Aim To investigate the association between frailty and incomplete delirium recovery at discharge (residual subsyndromal delirium [RSSD]), and to examine the mediating role of RSSD in the relationship between frailty and functional recovery at 12 months post‐delirium. Methods This was a prospective observational study of 234 individuals aged ≥65 years admitted to a specialized delirium unit. A 20‐item frailty index was derived using items from a comprehensive geriatric assessment. Individuals with frailty index ≥0.25 were defined as being frail. Diagnosis of delirium was in accordance with the Confusion Assessment Method. RSSD was defined by the Delirium Rating Scale‐Revised‐98 severity score of ≥13. We measured functional status (modified Barthel Index) on admission and 12 months post‐delirium. We carried out mediation analysis to elucidate the role of baseline frailty and RSSD on 12‐month functional recovery. Results A total of 167 (71%) older adults were available for analysis of 12‐month functional status. Frailty was an independent predictor for RSSD (OR 4.1, 95% CI 2.1–8.2, P < 0.001) and functional recovery at 12 months post‐delirium (β = −13.4, 95% CI –24.9 to –1.8, P = 0.02). RSSD significantly mediated the effect of baseline frailty status on functional recovery at 12 months (coefficient = −0.1, 95% CI –0.2 to –0.02, P = 0.02), with 45% of the total effect mediated by RSSD. Conclusions Frailty as a risk factor for poor functional recovery in the year post‐delirium might be attributable in part to its impact on incomplete delirium recovery at discharge (RSSD). Our findings support screening and interventions for frailty at admission, and extended rehabilitation for frail individuals with RSSD. Geriatr Gerontol Int 2017; ••: ••–••.