By David Castle, Partner, Vail Williams
The majority of commercial property leases require the occupier (the tenant) to keep the property in repair and good order – not doing so could have major cost implications when it’s time to exit the property.
The precise requirements will be set out in the lease but it is likely to contain obligations regarding repair; the requirement to redecorate; and to remove, at the end of the lease, any alterations made to the property. Failure to comply with the requirements will usually result in a ‘dilapidations’ claim from the landlord.
Depending on the size and nature of the property, and the precise obligations set out in the lease, this claim could range from a few thousand to many millions of pounds. It is not unusual for landlords to take a very different view of their tenants’ liabilities and for dilapidations disputes to become both protracted and acrimonious. Reducing landlord’s claims by 50% or greater is far from unusual and, while the final outcome might be satisfactory, the time and cost (surveyors/solicitors) to get there can be significant.
For all these reasons, understanding and reducing this exposure should be considered as vitally important by any occupier, and this needs to start sooner rather than later:
Consideration of future dilapidations liabilities must begin before the lease is signed. If not, the tenant may find themselves responsible for dealing with any outstanding repairs and for leaving the property in a better condition than at lease commencement. Less ambiguity when drafting the description of what exactly the tenant is responsible for, and can and can’t do, would go a long way to avoiding arguments at the end of the lease. Limiting the tenant’s obligations via a Schedule of Condition, allowing fair wear and tear or excluding certain parts of the property from the tenant’s obligations, are ways in which future exposure can be mitigated. If a business is looking to renew a lease and remain in occupation it is important that any accrued liabilities are considered and factored into the discussions. Simply postponing the inevitable and ‘rolling them forward’ might not be the best outcome from negotiations.
This said, Schedules of Condition are often not the panacea that many occupiers think they are. The tenant remains responsible for rectifying any deterioration, which may then necessitate repair or replacement of a particular part of the property anyway. Schedules also regularly do not get a mention in the lease obligations requiring the tenant to redecorate. The tenant remains responsible for redecoration – which then often remedies much of what was originally meant to be excluded by the Schedule.
During the lease
Given that potential dilapidations costs can be significant exposure, it is important to any business that they fully understand the nature of their repairing and reinstatement obligations and make appropriate financial provision – either for undertaking the required works during the term or for dealing with a claim at the end of the lease. Anticipating future liabilities can only be a good thing and dilapidations disputes often settle more straightforwardly when the tenant has forecasted for the liability. Understanding a future potential dilapidations exposure could also be a determining factor if a business is deciding whether or not to stay in occupation of particular premises or move to a new location.
There is also always the possibility that future dilapidations may be reduced by the landlord’s intentions for the property post lease expiry. Surveyors preparing lease end assessments should be asked to state their assumptions, and if appropriate assess this likelihood and explore a range of different scenarios.
Lease breaks can be a minefield for tenants – particularly if the break is conditional on the tenant completing certain obligations before the break date. Not dealing with these obligations, which can include complying with all the repairing, redecoration and reinstatement provisions in the lease, runs the risk of the break failing and the lease continuing – with potentially critical implications for any business. Early detailed attention is essential.
At the end of the term
In the months leading up to the end of the lease a business will normally have two options if it is intending to exit the property: either complete the required works before the end of the lease or simply vacate the building and await the inevitable dilapidations claim from the landlord. Early detailed consideration of the alternatives is essential if overall exposure is to be mitigated.
If the tenant completes the required works it means they are able to control its procurement and costs. But it may require early vacation to allow the works to go ahead. Awaiting the landlord’s claim does enable the tenant to stay in occupation for longer, but any landlord’s claim will be likely to include other heads of claim such as fees, loss of rent and business rates for the length of time the works are likely to take. Careful scrutiny of any claim, a review in the context of the exact property, and precise requirements of the lease are required if the claim is to be reduced.
Unless the landlord actually carries out the works, the amount that he can claim from a tenant may be restricted by either statute (Section 18(1) of the Landlord & Tenant Act 1927) or common law – by limiting the claim to the landlord’s actual ‘loss’. This is not necessarily the same as the cost of the works required to remedy any breaches of the tenant’s obligations, particularly where a redevelopment or substantial alterations or refurbishment of the property are probable. Tenants should ensure that their surveyor considers the possibility and advises accordingly.