News 26th October 2022 dilapidations

In the year to date, Workman has resolved dilapidations instructions covering 1.4m sq. ft, with a total value of almost £5m, through its 12 offices, nationwide.

As a firm uniquely placed to offer a collaborative property management to building surveying discipline, our dilapidations team has worked effectively. This ensures our clients – including Federated HermesBlackrock and Columbia Threadneedle – are never left exposed as a consequence of lease expiries and notices to quit.

During the course of 2022, our dilapidations team has delivered a variety of instructions across mixed-use sites, industrial properties, offices, and retail spaces. Of all the claims, 38% were for offices, 34% industrial, 24% retail and 4% mixed use. Carrying out the work is often the best way of demonstrating loss, and where clients have taken this route, we have seen settlement tracking closely to the original claim value.

See how Workman can help you with dilapidations.

Offices make up 38% of dilapidations claims

As the office market recovers from covid, offices retain significant value for many workers as hybrid working becomes the norm. In 2022, settled claims have risen from 35% to 38% as spaces are reassessed and owners align plans with dilapidations-level specifications. Office stock now requires evaluation for subdivision or alternative use, rather than focusing solely on refurbishment and leasing.

Occupiers’ reassessment of their needs has led to a trend of shorter-term flexible leases. This promotes landlords to collaborate with flex-space providers for higher rental income. While premium all-inclusive spaces offer increased rental income, they also carry the risk of higher dilapidations costs at lease expiration. This could mean a long-term problem for short-term flexible leases if landlords fail to consider dilapidations in advance.

Previously, a single occupier would assume maintenance responsibilities on Full Repairing & Insuring (FRI) terms for a building. However, in a multi-occupier setting, tenants’ maintenance responsibilities are often significantly reduced. Consequently, the role of management falls back to the landlord, by way of service charge.

To safeguard against potential maintenance issues, landlords must implement a Planned Preventative Maintenance (PPM) program. Associated costs must be recovered through service charges or all-inclusive rental terms. This will ensure there are no surprises come lease expiry.

Industrial is 34% of dilapidations settlements

In the past year, the industrial sector has stabilised, with fewer claims in total. The industrial and logistics sectors experienced rapid growth. This was due to factors such as increased online consumer spending, on-shoring and expanded manufacturing, resulting in heightened investor demand.

The sector’s stabilisation was anticipated as substantial capital was redirected from underperforming asset classes. This was to fuel the growth of the industrial and logistics sector. Today, the sector has rapidly matured into a stable, long-term investment option.

Retail accounts for 25% of dilapidations settlements

The retail sector has encountered numerous challenges in recent years. This included the devastating impact of the pandemic, resulting in the unfortunate collapse of several retailers.

Occupiers have relied upon Section 18(1) of the Landlord and Tenant Act 1927 (diminution) as a cap on liability, claiming that a building would be worth no more in repair than out.

However, a clear intention and marketing initiative by the landlord at lease expiry could help support the dilapidations claim. Even better, undertaking the work and incurring the loss usually trumps a S18 tenant defence should the matter go to court. This is because a court will give more credence to evidence of action, rather than simply a hypothetical valuation.

Mixed Use is 3% of dilapidations claims

Mixed use has seen the least occupier movement in our experience. This is perhaps due to a more resilient profile of combined residential, retail and workspace, which can often lead to reciprocal benefits. Indeed, we are seeing signs that this may be an upward trend as the post-Covid era develops.

How does Workman successfully manage dilapidations?

An occupier leaving a property is a challenging time for a landlord. In addition to the absence of immediate rental income, landlords also have to contend with void rates and the potential need to repurpose the building to adapt to a shifting market.

It is always best to start with a business plan. This is why, at Workman, we begin by having a dialogue with the owner at the start, to understand their intentions and desired outcome. The schedule must reflect the landlord’s intentions. If these are not correctly ascertained early in the instruction, it can lead to issues later.

Understanding what the landlord wants means we can create a bespoke schedule, which can reduce the time taken over dilapidations negotiations, meaning it is not only settled on time, but also on budget.

By Chris Wilkins, Partner and Head of Dilapidations, Workman