Commercial Dilapidations: Key considerations for landlords and tenants

Commercial dilapidations disputes are not new, but according to B P Collins’ property disputes team, the volume and complexity of claims currently being litigated are at levels not seen for over a decade.  A wave of leases entered into in the years immediately before and after the 2008 financial crisis – many of them for office and retail premises in major urban centres – has been expiring over the past several years, and the tenants vacating those properties have left behind a dilapidations liability that is, in many cases, significantly larger than either party anticipated at the outset of the term.  Hybrid working, ESG obligations, rising construction costs and a wave of tenant insolvencies have each added their own complication.

For landlords, dilapidations claims represent both a right and, increasingly, a financial necessity: the cost of bringing ageing and environmentally non-compliant buildings up to the standard required to re-let them in the current market is substantial, and the right to recover that cost (or as much of that cost as possible) from a departing tenant cannot be allowed to go unasserted.  For tenants, the stakes are equally high: a well-founded dilapidations claim can represent a material liability on the balance sheet, and a poorly handled one can result in a settlement or judgment that significantly exceeds what the tenant would have spent had it simply maintained the premises in accordance with the lease throughout the term.

What is a dilapidations claim?

A dilapidations claim is a claim by a landlord against a tenant for breach of the tenant’s repairing, decorating and reinstatement obligations under a commercial lease.  Those obligations will be set out in the lease itself – typically in the form of a repairing covenant, a decorating covenant, and an obligation to reinstate any alterations the tenant has made during the term.  A terminal dilapidations claim arises when the tenant vacates the premises, and the premises are not in the condition the lease requires.

Dilapidations claims divide broadly into three categories, each with its own procedural and legal framework:

1. Terminal dilapidations:  Claims arising at the end of the lease term.  These are by far the most common form of dilapidations claim and are governed by the Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (‘the Protocol’).  The Protocol requires the landlord to serve a schedule of dilapidations and quantified demand within a reasonable time after the end of the term, and the tenant to respond within 56 days.  The Protocol encourages early exchange of information, use of experts and exploration of settlement without litigation.
2. Interim dilapidations:  Claims brought during the lease term, where the tenant’s breaches of the repairing covenant are sufficiently serious to warrant action before the end of the lease.  The landlord’s options during the term include serving a notice requiring the tenant to carry out works (a ‘Jervis v Harris’ notice), entering the premises and carrying out the works itself if the tenant fails to comply, and recovering the cost as a debt rather than as damages – which avoids the statutory cap under section 18 of the Landlord and Tenant Act 1927.
3. Leasehold Property (Repairs) Act 1938 claims:  The Leasehold Property (Repairs) Act 1938 protects tenants from excessive landlord repair claims by requiring court leave for damages or forfeiture.  Where a lease was originally granted for more than seven years and there are at least three years left to run, the tenant can defend the schedule/section 146 notice by using the Act.  The tenant would need to serve a counter-notice within 28 days of receiving such a schedule/ section 146 notice in order for the landlord’s claim to be suspended.  The landlord can then only pursue the claim if it obtains a court order.  This procedure is rarely used in practice.

Why dilapidations claims are at a peak and more complex than ever

Three converging forces have driven the current surge in dilapidations activity:

