DILAPIDATIONS - EVERYONE WINS EXCEPT THE TAXMAN

Tenants of business premises typically are signed up to leases that require them to keep the premises in repair and to make good any damage caused after removing their fixtures and fittings at the end of the term.

Whilst repairs can be dealt with as they arise often they are left to accumulate and only come into focus as the lease nears the end of its term and the landlord serves a schedule of dilapidations on the tenant.

However it is possible to get the Taxman to indirectly assist. Annually during the lease term potentially the trading accounts of the tenant can include an item for dilapidations, as identified and costed up to and including that accounting year, thereby reducing profit and hence tax liabilities. In technical terms a provision is made in the accounts, which is allowable for tax purposes, but only if:-

1. It is in respect of allowable revenue expenditure

2. It is required by the UK generally accepted accounting practice.

3. It does not conflict with any specific tax rule governing the time at which expenditure is allowed.

4. It is estimated with sufficient accuracy.

With regard to point 2 above a provision should be recognised when:-

- An entity has a present obligation as a result of a past event.

- It is probable that a transfer of economic benefits will be required to settle the obligation.

- A reliable estimate can be made of the amount of the obligation.

It is clear by now that both expert advice from Accountants and Building Surveyors will be required in order to take advantage of this tax saving opportunity - the Accountant to assist with the technical aspects of preparation of accounts and taxation matters; and the Building Surveyor to accurately quantify and identify the various outstanding items of repair and their likely costs. In any given year the provision made in the accounts can only cover the specific damage up to that point and not for future damage that has not yet occurred; such future damage would fall to be assessed in the relevant accounting years.

In difficult economic times, when everyone is more keenly interested than ever in protecting profit levels, careful attention to the provision of amounts to cover dilapidations is both prudent and advisable. In effect everyone wins, as the tenant saves on tax and is helped in effect to pay the dilapidations bill; and the landlord is happy in the knowledge that his tenant is keeping an eye on their repairing liabilities and setting aside funds. The only loser is the Taxman!

The Building Surveying team at Drew Pearce are well placed to assist lessees with any aspect of their repairing and dilapidation obligations and interested parties are invited to contact either Martyn Burnett or John Murrin at Drew Pearce on 01392 201748.

Additionally when dealing with dilapidations at the end of the lease it necessary to also consider the question of diminution in value of the landlord's interest. In Section 18 (1) of the Landlord & Tenant Act 1927 there are two points to be covered:

1. The first is that any damages (dilapidations) should not exceed the amount (if any) by which the breach of repair diminishes the value of the landlordˇ¦s reversionary interest. This obviously limits the damages and requires valuation advice.

2. Secondly no damages can be recovered if at the time the lease comes to an end or shortly thereafter, it is intended to demolish or substantially structurally alter the premises which will mean that any repairs to be covered by any covenant in the old lease, will be valueless. This effectively extinguishes any claim for damages.

Therefore as a lease comes to an end both valuation and building surveying advice is crucial if leaseholders are faced with a claim for dilapidations.

For further advice on any of these matters contact John Daborn (01392 201748) in Drew Pearce's Professional Services department or one of the building surveying team mentioned above.