How does End-of-Lease Dilapidation in real estate finance work?

End-of-Lease Dilapidation refers to the process of assessing and rectifying damage or deterioration to a leased property that has occurred during the tenancy, beyond fair wear and tear, at the expiry of a commercial or residential lease. It is a significant financial consideration in commercial real estate that affects both landlord income and tenant exit costs.

How the End-of-Lease Dilapidation Process Works

• A dilapidation survey is conducted at lease expiry to document the condition of the premises
• The survey compares current conditions against the make-good obligations defined in the lease
• Landlord issues a schedule of dilapidations listing all defects requiring rectification
• Tenant is required to complete make-good works or pay compensation within an agreed timeframe

Common Dilapidation Items in Commercial Leases

• Removal of tenant fit-out including partitions, flooring, and ceiling tiles
• Repainting walls and ceilings to the original or agreed specification
• Repairing damage to floors, doors, windows, and mechanical systems
• Restoring the premises to the base building condition as defined in the lease

Financial Implications for Both Parties

• Tenants must budget for make-good costs throughout the lease term, not just at expiry
• Dilapidation provisions or bonds held during the lease provide landlords with financial security
• Failure to complete make-good exposes tenants to legal action and financial claims
• Landlords must act promptly after lease expiry to enforce dilapidation obligations within limitation periods

End-of-Lease Dilapidation is a financially significant obligation that both landlords and tenants must plan for throughout the lease term. Clear make-good provisions in the lease, regular condition inspections, and early engagement between parties at lease expiry are the most effective ways to manage dilapidation risk and cost.