1. A generation of lease expiries:  A significant proportion of commercial leases entered into in the early 2000s boom were for terms of fifteen to twenty-five years (usual at that time but unusual in the current market).  Those leases have been expiring steadily since around 2020, and the pipeline of expiries is expected to continue through the mid-2020s.  Many of the premises covered by those leases are offices that have been only partly occupied since the pandemic, retail units in high streets and shopping centres that have seen dramatically reduced footfall, and industrial and logistics properties that have changed use or been sublet in ways that created latent alteration and reinstatement liabilities.  The dilapidations position in many of these properties has been allowed to deteriorate during the latter years of the term, partly because tenants under financial pressure have prioritised cash over compliance, and partly because landlords have been reluctant to pursue interim claims against tenants whose continued occupation they needed.
2. Hybrid working and the office reinstatement problem:  The pandemic fundamentally changed how office space is used, and the change has permanently increased the dilapidations complexity of office leases.  Tenants who fitted out large open-plan floors with bespoke partitioning, specialist HVAC, raised access floors, cabling infrastructure and bespoke reception and breakout areas, are now departing premises that their landlords cannot re-let in that condition.  The reinstatement obligation (the obligation to remove alterations and return the premises to their original configuration) is the most contested element of many current dilapidations’ disputes.  Landlords argue that a market tenant would not take the premises in their fitted-out state and that full reinstatement is required; tenants argue that some or all the fit-out enhances, rather than diminishes, the value of the premises and that the landlord would not suffer loss from its retention.  The resolution depends on detailed analysis of the reinstatement clause in the lease, the condition of the premises at the start of the term and the current state of the occupier market for that type of space.
3. MEES, ESG and the supersession argument:  Commercial properties are currently prohibited from being let if they have an EPC rating of F or G.  The previous government consulted in 2021 on proposals to raise the minimum commercial standard to EPC C by 2027 and EPC B by 2030, but the government response to that consultation has never been published.  As of early 2026, the future trajectory of MEES for commercial property remains formally unconfirmed, though industry commentary broadly expects a minimum EPC B requirement to be introduced at some point between 2030 and 2035.  Many commercial properties that were let on long leases in the 2000s and 2010s fall significantly below the standards that will be required of them on re-letting.  This creates a dilapidations complication that is now appearing regularly in disputes: where a landlord intends to carry out substantial energy efficiency works to the building in order to meet MEES requirements, a tenant can argue that those works will supersede the repairs it would otherwise be obliged to carry out – engaging the second limb of section 18 of the Landlord and Tenant Act 1927, which provides that no damages are recoverable for breach of a repairing covenant where the premises would, at or shortly after the end of the term, be demolished or structurally altered so as to render the repairs worthless.  The interaction between MEES’ compliance obligations and the section 18 cap is one of the most live and commercially significant issues in current dilapidations practice.

The section 18 cap: the most important legal constraint on landlords’ claims

Section 18 of the Landlord and Tenant Act 1927 is the most important statutory provision in any dilapidations dispute.  It operates as a double cap on a landlord’s damages claim for breach of a repairing covenant:

1. The first limb provides that damages for breach of a repairing covenant shall not exceed the amount by which the value of the landlord’s reversion is diminished by the breach.  In practical terms, this means that the landlord’s claim is limited to the lower of: (a) the cost of the works required to remedy the breaches as set out in the schedule of dilapidations; and (b) the diminution in the value of the landlord’s interest in the property caused by the tenant’s failure to comply with the repairing covenant.  Where the landlord intends to redevelop or substantially refurbish the property, the diminution in value may be nil because a prospective purchaser or tenant of the building would know that the existing condition would be swept away by the proposed works.  In those circumstances, the first limb of section 18 can reduce an apparently substantial dilapidations claim, to a fraction of its headline value.
2. The second limb provides that no damages at all are recoverable where it is shown that, at or shortly after the end of the lease, the premises would have been demolished or structurally altered in a way that would have rendered the tenant’s repairs worthless.  This is the ‘supersession’ argument, and it is available to a tenant only where the landlord’s intention to demolish or carry out structural alterations is genuine, unconditional and will be carried out within a reasonable time of the end of the term.  The key question is the landlord’s intention at the relevant time: post-lease events are admissible as evidence of that intention, and a landlord who subsequently does carry out the works it claimed to intend will find the court more willing to accept that the intention was genuine at lease end.

Peachside Limited v Lee and Keung [2024]: a case study in section 18

The decision in Peachside Limited v Lee and Keung [2024] is the most significant recent judicial examination of section 18 and illustrates the factual and evidential battleground on which dilapidations disputes are fought.

The case arose from the expiry of a fourteen-year lease of restaurant premises in Manchester’s Chinatown (a former textile warehouse), with the lower floors of the building occupied by a bookmaker. The lease contained standard repairing and redecoration covenants.  When the tenant vacated, the landlord’s evidence described the premises as ‘a warzone with grease’.

