There is often a misconception that after paying rent and utilities there is little else for a tenant to pay.

However, at the end of a residential or commercial tenancy a tenant will often be required to leave the rented premises to a certain standard of repair - and if the premises are not left to that standard, the landlord may have a claim for what is known as dilapidations.

Dilapidations represent the cost of fixing repairs that a tenant has failed to perform, as required by a lease.

A "dilapidations" liability requires a tenant either to:

¦ carry out repairs; or

¦ pay the landlord damages equal to the cost to the landlord of carrying out the repairs.

A residential tenant in Bermuda, with a lease of less than three years is, by virtue of the Landlord and Tenant Act 1974, exempted from having to repair certain items. These are repairs to plumbing, wiring, the structure and the exterior of the property (including drains, fresh water tanks and external pipes and any cess pool).

Depending on what the lease says, it is possible for a tenant to minimise or eliminate repairing liabilities. For example, to secure a good tenant, a landlord may concede to lease obligations only requiring the tenant to:

¦ repair damage only above fair wear and tear; and

¦ leave the premises in no worse state than at the time the lease was taken (as opposed to keeping the premises in good and substantial repair and decoration at all times).

A tenant should plan for the possibility of a landlord's dilapidations claim. Typically a surveyor's "dilapidations report" is commissioned by the tenant and sent to the landlord near the end of the lease period.

A dilapidations report should list and cost all outstanding repairs, maintenance and decoration items, which are tenant obligations, and which have not been performed. If a tenant does not plan its exit carefully a surveyor's dilapidations report commissioned by the landlord could be received.

A dilapidations report commissioned by a tenant should take a more conservative approach than one commissioned by a landlord.

A landlord's dilapidations claim, meanwhile, should reflect the extent to which a departing tenant has failed to maintain the state and condition of its premises. However, if a tenant's repairing obligation is limited, so is the potential dilapidations liability. If a tenant has fully complied with the lease repairing obligations there should be no dilapidations liability.

Dilapidations often cause disputes between landlords and tenants and can result in court action. The court will decide on what is relevant, and what is not, in a surveyor's dilapidations report.

A lease of a whole building, such as an office block, can result in significant dilapidations liability, especially if structural repairs are required. If a lease is of office space on a single floor, in the form of an internal demise, any dilapidations liability may be limited to, for example, repainting.

Often when a tenant makes alterations to rented premises, the landlord requires the tenant to covenant to reinstate (remove and make good) those alterations, at the end of the lease period. This is known as reinstatement and is different to dilapidations liability.

Depending on the wording in the lease, a reinstatement obligation may only apply at the landlord's request. Whether or not a landlord will make such a request cannot be predicted with certainty. However, alterations that are beneficial and allow the premises to be let to a new tenant are often left in place. A tenant's idiosyncratic alterations usually have to be removed at the request of the landlord.

If there have been no alterations there should be no reinstatement claim. If there have been tenant alterations, the tenant should plan for the possibility of a reinstatement claim.

If the alterations are beneficial, a tenant will often advise the landlord that the alterations will be removed unless the landlord requests otherwise. Most landlords will wish to keep modernising alterations and so will ask the tenant to leave them in place.

Raising issues with a landlord before the lease period ends puts a tenant in a better negotiating position. For example, a tenant could be asked by the landlord to remove alterations after expiry of the lease period, the landlord knowing tenants often prefer to pay cash, rather than arrange and supervise reinstatement works. After the tenant pays for the reinstatement, the landlord could leave the alterations in place and quietly pocket the cash payment.

A surveyor will be able to advise a tenant whether or not improvements and/or alterations are of value to the landlord.

As tenant liability is dependent on what the lease stipulates, a lease should be fully understood before it is signed. Dilapidations and reinstatement claims can be significant and sometimes amount to more than the annual rent. Sometimes landlords do not appreciate possible exit liabilities of their tenants.

As existing lease periods end and if the rental market deteriorates so that tenants have greater choice, landlords may become much stricter with exiting tenants. The number of dilapidations and reinstatement claims may increase, as landlords look to make premises as attractive as possible to potential new tenants.

Landlords and tenants should take advice from both attorneys and surveyors before signing a lease so that potential end-of-lease, and other, liabilities may be identified.

Attorney Neil Molyneux is a member of the Property Practice Group of Appleby. A copy of this column is available on the firm's web site at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.