Dilapidations claims at risk as tenant insolvency rises

One in 189 businesses on the Companies House effective register became insolvent between 1 June 2024 and 31 May 2025, and April this year saw a ten-year high in compulsory liquidations.

With continuing global uncertainty and the UK economy still struggling, commercial landlords are increasingly facing the risk that tenants may not be solvent by the time the lease expires. Even tenants who remain viable may decide that the most cost-effective approach to a dilapidations claim is to undertake the works themselves at a lower cost.

In such circumstances, landlords should provide details of their potential dilapidations claim to the appointed insolvency practitioner using a proof of debt form, for example, where tenant companies are in liquidation or administration.

Submitting a claim in this way can lead to a level of payment if sufficient funds remain, first, after the insolvency practitioners' costs are met, and second any payments are made to secured creditors, as well as to HMRC in relation to certain claims.

This has been most obviously felt on the high streets, with retailers such as Debenhams, House of Fraser and Gap reducing the number of their stores or vanishing altogether. But the change goes beyond retail, with office tenants also downsizing as they adjust to the new normal of a hybrid workforce.

For landlords with older buildings, the additional difficulty is that many office occupiers are now looking to take space that fulfils their environmental, social and governance (ESG) criteria.

With most leases, the cost of improving premises to such standards will sit with the landlord – and many such works could lead to tenants challenging dilapidations claims based on section 18(1) of the Landlord and Tenant Act 1927, so that the landlord will be left with the bill.

In extreme cases, such improvements will be necessary because there is no market for the premises in their current state. But at the very least, there will be instances where repairs to these buildings – which would ordinarily be the tenant's responsibility – are likely to be superseded by works that the landlord will need or want to carry out in order to re-let them and comply with the Non-Domestic Minimum Energy Efficiency Standard (MEES) Regulations, for example.

Such worries have led an increasing number of tenants to undertake their own repair works in preparation for lease expiry. In these instances, it can often be difficult for a landlord to show that there is any breach of repairing obligations, even if the standard of work is not what it would itself have achieved.

Provided that a tenant meets the obligations and standards required by its lease – which can sometimes require expert interpretation – this route allows departing tenants to consider saving costs by having more choice over methods of repair and the materials used.

Returning the premises in the condition required by the lease should also avoid the risk of any claims against the tenant for loss of rent, the landlord's professional fees and irrecoverable VAT on the cost of works.

The key options available to a landlord during the term of a tenancy are:

• serving a notice of entry and repair following the precedent set in Jervis v Harris [1995] EWCA Civ 9, carrying out the works required and then looking to recover the costs from the tenant as a debt
• serving notice under section 146 of the Law of Property Act 1925 and, if appropriate, seeking to forfeit the lease
• obtaining a court order for specific performance of the repairing obligations
• pursuing a claim for damages in respect of the breaches.

None of these routes are straightforward, not least because extra requirements are imposed by the Leasehold Property (Repairs) Act 1938, where forfeiture or damages are sought in relation to any lease granted for seven years or more that has at least three years left to run. However, service of a Jervis v Harris notice – where available under the lease – can encourage engagement if a tenant is ignoring significant disrepairs.

We are also seeing a positive change in the light of the increasing attention being paid to ESG issues, which has put pressure on all businesses to reduce waste and carbon emissions.

This is encouraging some landlords and tenants to agree on a specification of work to suit an incoming tenant, including fit-out items that can stay in place rather than necessitating full reinstatement of the premises.

Although there may be commercial and legal considerations with this approach, the opportunity to reuse materials, reduce the volume and quantum of dilapidations claims and re-let more swiftly signals some hope of a more constructive future as the property market continues to adapt to new pressures.