Dilapidations

alt tag goes here

News article

Dilapidations - Always at the end?

March 2016

commercial news

Dilapidations is often a subject which only occupies the minds of Landlords and Tenants at the end of a lease and in many cases is often forgotten altogether by Tenants until sometime after the keys have been handed back.

Enlightened tenants’ may have remembered to consult the lease in the months before the term ends but these are usually the same tenants, who at the expiry of a previous lease, have suffered at the hands of a zealous building surveyor! Tenants knowledgeable in the contents of their own lease, in my experience, are few and far between and most are often unaware of the obligations placed upon them by their own signature, albeit 10 or 15 years ago. All this leads to a very confrontational and expensive end to a property transaction.

The question is, can it be avoided and does it benefit the Landlord as well as the Tenant to do so?

Most commercial leases of any length contain a clause which permits the landlord and /or his surveyor to request access to view the condition of the property within the term of the lease, not just exclusively at or near the end of the term. Most Landlords don’t tend to avail themselves of the full opportunity this provides and after all why would they the rent is rolling in, quarter days are happy events and all is good! The payment of rent tends to appear at the top of the tenant’s obligations in any lease and the clauses that follow it do not have perhaps the landlord’s attention to the same degree but can provide some nasty shocks for the landlord further down the road. Central to these is the repairing and insuring obligation.

Benefits of a Repair Schedule 

Landlords can see the value of their asset deteriorate when repairs and decoration obligations are left by the tenant. This can affect the rental incomes of adjacent buildings but in addition to this there are some opportunities for landlords in ensuring the tenants meet their obligations within the term. The most important of these may be the advantage that any repairs schedule issued by the Landlord in the term, provided there is more than 3 years remaining will not be troubled by The Landlord and Tenant Act 1927 s18(1). This statute limits the recovery of damages at the end of the lease to the landlord’s loss in reversionary value. This can mean that in practical terms the landlord does not recover sufficient funds from a tenant in default to cover the repairs to the building. This does not apply to schedules issued within the term thanks to a decision in Jervis v Harris 1995.This case made the important distinction that the cost of repairs carried out within the term were not recovered as damages but were a debt and so escaped the cap.

The landlord can also receive additional benefits from serving a repair schedule within the term. The improved condition of the building may have a positive impact on the rent during reviews. There is less risk of voids at the end of the term if the building is kept in good condition throughout and there is a greater chance of getting repairs carried out whilst the benefit of those repairs is being enjoyed by the Tenant. The process is also less confrontational because the cost of the works within a schedule issued on a tenant in occupation can be managed by the tenant, this is not the case once the keys have been handed back the landlord is in control of the repair works.

If a Landlord issues in interim schedule it is usual for the lease to contain a clause requiring the tenant to commence the works within a specified period. Failure to do so can provide an opportunity for the landlord to instruct his own contractors and recover costs as a debt. There is often a greater chance of recovery of costs if the Tenant is still present and trading in the premises. Substantial failure to attend to significant repairs to the building may allow the Landlord to seek Forfeiture and this may be preferable where the Tenant is not performing his or her obligations and the market would allow for either improved rental income or an alternative development opportunity.
 

Early warning

The real advantage however, in my opinion, is making the Tenant aware of their obligations at an early stage so that the repair obligations can be engaged and met in a way that allows the tenant to control their impact on the business financially. In the long run this can only assist the tenant! The tenant maintains control of cost and over the contractors engaged to carry out any work. It is always more cost effective for tenants to carry out the work themselves given the additional costs that a Landlord would be able to legitimately claim are likely to be avoided. It is often a requirement of any break clause that the repairing obligation is met and this is also assisted by early awareness of the repairing obligation. Breaks can often be frustrated by non-compliance with the repairing clauses. Keeping up with the repairs also crucially reduces the risk of receiving an eye watering demand from a landlord at the same time as the additional cost of moving premises at the end of the lease. Receiving an interim schedule allows the tenant to understand the Landlords practical expectations on repairs whilst there is an opportunity to discuss and negotiate. It allows the common misconceptions that tenants have over the repair liability to be tested whilst still having the opportunity and importantly the time to plan and react.

Prevention is better than cure

The concentration on sorting dilapidations at the end of the term is by far the norm and cannot produce the best outcome for property owners and tenants in the majority of cases. Prevention is better than cure and with that in mind is there not an argument that we should be considering auditing the repair obligations in the middle of commercial tenancies and using the interim repair schedule as a means of providing advantages for both the landlord and tenant. It is by no means a panacea to tenants who won’t ever understand or engage with their obligations but at least they cannot argue that they did not know what was expected. A history of engagement by a Landlord can only assist any future litigation to recover. Perhaps therefore we should not be afraid to break from the standard industry model and proactively use the clauses within commercial leases to drive the management of our client’s properties!

For further information on Dilapidations or anything related to Building Consultancy, please contact Paul Brown 01530 566577 or email him here

Click here to find out more about our commercial property services.

latest news

latest news

alt tag goes here
alt tag goes here
forthcoming events

forthcoming events

alt tag goes here
Auctions 2011

Fisher German hold auctions throughout the year. For further information about 2017 dates and results of past auctions, click below to visit our auction page.

Copyright © 2015 Fisher German    All rights reserved   |   Privacy Policy  |   Site Map   |    Accessibility                                                            Created by Supadü
alt tag goes here
Site Search
Awards logo - winner
facebook-social-icon
facebook-social-icon