Before the Notice Lands: A Five-Year Dilapidations Strategy for SME Tenants

For an SME occupier, the end of a commercial lease should be a property event, not an accounting ambush. Yet dilapidations — the cost of putting a building back into the state the lease requires — often surface only when the exit notice is served. By then the tenant has little leverage, a fixed moving date and, frequently, no agreed record of the property's condition at the start.

The remedy is not aggressive lawyering. It is a planned, documented exit that begins years before expiry. This guide sets out a five-year framework for owner-managers who do not have a property department.

Start with the repair covenant, not the exit clause

Every dilapidations claim is measured against the lease. Before commissioning surveys or negotiating, isolate the repairing, decorating and reinstatement obligations. Is the lease full repairing and insuring (FRI), internal only, or subject to a schedule of condition? Does it exclude fair wear and tear? Does it require the tenant to remove alterations or reinstate the original layout? The answers define the ceiling of the landlord's claim. Pay particular attention to yield-up clauses, which can be wider than the repair covenant itself.

Commission a condition survey while there is still time

At least five years before expiry — or immediately, if the lease is shorter — instruct an RICS-regulated building surveyor to prepare a condition survey. The survey should record the property's current state, identify breaches of the repair covenant and provide an indicative cost of remedial works. Treat the fee as a governance cost, not a property overhead: it converts an unknown liability into a budget line. Ask the surveyor to distinguish between repair, decoration, reinstatement and statutory compliance, because each is negotiated differently.

A schedule of condition is a negotiating instrument

If the lease does not already annex a schedule of condition, try to agree one with the landlord now. A schedule records the state of the property at a given date, usually with photographs, and can be incorporated into a deed of variation. Landlords are more willing to agree when the tenant is current on rent and the request is framed as good estate management. If agreement is refused, commission a unilateral photographic condition report and send it to the landlord with a covering letter. It is not as strong as a bilateral schedule, but it is better than memory.

Put a number on the liability, then fund it

An indicative dilapidations assessment gives the board a range, not a precise invoice. Use it to build a sinking fund. If the likely liability is £60,000 in five years, an annual provision of £12,000 — before inflation and professional fees — is a more honest cash plan than a last-minute bank facility. Discuss with your accountant whether a provision should be recognised under FRS 102. The point is not accounting purity; it is that a known future cost should appear in management accounts before it appears in a solicitor's letter.

Negotiate from evidence, not from the final quarter

Landlords respond better to a tenant who arrives with a condition report, a maintenance log and a proposed scope. Early negotiation can take several forms: a deed of variation capping liability, a cash settlement, an agreed schedule of works, or a surrender on terms. Remember that damages for breach of a repairing covenant are limited by section 18(1) of the Landlord and Tenant Act 1927 to the diminution in the value of the landlord's reversion, and that the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of a Commercial Property sets out an expected process. Those protections matter, but they are easier to use when the tenant has its own evidence.

The five-year countdown

• Year 5: audit the lease, commission the condition survey and open a dilapidations budget line.
• Year 4: agree a schedule of condition if possible; start planned maintenance and fix serious breaches.
• Year 3: review alterations, reinstatement obligations and statutory compliance; update the risk register.
• Year 2: obtain an updated cost assessment; open without-prejudice discussions with the landlord.
• Year 1: formalise the scope, obtain contractor quotes, serve any break notice correctly and consider whether a negotiated surrender is cheaper than works.

Common pitfalls for owner-managers

• Treating dilapidations as a legal issue rather than a cash and governance issue.
• Assuming fair wear and tear covers every worn item.
• Forgetting that reinstatement of alterations can cost more than repair.
• Keeping no maintenance records, so every defect becomes the tenant's fault.
• Waiting for the terminal schedule before taking advice.

A dilapidations plan is not a prediction of doom. It is a controlled exit. The tenant that starts early can choose between works, cash and negotiation; the tenant that starts late usually gets an invoice. For the board, the discipline is the same as any other known liability: quantify it, fund it, review it and record the decisions. That is the operational, property and governance case for acting long before the notice lands.