Managing delapidations – insights from Dennis Venn

Businesses looking to amend their bricks and mortar status should carefully consider how they have entered into their leases.  While many are focused in reduction in size of premises held, consideration should also be given to consolidation of many satellite offices into a central location with less overall space as a means of reducing not only overall rents but rates, insurance etc.  If many staff are working remotely consideration to having a single of fewer satellite offices where buildings may not be occupied for more than 50% capacity for most of the time to a more central location achieving occupancy of 70-80% (if not 90%+) being more efficient.

Managing dilapidations

It is often not possible to immediately break from a lease although careful review of the documents should be undertaken and early planning implemented to achieve any desired aims for relocation.  Break clauses can be punitively written requiring tenants to have fully paid rent, not be in arrears in any respect and often to have fully complied with all breaches of lease.  Clauses such as this particularly compliance with all breaches, may require careful planning and investment of time and money to ensure compliance is achieved as any minor failings can result in the break option not being correctly fulfilled and the tenant tied into a further number of years until the next break or lease expiry.

A landlord should actively review their portfolio and tenants to risk assess whether tenants are likely to leave, likely to relocate from out of town to more central locations or relocate from central locations to out of town locations to facilitate ease of access.  Alteration and reconfiguration of existing premises may encourage tenants to remain.

‘A commercial approach is required when reviewing dilapidations.  Claims are all too often overinflated by landlords, or underestimated by tenants, which can lead to professional costs quickly escalating. That makes resolution difficult particularly where costs and losses are a significant element compared to the actual claim for repair.’ said Dennis Venn.

Landlords require a clear strategy for dealing with tenants and managing dilapidations as they leave.  In some instances, the opportunity to undertake repairs prior to a tenant leaving may be the “safest way” for a landlord to be able to recover the costs for repair.  Often the limitation of any payment by a tenant is a Section 18 valuation which determines the landlord’s loss by the reduction in value as the landlord’s reversion which may be less than the cost of repairs to a property.  Should leases have appropriate clauses for a landlord to enter into the premises and undertake repair, these costs can be reclaimed as a debt thus avoiding a Section 18 assessment.  There are a number of factors to consider prior to taking such action as the tenant has a benefit of quiet enjoyment and will all costs be recovered if proper procedures and requirements within the lease and Landlord & Tenant Act are not correctly followed this often requires legal as well as surveying input.

If the accommodation is either outdated, or of inappropriate size the landlord should give consideration to reconfiguration of individual buildings or their portfolio.  We are assisting a number of landlords in this process at present.  Whilst landlord’s alterations can impact on a dilapidations claim at the end of a lease, a longer term view needs to be taken by landlords in order to have properties quickly re-let and in the longer term be the quality and size that the market demands.  Ever since 2010 the higher demand for office space has been for smaller accommodation with a lot of medium size offices being either sub-divided to provide smaller suites or have been lost to residential conversion.

The trend for remote working will no doubt be reflected in the amount of floor space individual companies will require in the future.  There is likely to be a trend of some downsizing although it will be interesting to see whether companies take the opportunity to improve the quality of space (particularly in smaller businesses) where downsizing may not result in significant cost savings and relocation costs and dilapidations etc may make relocation, although cheaper, not the eventual choice compared to improvement of the working environment.

Even where there are not onerous clauses required to meet a break, or when coming to the natural conclusion to the lease careful consideration is for the strategy to exit a premise.  It is for the tenant to comply with the covenants within the lease.  Prior to the end of the lease the landlord is not obliged to advise of what work they require to be undertaken.  Early dialogue is required.

Often the options for a tenant vacating are to undertake work to remove any alterations, put the property into repair and decorate in order that they have no financial or other liabilities at the end of the lease.  The other extreme is to do no work and potentially argue that the landlord’s improvements to the property will supersede some, if not all, of the tenant’s covenants and therefore result in a lesser cost to the tenant than actually undertaking the repairs.

‘Whilst there is a large push for remote working at present, I believe in the longer term there may be a return to office-based working for its social interaction and ability to enable communication via osmosis.’ Added Venn. ‘Significant reduction in staff numbers working remotely in the short term will not impact on the wider business although in the medium-long term thought should be given to maintaining a company/corporate feel and while currently everyone within the company will know each other as staff changes occur, working remotely can dilute any company ethos and make it more difficult to facilitate the interaction between members of staff that are, in the service industry, particularly professional and banking services and people related businesses. ‘

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