Leave a message?

Delapidation provisions are the liabilities to put back a property at the end of the lease into the same condition it was when you commenced the lease.  Therefore, any change in the condition of a property during the lease my creates a liability.  This is one area that companies often fail to account for correctly. 

  • If it is probable that you will need to pay delapidations and you can reliably estimate the cost – you should provide.

 
  • If it is probable that you will need to pay delapidations but you cannot reliably estimate the cost – you should not provide, but you should disclose.

 
  • If it is possible that you would need to pay delapidations and the likelihood of this is not remote - you should not provide, but you should disclose.

 
  • If it is possible that you would need to pay delapidations and the likelihood of this is remote - you should do nothing.

 The most common failings are:
  • Getting the above wrong; or

  • Calculating the delapidations on a straight line basis; or

  • Not considering a break clause.

 Calculating dilapidation provision The easiest way of explaining the calculation needed is by providing an example:A lease is taken on in 2020 on a 10 year lease.  The property requires £125k to install some fixtures and fittings.  The probability is that there will be £75k dilapidation liability to pay in 10 years’ time.The double entry initially is: DR Fixed Assets £125,000CR Creditors £125,000 DR Fixed Asset £46,043CR Provision £46,043Being the net present value of £75k assuming a rate of interest of 5%.
Future Value75000
Annual Interest Rate0.05
Number of Years10
Present Value=+C2/(1+C3)^C4
 
Future Value£75000
Annual Interest Rate5%
Number of Years10
Present Value£46,043
After one year the double entry is:DR Depreciation expense £17,104CR Accumulated depreciation £17,104DR Interest (P&L) £2,302CR Provision £2,302Being the net present value of the effective interest (£75,000-£46,044=£28,957)
WACC0.05
Total Intrest28957
Years12345678910Total
Discount Factor=+(1+$C1)^C3=+(1+$C1)^D3=+(1+$C1)^E3=+(1+$C1)^F3=+(1+$C1)^G3=+(1+$C1)^H3=+(1+$C1)^I3=+(1+$C1)^J3=+(1+$C1)^K3=+(1+$C1)^L3=SUM(C4:L4)
Present Value=+C4/M4*C2=+$C$2/D4=+$C$2/E4=+$C$2/F4=+$C$2/G4=+$C$2/H4=+$C$2/I4=+$C$2/J4=+$C$2/K4=+$C$2/L4=SUM(C5:L5)
 
WACC0.05
Total Intrest28957
Years12345678910Total
Discount Factor1.051.101.161.221.281.341.411.481.551.6313.21
Present Value£2,302£26,265£25,014£23,823£22,689£21,608£20,579£19,599£18,666£17,777£198,322
Issues that require further consideration:
  • Lease that has a break clause

  • Agreement to pay the landlord a fixed sum

  • Agreement to waive the delapidations costs since the tenant extends the lease

  • Auditors would require the necessary evidence and workings to be able to become comfortable that the treatment has been performed correctly.

Back to News & Press