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Dilapidation Provision: Safeguarding At End Of Lease

Navigating the complexities of dilapidation provisions is crucial for both landlords and tenants in the commercial leasing landscape. This safeguarding clause, embedded in lease agreements, is a strategic asset accounting tool. It not only provides a clear set of rules for landlords and tenants when dealing with dilapidated properties but also contains insights into accounting practices. Our specialised services enable landlords and tenants to accurately calculate, claim, and deal with dilapidation costs, offering an opportunity for legal and tax relief. Trust us to guide you through the intricacies of dilapidations, ensuring a seamless and cost-effective end to your lease.

Dilapidations Liability and FRS 102

  • Companies can save on their corporation tax bill right now due to FRS 102 and may not be aware.
  • Companies can make a provision for known future repairs (dilapidations) for their properties, classing it as an expense and including within their profit and loss accounting.
  • Staying compliant in accordance with FRS 102 is a must for companies. Rules may be breached if the dilapidations provision is too high.

Making a Dilapidations Provision Under FRS 102

How can I make a provision?

Under section 21, FRS 102 allows a company to make provision for known dilapidations liability within their financial statements. This helps reduce corporation tax liability.

With the right FRS 102 Accounting plan in place, it will not only welcome a boost to cash flow but will allow for sensible advance planning, to ensure the funds are available at lease expiry/break.

It is a balancing act for the company; too high a provision not only risks breaching the rules but could sterilise an excessive sum of money from use within the business.

What does provision require?

Chartered building surveyors are needed to assess and negotiate the cost of remedial works.

Chartered valuation surveyors are required to apply the statutory cap (S18 of the Landlord & Tenant Act 1927 in England & Wales and S65 of the Landlord & Tenant (Amendment) Act 1990 in Ireland).

The cap means that the compensation due to a landlord for breached covenants to repair (decorate and reinstate alterations) will be the ‘lower of the cost of remedial works OR the impact (if any) upon the property’s freehold value.'

Benefits Of FRS 102 Dilapidations Liability Assessments

An increasing number of corporate tenants take advantage of the significant benefits offered by FRS 102:

  • Reduce the risk of not having the money required to meet a dilapidations bill at lease expiry/ lease break
  • Legitimately reduce annual Corporation Tax payments during the currency of the lease
  • Improve cash flow - freeing up more cash than otherwise to invest in the business.

What else should you know about FRS 102?

Step 1, speak to a chartered surveyor

It will be appreciated that employing FRS 102 to best effect for the Company is a balancing act. Dilapidations assessments are traditionally, and initially, prepared by Chartered Building Surveyors – the discipline of a chartered surveyor who identifies breaches of lease covenants (to repair, decorate and reinstate tenant’s alterations) and prices their remedy. Often this resultant total is entered in the Accounts as the provision for dilapidations.

The gain should be worth it 

However, assuming accurately assessed, this figure is likely to be well in excess of what the eventual true liability will be if the tenant company was to employ the Diminution in Value defence (Section 18) in dilapidations negotiations at lease expiry/break date. As explained at Valuations & Diminution in Value this invariably serves to ‘cap’ the damages for dilapidations payable to a landlord to notably less than the (lowest) Cost of Works assessment.

Don't run the risk of breaching the rules

A higher than necessary/realistic provision in your Accounts might of course achieve greater tax relief, but that may be pyrrhic relative to the amount of excess cash duly tied up and thus sterilised from use within the business.

That is why dilapidations assessments should always be made by both disciplines of chartered surveyor necessary for accurate dilapidations assessments. The Chartered Building Surveyor to, as is always required, identify breaches and price remedies. Then, the Chartered Valuation Surveyor (Valuer), to advise to what extent that resultant total might realistically be lowered, or reduced, by use of the Diminution in Value (Section 18) defence.

Protect your company

You can then take an informed view on which figure within that range best protects and suits your company.

As the only dilapidations consultancy employing both disciplines of dilapidations surveyor – the Chartered Building Surveyor and the Chartered Valuation Surveyor – we are uniquely placed to provide you with that complete advice to consider for FRS 102 purposes.


Chartered Surveyors

We are the only dilapidations consultancy in the UK & Ireland that provides both Chartered Building and Valuation Surveyors, ensuring the best results for our clients.

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