Repair, Reinstate, Reconcile: A Dilapidations Provisioning Method for UK Tenants

When a UK SME negotiates a new lease, attention concentrates on the rent, the break clause and the rent-free period. The repairing obligation is often accepted with far less examination — and it is precisely that clause which can return, costed and dated, long after the final box has left the building.

Dilapidations are a deferred liability rather than a remote one. What follows is a practical method for pricing that liability before signature and for carrying it in the business plan as a known cost. It is general guidance, not legal advice: the wording of any lease should be reviewed by a solicitor, and the cost of compliance assessed by a chartered building surveyor.

Why the liability stays out of sight

A terminal dilapidations claim is usually served after the tenant has gone, commonly between three and twelve months after the term ends, once the landlord has commissioned its own survey. By that stage the negotiating position has narrowed, the evidence has aged, and the person who signed the lease may no longer be in the business.

Three features make the exposure easy to underestimate. First, most full repairing and insuring leases place the whole burden of repair, decoration and reinstatement on the tenant, with no cap. Second, the claim is often not the cost of the works actually done but a reasonable estimate of the loss, subject to the statutory cap on damages in section 18(1) of the Landlord and Tenant Act 1927, which limits recovery to the diminution in the value of the reversion. That defence exists, but it must be argued with valuation evidence, and it rarely reduces a claim to nothing. Third, the costs of surveyors, solicitors and project management sit on top of the building works.

For a small business, a five-figure or low six-figure demand arriving in a quiet quarter can do more damage than a rent increase would have done. It deserves to be modelled before the lease is signed.

Five clauses that set the ceiling

A useful audit begins with the repairing and yielding-up provisions rather than the rent schedule.

The standard of repair. "Good repair" and "put into repair" are materially different obligations. The first requires the tenant to hand back the premises in the state a reasonably minded tenant would consider appropriate; the second can require the tenant to remedy pre-existing defects that were present at the start of the term.

Reinstatement of alterations. This is the most expensive clause in many leases and the least discussed. Partitions, mezzanines, additional kitchenettes, data cabling and air conditioning installed over the term may all be removable at the tenant's cost. Check whether landlord's consent to alter carries an express condition of reinstatement, and whether a licence to alter records what must stay and what must go.

Decoration cycles. Many leases specify internal redecoration at intervals, often in the final year of the term, whether or not the premises need it. That is a scheduled cost, not a contingent one.

Yielding up and signage. Obligations to remove signage, make good fixings, return keys and reinstate the original layout are frequently bundled into the final clause and rarely costed.

Notice and access. Provisions allowing the landlord to enter and require works during the term convert a future liability into a present cash call. Understand the notice mechanics before they are used.

The schedule of condition is the whole argument

Where a schedule of condition is annexed to the lease and expressly referred to in the repairing covenant, the tenant's obligation is commonly limited by it: the premises need only be returned in no worse condition than the schedule records. Without that document, the assumption is that the tenant received the premises in repair and must return them in repair.

A schedule worth having is jointly prepared, dated, photographic, referenced in the lease itself, and specific about defects rather than general in tone. A single line describing the premises as being "in good condition throughout" helps nobody.

At renewal, the same discipline applies in reverse. A schedule prepared for the original term describes a building that has since been altered, refurbished and, in many cases, worn. Refreshing the baseline at renewal — before the new term begins — is one of the cheapest pieces of risk management available to a tenant.

Turning the survey into a number

An exit provision should be built from evidence rather than intuition. Commission a costed dilapidations assessment from a chartered building surveyor, ideally with a reinstatement element priced separately. Ask for the assessment on a per-square-metre basis so that it can be sanity-checked as the portfolio changes.

A workable model contains five components: the costed works, professional fees for managing them, VAT where it is not recoverable, a contingency typically in the region of 15 to 25 per cent for works discovered late, and a negotiating allowance recognising that claims are frequently settled below the headline figure. The result should be treated as an estimate and revisited at each lease event.

As an illustration, a 400 square metre office with dated partitioning and a legacy comms room might carry a costed works estimate in the region of £40,000 to £70,000 in 2026, before fees and contingency. The precise figure will depend on location, specification and the age of the fit-out, but the order of magnitude is enough to change a business plan.

Carrying the provision without distorting the accounts

Under FRS 102 and IFRS 16, an obligation to reinstate or repair at the end of a lease is generally recognised as a provision, built up over the term rather than booked in one hit at exit. Many SMEs, particularly those below the audit threshold, take a simpler route: a monthly accrual held in a ring-fenced reserve, reviewed annually and disclosed in management accounts.

Either approach is defensible provided the number is real. What is not defensible is a liability that surfaces only when the claim lands, particularly where a refinance, a sale or a change of premises is in view. Lenders and buyers increasingly ask for dilapidations exposure as part of due diligence, and a tenant who can produce a costed assessment and a funded provision negotiates from a materially stronger position.

A short protocol

Before signature: read the repairing and yielding-up clauses line by line; insist on a joint schedule of condition annexed to the lease; check reinstatement conditions attaching to any alteration; and obtain an indicative surveyor's assessment so that the provision can be set on day one.

At renewal: refresh the schedule of condition, negotiate a clean baseline where the landlord will accept one, and reprice the provision against current construction costs.

Twelve months before exit: commission a terminal assessment, agree the reinstatement scope in writing where possible, and hold a specific cash reserve rather than relying on general working capital.

The rent is the visible cost of occupancy. The dilapidations liability is the one that waits. Treating it as a priced, funded and reviewed element of the business plan turns an eventual argument into a manageable line item.