Pub Dilapidations: A Pie and a Pint

As many pubs struggle for survival, it is more important than ever that tenants understand how to best limit their lease liabilities, both when taking new leases and when exiting.

Landlords are legally entitled to dilapidations from tenants at the lease end, being damages for failure to perfectly honour tenants' lease obligations to repair (which, in English law, is ordinarily to a higher standard than at the lease start), redecorate and reinstate alterations. This sum can be crippling. Here is how to minimise.

In late 2022, the Pubs Code Adjudicator (PCA) issued its “fact sheet”: What Tied Pub Tenants Need to Know About Repairs and Dilapidations. This can be viewed by clicking here.

This majors on potentially minimising exposure to excessive repairing liabilities by having a Schedule of Condition (SoC). The guidance advises that the pub owner “…should provide you with all the information about repairs to the property before you enter into your agreement, including an SoC which records the state of repair of the property at the start of your agreement”.

It goes on to explain that an SoC is “…a document…which summarises the state of repair of the premises.” It continues by noting, for the tenant's benefit, “Unless your agreement says otherwise, the premises must be kept in at least the state of repair shown in the SoC.”

But in practice, this guidance is an oversimplification. For all business tenancies, not just pubs, SoCs are far from a panacea. They can, however, play a worthwhile part in helping to minimise dilapidation payments by tenants to landlords at the lease end. It is the lesser of two key defences to be deployed, referred to respectively in this article as “the pie” and “the pint”.

The Pie: A proper SoC

So your obligation as a tenant, according to the PCA’s guidance, is to keep “…the premises…in at least the state of repair shown in the SoC”. So you may be better advised to jointly instruct the building surveyor with your landlord to ensure the emphasis is on identifying and accurately recording (both in photographs and text) as much disrepair as is reasonably possible (bearing in mind that such surveys are not ordinarily intrusive – the cost would be prohibitive – and so, for example, dry rot might not yet be apparent).

But you will appreciate that there are very brief (landlord-friendly) and far more thorough SoCs.

However, no matter how thorough, remember that decay is inexorable, albeit slowed by regular maintenance. So items recorded in an SoC will inevitably worsen during your lease, and often, the only way to hand back at lease end in “at least the state of repair shown in the SoC” is to unavoidably hand back in better repair (e.g. the one-third rotten window sill at lease commencement, now two-thirds rotted at lease end; fixing “your” extra third is simply not practicable, hence an entire new sill).

Whilst the PCA has provided excellent advice, it will be appreciated that its potential benefit to tenants is unavoidably limited. In short, do use SoCs – do them thoroughly with at least a joint appointment by you and the owner – and then prepare for your ultimate second defence, at lease expiry.

The Pint: the Terminal Dilapidations Sum is NOT the cost of all repairs

At lease end, the landlord has a chartered building surveyor (CBS) survey to identify breaches of your lease covenants to repair, redecorate and reinstate alterations and present these in what is called a Terminal Schedule of Dilapidations (or Quantified Demand), including pricing to remedy everything. This can total hundreds of thousands of pounds – sometimes more.

The Forum of British Pubs (FBP) sets out very useful guidance in its document “Dilapidations in tied pubs – learn the essentials” linked here.

It emphasises, in particular, the otherwise little-appreciated game-changer for tenants of Section 18 (1) of the Landlord & Tenant Act 1927. Only if known about and used by tenants in dilapidations negotiations, this provides that the amount payable to the owner/landlord in damages will be the lower of the negotiated cost to remedy all the breaches OR the amount (if any) by which the breaches serve to reduce the property’s open market value. This so-called “Diminution in Value” (or “Section 18”) defence is the expertise of a different discipline of surveyor, the chartered valuation surveyor (Valuer).

If you think about it, “cost” and “value” are not the same thing. Especially for older properties, it is unlikely that every single breach will impact the value commensurately, if at all. Especially relatively minor items, which are aggregated, can still add up to a big number.

But the benefit of having a Valuer apply Section 18 is usually far greater these days, massively reducing dilapidation payments by tenants at the lease end. This is because so many vacated pubs will never be pubs again. Instead, they require converting for different uses such as residential, pizza delivery, drive-thru coffee, or convenience stores. Sometimes, they are demolished altogether, particularly those purpose-built on 1970s housing estates.

In practice, Section 18 considers what a “hypothetical purchaser” of the pub at lease expiry would be likely to do with it, not what the actual owner claims it is going to do.

So if your Valuer can evidence likely repurposing going forward – or even demolition – much to all of the landlord’s dilapidations claim to mend every breach falls away.

The FBP guide is not entirely accurate in detail (for example, the landlord’s terminal dilapidations survey fee passed on to the tenant is now likely to be at least £1500 plus VAT), but it is clearly well intended, particularly its commendable highlighting of the Section 18 (Diminution in Value) defence.

Conclusions

Each of the guidance notes by the PCA and the FBP recommends one of two wise investments by tenants to ensure that the terminal dilapidations sum due to the landlord at the lease end is not crippling.

Both recommend obtaining the advice of a qualified surveyor. As explained in this article, these are really two surveyors of distinct disciplines. Ordinarily, that would be two sets of fees. But not at Dilapsolutions, which is the only UK-wide dilapidations consultancy which employs both building and valuation surveyors within the same fee, so reassuring that minimum settlement sums are achieved.

If you require assistance with dilapidations, schedule of conditions or have received a dilapidations claim from your landlord, please contact paul@dilapsolutions.com.