covenant, the seller is not released on that assignment. Release waits for the next assignment that is not excluded (s.11). The result for you: the landlord's best target is the person now holding the lease.

What the seller owes you is a contract question, not a statute question. The assignment will carry whatever promises the seller gives about the state of the premises, and a seller who is released has less reason to care about the state of the repair after the sale.

Ask your solicitor: whether the lease is a "new" tenancy under section 1 of the 1995 Act, given the dates of the agreement for lease, any option and each deed of variation.

The lease clauses that create the repair bill

Short answer: The lease, not the protocol, decides what work is owed. The protocol itself says it does not define dilapidations, repair, reinstatement or redecoration, and that the work depends on the lease and related documents (Dilapidations Protocol para 1.4).

The Dilapidations Protocol is the court's pre-action code for claims against tenants at the end of a lease of commercial property in England and Wales (para 1.1). It sets the steps and the paperwork. It does not say what you owe. For that you read the lease and the documents around it, in the order below.

Repair clause. Find the words that set the standard: "put and keep in repair", "keep in good repair", "keep in no worse condition than shown in the schedule of condition". The wording sets whether you are repairing from a high standard, a low one, or a fixed starting point. Copy the exact clause into your notes, with its clause number, before you price anything.

Decoration clause. Many leases require internal and external decoration at set intervals and in the last year of the term. Note the cycle (for example every five years) and the last date it was done. A decoration cycle that is due soon is a cost you can calculate from today's date.

Yield-up clause. This is the covenant to hand the premises back in a stated condition when the term ends. A tenant served with a notice to do internal decorative repairs can ask the county court for relief if the notice is unreasonable. That relief does not cover a covenant to put the property in a specified state of repair at the end of the term (Law of Property Act 1925 s.147(1) and (2)). So a yield-up covenant is outside the safety valve.

The same section excludes an express covenant to put the property in decorative repair that has never been performed, matters needed for sanitary conditions or to maintain the structure, and statutory fitness duties (s.147(2)). For you this means the relief is narrow. Do not rely on it to cut a decoration bill unless your lease clearly falls inside it.

Alterations and reinstatement. A previous tenant's licence for a mezzanine, a partition wall or a new shopfront often says the work must be removed at the end. The landlord's schedule must list reinstatement items and identify any reinstatement notices already served (Protocol para 3.2). Ask for every licence for alterations, because the reinstatement duty can sit there and not in the lease.

Schedule of condition. Some leases attach a photographic record of the premises at the start and limit repair to that condition. If one is attached, it is the most useful document in the file. If none is attached, a record made now, before completion, fixes the starting point for the next tenant, which will be you.

Consent to assign. The lease will say whether you need the landlord's consent to take the assignment. A covenant needing consent is read as subject to a proviso that consent is not to be unreasonably withheld, though the landlord may require a reasonable sum for legal and other expenses (Landlord and Tenant Act 1927 s.19(1)(a)). For a qualifying lease, parties may have agreed circumstances in which consent may be withheld or conditions for granting it, and a landlord relying on an agreed ground is not treated as unreasonable (s.19(1A)).

That second point only covers leases granted on or after 1 January 1996, because subsections (1A) to (1E) were inserted from that date (1995 Act). Read the alienation clause for a condition that links consent to repair, such as a requirement that you remedy existing breaches or give a guarantee. A condition of that kind turns the seller's disrepair into a price you pay on day one.

One more document sets the stage: the landlord's own file. A landlord who has served nothing in ten years is in a different position from a landlord with a schedule on the desk.

Ask your solicitor: whether the alienation clause, or the licence to assign, makes the landlord's consent depend on remedying existing disrepair or on any guarantee.

Four ways a landlord can turn disrepair into money

Short answer: A landlord can claim damages, threaten forfeiture, oppose your renewal, and recover its surveyor's and solicitor's costs. Each route has its own conditions, and several of them have time limits or statutory brakes.

Route 1: damages. A landlord can sue for breach of a repairing covenant during the lease or at its end. Damages cannot exceed the amount by which the landlord's reversion (its interest in the building once the lease ends) is reduced by the breach (Landlord and Tenant Act 1927 s.18(1)). That cap and its demolition exception are the centre of section 4. The section applies to leases created before or after the Act (s.18(3)).

Route 2: forfeiture. Forfeiture is the landlord's right to end the lease for breach. The right is not enforceable until the landlord serves a notice that specifies the breach and requires it to be remedied if it can be. The notice also requires money compensation if the landlord wants it, and the tenant must fail to comply within a reasonable time (Law of Property Act 1925 s.146(1)). The statute does not say how long a reasonable time is.

For a repairing covenant there is an additional hurdle. The landlord must prove the notice came to the knowledge of the tenant, an under-lessee or the person who last paid rent, and that a reasonable time for repair then passed (Landlord and Tenant Act 1927 s.18(2)). A notice sent by registered post is taken as known when it would ordinarily be delivered, unless the contrary is proved.

The court can grant or refuse relief against forfeiture as it thinks fit, on terms it chooses, including an injunction against future breaches (s.146(2)). The s.146 restrictions do not cover forfeiture for non-payment of rent, which has its own law, and section 146 has effect despite a contrary term in the lease (s.146(12)). A clause in the lease that tries to switch the notice requirement off therefore gives you nothing to worry about on that point.

Route 3: opposing renewal. If you want to stay beyond the contractual end date, the landlord can oppose a new tenancy because of the state of repair. The state must result from the tenant's failure to comply with its repair and maintenance obligations (Landlord and Tenant Act 1954 s.30(1)(a)).

