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Proactive is a word which many companies like, however, when it comes to matters such as dilapidations, things are often left until after lease expiry when a financial settlement is the only option available to settle a claim.
It’s more likely that a proactive approach is taken when moving to new premises, however, if the premises are merely being vacated because they are surplus to requirements then dilapidations is often ignored until a dilapidations claim is received from the landlord.
Here we look at some of the benefits of a proactive approach to dilapidations 12-24 months before lease expiry or break clause:
Time to plan a strategy
If the matter is addressed during the term then a strategy can be implemented to minimise dilapidations and lease exit costs. The more options you have available to you the better, and whilst you have a lease, all options are available. Once the lease has expired, you’re in the landlords hands and the matter can become more protracted and potentially more expensive if the landlord demonstrates their loss or the matter escalates through a legal process.
Having a Dilapidations Liability Report (DLR) undertaken during the term assists with budgeting for dilapidations and compliance with FRS 102 (See link to Accounting for Dilapidations)
The DLR also assists in making the tenant aware of any onerous lease terms during the term such as break clauses conditions (Vacant Possession, Material Compliance) or obligations to reinstate which will certainly impact on the strategy put forward.
A DLR may also assist a tenant in understanding the likely dilapidations cost which may be a factor in whether to 'Stay or go' so it's always useful to understand the potential costs involved early on.
Approaching the landlord early
Approaching a landlord during the term is a strategy that M³ Dilapidations Consultancy have encouraged when advising clients on dilapidations and lease exit strategy.
It’s an approach that we rarely see used by tenants but it often catches the landlord off guard. Ultimately, the dilapidations claim isn’t going to go away so there is no harm in approaching the landlord early, depending on the circumstances of the case. The sooner the tenant has the landlords view on damages and is engaging with them the better.
From our experience, landlords prefer a financial settlement rather than a tenant undertaking the dilapidations works. A mere threat to undertake the works can sometimes achieve a very beneficial settlement.
Get the benefit of certain works
This is dependent on a number of factors such as property type, use, future use & likelihood of works ever being undertaken. If it's very likely a landlord would undertake the works after expiry then it can be of benefit for a tenant to undertake certain works during the term and get the benefit of them, ensuring that they don’t have to be undertaken again and being able to control cost.
Examples are below:
Industrial premises = replacing of rooflights or replacing of warehouse heating
Office premises = could be replacing air conditioning
Retail premises = could be undertaking certain external works (if demised).
M&E
M&E can often form a large part of a dilapidations claim. Each property is different so the amount of M&E will differ, however, it’s always good to ensure it has been maintained and there is an understanding of its condition.
If the premises are given back to the landlord with no record of M&E being serviced then this gives the landlord ammunition for its replacement and recovery from the tenant as damages, however, if the tenant can provide validation and compliance of the M&E then the landlord will struggle to recover the monies. Often maintenance is much cheaper than full replacement.
MEES
Following the introduction of the MEES regulations in April 2018, a landlord is not able to let or renew a tenancy until an E rating is obtained. It may therefore be clear which items the landlord may have to improve and may not form part of a dilapidations claim. It’s good to be aware of what these items maybe during the term. An example could be that the landlord will be required to replace/ upgrade the lighting, replace the air conditioning or replace heating systems.
Choice of contractor/ standard of repair
If certain dilapidations works or in some cases all dilapidations works are to be undertaken as part of the strategic advice then being aware of this during the term you will have the choice of contractor, type of repair and standard of repair.
There are advantages to a financial settlement but there are times whereby undertaking the dilapidations works is the best strategy. A good example we had recently was a heavily fitted out industrial unit. We approached the landlord 12 months prior to lease expiry and they produced a schedule of dilapidations equating to £275,000.
After negotiations and the landlord obtaining a quotation for the works equating to a similar figure, we tendered the works and successfully completed the works for £145,000. This included repair of certain items rather than replacement which created a significant saving.
Diminution Valuation
If a Diminution Valuation is going to be of use to cap the dilapidations claim then it’s always good to get your valuation in before the landlord. It is very much case dependent and its imperative that the dilapidations surveyor has an understanding of the factors that affect value.
VAT
Knowing the Landlords VAT position is very important. If the Landlord is not registered for VAT and this forms part of the claim then it’s good to know this early and factor this into any figures as it may determine whether to undertake the dilapidations works or agree a financial settlement.
Alterations
Being aware whether you have to reinstate alterations or whether the landlord is required give the tenant notice is an important factor to be aware of as this has an impact on strategy and whether to approach the landlord early or not.
The above is not an exhaustive list and each dilapidations matter needs to be reviewed on a case by case basis taking into account many factors in order to minimise costs. Our evidence shows that those occupiers who are proactive and have options available to them during the term are the ones who obtain the lowest settlements.
Summary
Being prepared by having a strategy in place and a estimate of likely dilapidations costs should considered for all occupiers of commercial property.
Even if you remain in the space the report will still be of use for when the you do decide to move and will highlight any onerous lease terms early on.
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