For tenants closing a dilapidations claim
Dilapidations Settlement Agreement: Works or Cash?
Sviatoslav JerdetchiiCEO & Founder of Craftex. Updated , 4 min read
The short answer
A dilapidations settlement agreement ends the landlord's claim in return for a cash payment, works by the tenant, or both. The right choice is whichever costs less in full, once rent, time and risk are counted.
- Cash suits a tenant who has left, or a landlord who will refurbish anyway.
- Works suit a tenant with time and access before the lease ends.
- The agreement should release all dilapidations claims, in clear words.
- A cash payment for dilapidations is outside the scope of VAT.
A dilapidations settlement agreement ends the landlord's claim on agreed terms. Usually that means the tenant pays cash, does the works, or a mix of both. In return, the landlord releases the claim.
The big decision is works or cash. Get it right and the claim costs what the work is worth. Get it wrong and you pay the landlord's rates, or extra rent while the works overrun.
This guide compares the two options, explains what the agreement should cover, the VAT and tax position and how to negotiate the figure. We help tenants settle a dilapidations claim: one team prices both options, negotiates and can do the works. Weighing it up now? Compare works and cash.
Works versus cash settlement
Most claims end one of two ways. The tenant does the works before handing back, or pays the landlord a sum and walks away.
| Doing the works can make sense when | Paying cash can make sense when |
|---|---|
| There is time and access before the lease ends | You have already left the premises |
| A builder's price is below the landlord's costings | The landlord will refurbish or redevelop anyway |
| The items are clear reinstatement of your own alterations | The claim looks weak under the section 18 cap |
| A break clause needs the premises in a set state | Doing the works would mean paying rent past the end |
Count every cost, not just the price of the works. Doing them yourself can mean rent and service charge until they finish. Paying cash can mean paying for works the landlord never does.
What a settlement agreement covers
A settlement is only as good as the document behind it. Solicitors usually draft it. Make sure it covers each of these:
- The parties. The landlord, the tenant and any guarantor, named exactly.
- The payment. The sum, when it is paid and whether it is in full and final settlement.
- The works. If the tenant does any, the scope, standard and finish date, and who signs them off.
- The release. Which claims are released: repair, redecoration, reinstatement, consequential losses and fees.
- The rent deposit. When it is returned, and any deductions.
- Costs. Who pays each side's legal and surveyor's fees.
The release is the line to read twice. A narrow release can leave the landlord free to claim for items the schedule missed.
VAT and tax on a settlement
The tax position depends on which way you settle. Take advice from your tax adviser, but HMRC guidance sets the frame.
| Cash to the landlord | Works by your contractor | |
|---|---|---|
| VAT | Outside the scope of VAT (Notice 742) | VAT on the works as normal |
| Corporation tax | Deductible to the extent it reflects deferred repairs | Repairs usually deductible; capital items not |
HMRC calls a cash payment instead of making good a composition payment. Its manual allows it to the extent it reflects deferred repairs. Capital items, such as removing structures the tenant added, are not deductible. The sum may need apportioning.
Check the quantified demand too. The Protocol asks it to say whether VAT applies, and a damages payment should not carry VAT.
Negotiating the figure
The landlord's first figure is an opening position. The Protocol expects both sides to meet, generally within 28 days of the tenant's response, to agree as many items as possible.
Three things move the figure most:
- What the lease actually requires. Items the lease never asked for come out.
- What the work really costs. A builder's price per line, not a surveyor's estimate.
- What the landlord really lost. For repair, section 18 caps damages at the fall in value of its interest.
Our guide to the section 18 valuation explains the cap. The Scott schedule is where the line-by-line argument happens.
Our own RICS-qualified quantity surveyor prices every line from current builders' rates. Because our own crews do the work, that price is one we will build for. Already holding a contractor's quote for the works? Send it to us. We'll beat it.
Craftex carried out a warehouse fit-out for us, and I couldn’t be happier with the outcome. The space has been completely transformed into a highly organized and efficient environment that makes our daily operations much smoother. The team was professional but also very approachable — I always felt comfortable asking questions or giving feedback. They came up with smart, practical solutions that worked perfectly for our setup, and everything was explained clearly along the way. The best part was how they stuck to the agreed timeline, finishing on schedule without cutting corners. It’s rare to get both quality and reliability, but Craftex delivered both.
Signing off and handing back
If you settle by doing the works, the handback is where the agreement is tested. Plan it so nothing is left open.
- Agree the scope in writing before work starts, item by item.
- Programme the works to finish inside the lease, with a margin.
- Invite the landlord's surveyor to inspect before the end date.
- Fix any snags they raise, then get written sign-off.
- Hand back the keys with photos, certificates and a signed receipt.
One team, one point of contact: we price the options, negotiate with your landlord and, if the works cost less, do them ourselves. For Drake's railway arch in Bethnal Green, we did the dilapidation works at the old warehouse and the full move into the new one.
Settling soon? Compare works and cash with real prices before you sign.
Before you sign a settlement agreement
- Price both options: works and cash, with rent and risk.
- Check every line against the lease and licences.
- Apply the section 18 cap to the repair items.
- Read the release wording twice.
- Agree who pays each side's fees.
- Confirm the VAT position on any payment.