Route 4: costs. Where a breach is waived at the tenant's request, or the tenant is relieved from forfeiture, the landlord may recover reasonable costs as a debt. Those are costs properly incurred in employing a solicitor, surveyor or valuer, and they come in addition to damages (Law of Property Act 1925 s.146(3)). A negotiated waiver is therefore not free. Expect the landlord's professional fees on top.

Which route a landlord picks depends on what it wants. A landlord who wants the shop back uses forfeiture or renewal opposition. A landlord who wants the shop repaired uses notices. A landlord who plans to demolish uses neither and instead claims nothing for repair, for reasons covered in section 4.

Under the 1925 Act the court can also vest the lease in an under-lessee (a sub-tenant) for no longer than the sub-lease (s.146(4)). That matters if you plan to sub-let part of the premises, because a sub-tenant may be able to protect its own position when the head lease is forfeited. Ask the seller whether any part is already sub-let, and request the sub-lease.

Ask your solicitor: whether any breach has been waived in writing by the landlord, and whether the waiver is expressed to be personal to the seller (1995 Act s.3(4)).

The cap: what the landlord can actually recover

Short answer: Damages for breach of a repairing covenant cannot exceed the amount the breach reduces the value of the landlord's reversion. If the building will be demolished or structurally altered soon after the lease ends, repairs at the end of the term are not recoverable.

The cap sits in section 18(1) of the Landlord and Tenant Act 1927. Damages for breach of a covenant to keep or put premises in repair, during or at the end of the lease, cannot exceed the amount by which the value of the reversion is diminished (s.18(1)). The reversion is the landlord's interest in the building once the lease ends.

The same subsection gives an exception. No damages are recoverable for breach of a covenant to leave premises in repair at the end of the lease in one case. That case is premises that will be demolished, or structurally altered so the repairs would be of no use, at or soon after the end of the term (s.18(1)). Ask the landlord what it plans for the building.

Next, how the courts measure the cap. In Van Dal Footwear v Ryman [2009] EWCA Civ 1478, the Court of Appeal said diminution is found by comparing two values of the landlord's freehold reversion. The difference between those two values is the diminution caused by the breaches (para 4).

The judge in Van Dal had added a 7.4% uplift for a hypothetical repeated offer of the reversion. The Court of Appeal allowed the tenant's appeal. It held that the only hypotheses permitted are two simultaneous sales of the reversion, and the judge had mis-identified what was being valued (paras 11 to 15). The reversion is the freehold as it came back into the landlord's hands, before the landlord lets it again (paras 8 to 10).

For you, that means a landlord's valuer cannot add value for a better letting that the landlord might later achieve. A diminution valuation that does so is open to challenge on the Van Dal reasoning. Ask your own valuer to read the landlord's valuation for any uplift of that kind.

The second case sets the starting figure. In Tiger Aspect Holdings v Sunlife Europe Properties [2013] EWCA Civ 1656, the Court of Appeal set the common law measure. It is the cost of repairs the tenant should have carried out plus loss of rent during the works (paras 1 and 40). Section 18 caps that measure. There the diminution exceeded the cost of the necessary works, so the cap did not bite (paras 1, 3 and 14). The assessed damages were £1,353,254.

The same case deals with a landlord who does more than the lease requires. The test is whether what the landlord did goes no further than was necessary (paras 9 and 10). A landlord that carries out a wider refurbishment can recover only the cost of the cheaper works that would have remedied the tenant's breaches.

The first-instance judge allowed 50% of the cost of basement toilet works that went beyond the tenant's obligations. The judge also disallowed most of the façade claim, because the landlord would have re-rendered it anyway (para 13). Those figures were decisions on that case's facts. Do not treat 50% as a rule.

The Protocol points the same way. The figures in a Quantified Demand should reflect the landlord's likely loss, which is not necessarily the cost of the works. Works likely to be superseded by the landlord's intentions should be left out (Protocol paras 4.5 and 4.6). A demand that prices every item at full cost, with a refurbishment planned, is out of line with that guidance.

The worked example below uses the order the courts use. It starts with the cost of necessary work, adds loss of rent, and then applies the cap.

Illustrative figures, not from any real lease. A landlord's schedule prices repair at £48,000. Of that, £8,000 is a new toilet block the lease did not require, and £40,000 is repair the lease did require. The landlord also claims £10,000 of rent lost while the works are done. A valuer reports that the breaches reduce the value of the reversion by £39,000.

StepWorkingAmount
Repair the lease requiredas scheduled£40,000
Toilet block beyond the lease, allowed at 50%£8,000 x 50%£4,000
Cost of works allowed£40,000 + £4,000£44,000
Loss of rent during worksas claimed£10,000
Common law measure£44,000 + £10,000£54,000
Diminution of reversionvaluer's figure£39,000
Recoverable (the lower figure)lower of £54,000 and £39,000£39,000

Check: £40,000 + £4,000 = £44,000; £44,000 + £10,000 = £54,000; the lower of £54,000 and £39,000 is £39,000.

Change one fact. If the landlord has a signed contract to demolish the building and the demolition falls at or soon after the end of the term, the exception applies and the end-of-term repair claim falls to £0. If instead the valuer reports £60,000, the cap does not bite and the recoverable figure is £54,000. The conclusion for you: ask what the landlord intends for the building before you price the claim.

Ask your solicitor: whether the landlord has any plan, planning application or contract for demolition or structural alteration, and what the lease says about works at the end of the term.

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