Why dilapidations assessments matter more than ever in an inflationary market

For many occupiers of commercial property, dilapidations are often viewed as an issue to address when a lease is approaching expiry.

However, every tenant with repairing obligations under a lease has a potential dilapidations liability from day one, and ensuring that liability is accurately reflected in company accounts is becoming increasingly important.

In today’s economic climate, rising construction costs, labour shortages and material price inflation have significantly increased the potential cost of meeting lease-end obligations.

As a result, a dilapidations provision calculated three, five or even ten years ago may no longer reflect the true cost of repairing, reinstating and redecorating a property at lease expiry.

Is your dilapidations provision keeping pace with rising construction costs?

Matt Beech, Partner in the Building Consultancy team at Vail Williams, explores what dilapidations are, how inflation has changed the dilapidations question and what you should be doing as an occupier, to plan for this future cost.

What are dilapidations?

Dilapidations refer to breaches of a tenant’s lease obligations relating to the condition of a property.

These obligations typically include requirements to:

• Repair and maintain the premises
• Redecorate the property at specified intervals or lease expiry
• Reinstate alterations carried out during the lease term
• Return the property in the condition required under the lease

At the end of a commercial lease, landlords may pursue a dilapidations claim to recover the cost of outstanding works required to remedy these breaches.

For occupiers, understanding and accurately forecasting this potential liability is an important part of lease management and financial planning.

How inflation has changed the dilapidations equation

However, the construction industry has experienced substantial cost increases over recent years and this could affect dilapidations costs which occupiers may not be prepared for.

While inflation has eased from its peak, the cumulative effect of higher labour rates, increased material costs and ongoing supply chain pressures continues to impact the cost of property repairs and reinstatement works.

We have seen significant increases across many of the works commonly associated with dilapidations claims, including:

• Internal and external redecoration
• Mechanical and electrical (M&E) works
• Flooring works
• Ceiling repairs and replacement
• Joinery and partitioning works
• Reinstatement of tenant fit-outs and alterations
• General repair and maintenance works

For occupiers, this means that historical cost assumptions may no longer be reliable.

A dilapidations liability assessed several years ago could now be materially understated, particularly for properties requiring significant reinstatement works or extensive repairs at lease expiry.

Why occupiers should review dilapidations provisions regularly

Many businesses establish a dilapidations provision early in a lease and assume it will remain broadly accurate throughout the term. In reality, dilapidations liabilities are dynamic and can change significantly over time.

Regular dilapidations assessments allow occupiers to ensure provisions remain aligned with actual exposure and provide greater certainty when preparing financial accounts.

For finance directors, property managers and portfolio occupiers, reviewing dilapidations liabilities on a regular basis can help support more accurate budgeting, forecasting and financial reporting.

The financial risks of under-provision

One of the most common issues occupiers face is underestimating their dilapidations liability.

If the actual cost of meeting lease obligations exceeds the provision held in company accounts, businesses may face an unexpected financial burden at lease expiry. This can be particularly challenging when combined with relocation costs, new fit-out expenditure or other property-related commitments.

By obtaining an up-to-date dilapidations assessment, occupiers can better understand their exposure and make informed decisions well before lease-end obligations crystallise.

An insufficient dilapidations budget can result in:

• Unexpected lease-end costs
• Pressure on cash flow and budgets
• Accounting and reporting challenges
• Reduced certainty during lease negotiations
• Increased risk when planning property strategy

The benefits of a professional dilapidations assessment

A professional dilapidations assessment provides an evidence-based estimate of likely lease-end liabilities, taking account of both the legal obligations within the lease and current market conditions.

An assessment typically considers lease repairing obligations, current property condition, reinstatement requirements, future repair and decoration obligations, current labour and material costs and anticipated dilapidations exposure at lease expiry.

By combining technical building surveying expertise with a detailed understanding of landlord and tenant matters, occupiers gain a clearer picture of their potential liability and can ensure appropriate financial provisions are maintained.

At Vail Williams, our building consultancy team provides specialist dilapidations advice to occupiers across a wide range of sectors and property types.

We help businesses understand their lease obligations, assess potential dilapidations liabilities and establish realistic provisions that reflect current market conditions. Our experienced surveyors undertake detailed dilapidations assessments to provide greater certainty around lease-end exposure and support informed decision-making.

Whether you occupy a single commercial property or manage a national portfolio, we can help you review your dilapidations provision, identify potential risks and ensure your financial planning reflects today’s construction and reinstatement costs.

If your dilapidations provision has not been reviewed recently, now may be the time to reassess whether it accurately reflects your potential lease-end liability.

To discuss a dilapidations assessment or review your current provision, contact the Vail Williams building consultancy team.