How short-term leases affect dilapidations claims and building repairs

There are many consequences of shorter lease terms, but this is particularly so, and coming to the fore, in relation to repairs and terminal dilapidations claims.

Why might consecutive short-term leases have an impact on the repair of a building?

If you have a series of short-term tenants, say five tenants over 15 years, each having a 2 or 3-year lease term, it is unlikely that when they take on the lease, they will agree to a full repairing and insuring obligation.  More likely, a short-term tenant will want to take on limited repair obligations and have them limited by a schedule of condition.  This means they are only obligated to repair the property when they leave it in the same state it was in when they took it on. 

Over a 10- or 15-year period, this can mean incremental deterioration to the property because none of the tenants has carried out proper maintenance to the building's fabric, which inevitably has to be undertaken at some stage. 

In itself, this could be a vicious circle, because if the property is not properly maintained and in a good state of repair and condition, a short-term incoming tenant is not going to want to take on a full repairing obligation for the property, but the repetition of short-term tenancies and limited repair obligations means that buildings do fall into a state of disrepair over a fairly short period of time.

Why might a landlord not pursue an outgoing tenant for dilapidations?

Given the decreasing number of retailers looking for units to have a high street presence, for example, landlords are also often very keen to forego potential terminal dilapidations claims when a tenant moves out, even if the tenant did have repair obligations, because they are focused on reletting the property quickly to maintain an income stream.  Again, this is not helpful for maintaining and repairing a building, as an opportunity is lost to carry out repair works before the next tenant moves in.

Why would a landlord not require reinstatement?

It is also common to see landlords foregoing claims in relation to reinstatement of premises, again, in a drive to attract a new tenant and perhaps to let the building to the new tenant with the previous tenant’s alterations.  This is commonly seen in the case of mezzanine floors, where the first tenant may have added the mezzanine and been obliged to remove it when they vacated the premises. Still, the landlord recognises that it will be easier to relet the building with the mezzanine remaining in place, so they do not require the outgoing tenant to remove the mezzanine. They then let the building to the incoming tenant with the mezzanine already in place. 

From a legal perspective, that means that when the second tenant moves in, the mezzanine is effectively a landlord's fixture, most definitely not a tenant's fixture, and tenant number two, if they are well advised, would not agree to an obligation to remove the mezzanine when they move, because clearly they have not been responsible for putting it in originally. 

Again, on a short-term basis, this may work, but at some point, the landlord needs to consider who will pay the costs of reinstating the premises and should be aware that those costs might ultimately fall to them.

What should a tenant think about when taking on a lease for a short term?

For any tenant taking a short-term lease, they need to think very carefully about agreeing to limited repair obligations and making sure that a valuable schedule of condition is agreed and annexed to their lease.  So often, only half a job is done here. Although the tenancy document references a schedule of conditions, it is never actually appended to the tenancy agreement itself. 

An ingoing tenant must ensure that the schedule of condition is produced and annexed to the agreement; otherwise, they may find that the protection they thought they would have from limited repair obligations is actually redundant without it.

What should a landlord consider when dealing with repeated short-term lets?

Landlords who let the property on a series of short-term leases effectively defer their dilapidations liability, which means that, in the background, the extent of disrepair is silently accruing but will need to be dealt with at some point. 

A landlord needs to balance their financial interests and drive to maintain ongoing income streams from short-term tenants with limited repair obligations, with the need to accrue funds to carry out required repair and maintenance to the building at some point in the future. 

It is also worth considering that whilst in the short term it might be attractive to keep letting a tired building, an investment in capital works to the building, perhaps to improve its EPC rating, might actually make it more lettable in the future and attract a higher income. 

It should also be borne in mind that the sum that may need to be spent on repairs after a series of short-term tenancies might well be significantly higher than it would have been if a dilapidations claim had been made against each tenant at the end of the short-term lease.  If works were done regularly to a building to keep it in good repair, that might in fact cost much less than if they were only carried out once every 10 or 15 years.