The landlord proposed to carry out works in two phases.  Phase one involved repairing the premises to a standard suitable for re-letting as a restaurant.  Phase two, if re-letting as a restaurant proved impractical (the court heard evidence that demand for restaurant premises in Chinatown had weakened at the relevant time) involved converting the premises to commercial office use, including the installation of a new passenger lift.

The former tenant raised both limbs of section 18.  On the first limb (diminution), the tenant argued that the cost of the phase one repairs exceeded the actual diminution in the value of the landlord’s reversion, because the building was effectively unlettable in its existing form due to poor access.  On the second limb (supersession), the tenant argued that the landlord’s true intention was full redevelopment once it recovered the bookmaker’s occupation of the lower floors, and that the phased approach was a device to extract the maximum possible dilapidations recovery.  The tenant contended that the real intention – redevelopment – would render the phase one repairs valueless, engaging supersession.

The court found for the landlord on both points.  It was satisfied that the phased approach was genuine and commercially reasonable: the landlord had first attempted to re-let the premises in their then-condition, had taken professional advice on the most advantageous use of the building, and had concluded that phase one repairs were a necessary precursor to any re-letting or redevelopment.  The court was not persuaded that the phase two works – the installation of a new passenger lift – would in fact be carried out, given that the landlord lacked the funds to do so, and declined to treat the phase two plans as evidence of a superseding intention.  Damages were awarded against the former tenant in excess of £500,000.

The case carries several important lessons:

1. First, the court will scrutinise the landlord’s post-lease intentions carefully, and landlords who carry out a phased programme of works – repairs first, redevelopment later – are better placed than those who announce an immediate redevelopment plan at or around the time of lease expiry.
2. Second, the supersession argument requires convincing evidence of a genuine, funded and imminent intention to carry out the structural works; a vague or aspirational redevelopment plan will not engage the second limb.
3. Third, the admissibility of post-lease events as evidence of the landlord’s intention means that what the landlord actually does after the lease ends matters as much as what it said it would do when serving the schedule of dilapidations.

The insolvency complication

The current dilapidations wave is coinciding with a significant increase in tenant insolvency, which creates a further layer of difficulty for landlords seeking to recover the cost of dilapidations from vacating tenants.  In 2025 there were 23,938 registered company insolvencies in England and Wales, with compulsory liquidations reaching their highest annual total since 2012, including a ten-year monthly high in April 2025. One in 194 companies on the Companies House effective register entered insolvency in the twelve months to February 2026.¹  Portfolio landlords are regularly facing the position of having to re-let premises unexpectedly early because a tenant has entered administration or liquidation, leaving the landlord with a dilapidations claim that can only be submitted as an unsecured proof of debt in the insolvency – a claim that will rank behind lots of other creditors and may recover little or nothing.

Where a tenant is in administration or liquidation, landlords should submit a proof of debt to the appointed insolvency practitioner as promptly as possible, supported by a schedule of dilapidations and a costed quantified demand.  The earlier a proof of debt is submitted and agreed, the better the landlord’s prospects of recovery from whatever funds are available.  Landlords should also consider whether there are guarantors, former tenants or subtenants who may have their own liability for the dilapidations, independently of the insolvent tenant.

The insolvency risk also argues for a more proactive approach to dilapidations management during the term.  A landlord who waits until lease expiry to discover the state of the premises, only to find that the tenant is insolvent, will have lost the opportunity to take interim action that might have secured at least partial recovery while the tenant was still solvent and trading.  Landlords should use all the tools at their disposal: Jervis v Harris, or by negotiating an interim schedule and cash payment.

