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What is a dilapidation assessment?
This process allows you to budget for any Terminal works that are likely to be necessary to comply with the terms of your Lease and enables seamless vacation with minimal disruption to core business activities.
Depending on what Financial Reporting Standards you utilise, a Dilapidations Liability Assessment can be a useful tool in offsetting your liability as a cost for tax purposes.
A Chartered Surveyor should be appointed to assess your Lease Documentation, allied with any accompanying documentation pertinent to your occupation of the Demise.
An inspection will be arranged so that the Surveyor can assess the condition of the Demised premises and undertake a fully measured survey.
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The Use of Dilapidation Assessments
Dilapidations Liability Assessments can be a useful tool for both Landlord and Tenant.
A Landlord may wish to procure an Assessment in order to establish their potential position in relation to a future Dilapidations claim.
A Tenant typically procures a Dilapidations Assessment in order to establish their potential exposure in respect of capital expenditure should the lease terminate.
From a Tenant’s perspective, a Dilapidations Liability Assessment can be useful in setting out a likely claim for damages and help to strategise an exit with minimal disruption to core business activities. For example, the lease may require re-decoration within the last 3-6 months of the term and so knowing this, will allow the Tenant to program these works around incumbent business activity so that the residual liability is distilled.
A Dilapidations Liability Assessment can also be utilised to establish potential cost liabilities as a fixed cost for financial reporting purposes.
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Financial implications and accounting of dilapidations
In relation to commercial leases, the Financial Reporting Standard 102 (FRS102), which has recently replaced FRS12, provides an allowance for future dilapidation liabilities to be treated as an operation-related expense that can be included within the profit and loss account of the operating company.
Until the expenditure has been satisfied (in that the Dilapidations are settled at lease end) the proposed likely liability can be included within the company’s tax computation subsequently reducing tax exposure.
Given current market conditions, allied with uncertainty over inflation, fuel costs, restrictions on international business, and the like, utilising this particular method of accounting is an astute way of mitigating tax liability.
A Tenant’s potential dilapidation provision is completely deductible for corporation tax purposes if certain FRS102 criteria are met, those being;
The business is a party to a present legal or constructive obligation – Typically this requires the presence of a signed lease contract, giving rise to a legally binding commitment for the Tenant to undertake specific reinstatement, re-decoration, and repairs for the duration of the term, referred to as covenants.
The incumbent legal obligation is as a direct result of a past event – In respect of occupying a Leasehold property, this would typically be the end of a lease term.
Transfer of economic benefits arising from legal obligation – For this aspect to be satisfied in full, it would need to be fully demonstrable that the proposed expenditure would be required to complete reasonably necessary dilapidation works in order to comply with obligations set out within the Lease or to make a settlement payment to the landlord in respect of damages.
A reliable estimate of the cost – This aspect requires a wholly professional assessment of the likely cost of dilapidation works supported by robust supporting evidence.
Our Chartered Surveyors have extensive experience in dealing with lease-end dilapidations and proposed costs thereof, and regularly prepare FRS102 compliant dilapidations assessments for a variety of accountants, Commercial organisations, and Institutional clients, enabling them to provide a reliable and accurate estimate of their Leasehold Dilapidations capital liability.
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