We may be in lockdown – but it’s important not to allow dilapidations to lapse

The focus of most Landlords in recent weeks has been on the March Quarter Day for payment of rents under commercial leases. Unsurprisingly in the current business environment, rent collection has proved particularly challenging, particularly in the retail, F&B and leisure sectors.

With the Quarter Day now passed, there is another Landlord and Tenant conundrum coming into view – dilapidations and ensuring claims are not permitted to lapse because of C-19 distractions.

When it comes to dilapidations there are four key considerations;

  • Date of Lease Expiry
  • Lease Break
  • Section 18 Diminution
  • Frustration.

Date of Lease Expiry

Fundamentally, a Tenant’s liability is crystallised at the date of lease expiry. It is important to establish the condition of the premises to avoid possible challenges that any disrepair or other breaches of covenant occurred after the lease expired.

The Landlord’s intentions must also be considered. What might have seemed a favoured course a few months ago may be very different now. A Tenant’s opportunity to rely on defending a claim, on the basis of supersession, may now carry less weight as Landlords scale back on refurbishment proposals.

Some leases require a schedule to be served within a certain period, particularly when it comes to reinstatement – and it is important that these dates are not missed. As a minimum, leases with upcoming events should be reviewed to identify if such clauses are present and engage with Tenant’s representatives to protect the Landlord’s position.

Access to inspect may alone be a challenge – are the premises occupied and what are the practicalities of actually seeing the premises?

Lease Break
Leases that expire or have break events in the coming months need to be carefully considered. Again, access to inspect maybe problematic.

Achieving an effective break will clearly be a challenge for Tenants in the coming months – how will a Tenant offer up vacant possession with fitting out and contents in place? Even if a contractor can work in keeping with Public Health England and Government guidelines, will materials be available within the required timescale? This may be time to discuss options with the Tenants – lease extensions, renewals or financial settlements.

Construction sites in the UK are not currently required to close if they can demonstrate compliance with Government guidance on social distancing. It is therefore likely that the Courts would take the view the break has not been frustrated and the Tenant should have complied with giving up with vacant possession.

Section 18 Diminution Valuation
The property market had already been experiencing significant structural changes in tenants’ requirements, particularly in the retail sector, which has created subdued demand.

Covid-19 has amplified this problem, increasing the likelihood of Tenants seeking to rely more than ever on diminution valuations as a cap on liability. A clear intention and marketing initiative by the Landlord at lease expiry will help support the dilapidations claim.

Frustration
In the absence of any legal precedent, it is unlikely that a lease can be viewed to have been frustrated because of the outbreak of Covid-19, and it is highly unusual for a lease to contain a force majeure clause permitting termination in such an event.

Summary

  • Review all leases with events such as expiries and breaks for the next six-month period and prioritise based on risk
  • Undertake desktop reviews of leases, licenses and any other information held by Property Managers and establish strategy for those that fall within the next six months
  • Review the strategy for current claims – has the strength of the negotiating positions changed – favourable or less so? Have the intentions for the building changed? What is the financial standing of the former Tenant? Is it time to try to strike a deal?

by Chris Wilkins