Practical steps for landlords and tenants

For landlords:

1. Carry out a pre-expiry inspection and serve the schedule promptly:  A schedule of dilapidations should be served within a reasonable time of the end of the lease – the Protocol identifies 56 days as the target, though this is guidance rather than a strict rule.  Delay in serving the schedule can prejudice the landlord’s position in negotiations and may be used by the tenant to argue that the landlord has carried out works that supersede the items in the schedule.  A pre-expiry inspection, carried out during the last six to twelve months of the term, will allow the landlord to identify the scope of the likely claim, advise the tenant of its obligations and take a contemporaneous record of the condition of the premises before the tenant vacates.
2. Understand the section 18 cap before quantifying the claim: A schedule of dilapidations that exceeds the section 18 cap will be reduced by the court to the diminution in value of the landlord’s reversion.  If the landlord intends to redevelop or carry out MEES compliance works, the cap may be very low.  Landlords should commission a diminution valuation alongside the building surveyor’s schedule so that the claim is properly calibrated from the outset.  A claim that is pitched at the full cost of works, without reference to diminution, risks being substantially reduced at trial and may expose the landlord to a costs order for having pursued an overstated claim.
3. Think carefully about post-lease intentions: As Peachside confirms, the landlord’s post-lease intentions are relevant and admissible.  A landlord who intends to redevelop or substantially refurbish the property must consider whether those intentions will engage the supersession argument and, if so, how to structure and evidence its plans to maximise the recoverable claim.  A phased approach (repairing and re-letting before redeveloping) may produce a better outcome than announcing an immediate redevelopment plan.  Professional advice should be taken before any works are commissioned or any statements made about future intentions.

For tenants:

1. Understand the reinstatement obligation before you leave:  The reinstatement obligation is the most commonly underestimated element of a commercial dilapidations’ liability.  A tenant that has made significant alterations to the premises (partitioning, mezzanines, specialist plant and equipment, bespoke fit-out) may be required to remove all of it and reinstate the premises to their original configuration at considerable cost.  Tenants should review the reinstatement clause in the lease and seek a landlord’s licence for the relevant alterations at the time they are made – many licences for alterations include a statement of the reinstatement obligations, and tenants who fail to obtain a licence may find themselves with unrestricted reinstatement liability.  Before vacating, tenants should carry out their own survey of the premises and assess the gap between the current condition and the lease standard, so that a realistic liability can be quantified and budgeted for.
2. Deploy the MEES and ESG supersession argument where it is available: Where the landlord’s post-lease plans include MEES compliance works or other significant energy efficiency or ESG-related refurbishment, the tenant should investigate whether those works will supersede the items in the landlord’s schedule of dilapidations.  If the landlord intends to replace the building’s M&E systems to achieve the required EPC rating, there may be little point in the tenant repairing those systems to the lease standard only for them to be ripped out.  Tenants should request early disclosure of the landlord’s post-lease intentions and commission their own expert evidence on the extent to which planned works would supersede the items claimed.

For both landlords and tenants:

1. Engage the Dilapidations Protocol and consider ADR:  Most dilapidations disputes are settled without litigation, and the Protocol is designed to facilitate that outcome.  The parties’ respective surveying experts are encouraged to meet, narrow the areas of disagreement and agree the items in dispute and each side’s position on them.  Mediation is frequently productive in dilapidations’ disputes, because both parties have an incentive to avoid the cost and disruption of a trial and the outcome of litigation can be genuinely uncertain.  Early engagement with the Protocol process, and a realistic assessment of the section 18 position, will almost always produce a better outcome than a late and reluctant settlement after significant litigation costs have been incurred.

Commercial dilapidations disputes require a combination of specialist legal knowledge and expert surveying input.  The law is technical, the facts are often complex, and the interaction between the common law measure of damages, the section 18 cap and the landlord’s post-lease intentions can produce outcomes that are difficult to predict without careful analysis.  B P Collins’ specialist teams act for both landlords and tenants in commercial dilapidations disputes, from the service of the initial schedule through negotiation, expert evidence and, where necessary, proceedings.

The property disputes team wants to get to the heart of the issue, understanding the objective and managing the dispute to analyse the risks and achieve a resolution as swiftly, efficiently and as cost effectively as possible. For more information, get in touch with Elliott Brookes or email enquiries@bpcollins.co.uk or call 01753 889995. The team’s ethos is simple: solve the problem.

1. Commentary – Company Insolvency Statistics February 2026 – GOV.UK ↩︎