Insights 2nd June 2021 Building Consultancy

Despite 12 months of covid lockdowns, Workman resolved a total of 402 dilapidations instructions covering 3m sq. ft, with a total value of £30m. Of all the claims, 85% were settled within six months.

Our dilapidations team worked tirelessly to ensure we could overcome the challenges of restricted access so that our clients, including Federated Hermes, Blackrock and Columbia Threadneedle, were not left exposed as a consequence of lease expiries and notices to quit.

Here we share our six-point guide to successful dilapidations…

1. What are dilapidations?

Dilapidations relates to the disrepair of properties. It is the term used to cover the maintenance and repair required during and at the end of the lease period. The buoyancy of the property market dictates the approach to a dilapidations claim, depending on current demand for a particular asset class.

During a downturn, an oversupply of space – or lack of demand – results in occupiers being able to negotiate higher incentives, lower rents and more flexible lease terms when taking a new lease.

Conversely, during a buoyant market, supply is often limited, which means landlords are in a good position to negotiate strong terms.

2. Common pitfalls when dealing with dilapidations

The biggest pitfall is not understanding the landlord’s intentions when the lease expiry date arrives, and therefore serving a schedule that’s unrealistic. This causes delays to the process and also means unrealistic expectations are set. A more efficient approach is to wait until intentions for the property are known, and then serve a schedule that reflects this.

When preparing a schedule, it is important to be mindful of s.18(1) of the Landlord and Tenant Act 1927 (diminution), which places a theoretical assessment of the property in or out of repair. This is a tactic sometimes deployed by occupiers to justify a position that the repairs are unnecessary irrespective of liability based on market conditions. While this must be carefully considered by the landlord’s representatives, there is a misconception that this report will always diminish a landlord’s claim.

Clearly each case needs to be assessed individually. However, undertaking the work and incurring the loss will trump a s.18 defence, should the matter go to court. Put simply, a court will give more credence to evidence of works carried out, rather than a hypothetical scenario of what something may or may not be worth.

3. Planning for success

It is always best to start with a business plan, so at Workman we begin by having a dialogue with the owner as early as possible to understand their intentions and desired outcome.

In this way, we ensure that our chance of recovery is higher, rather than going in blind and serving a schedule that follows the letter of the lease.

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 within budget.

Using this proactive approach, we’re having conversations about dilapidations 12 months out from the lease expiry date and agreeing a strategy that fits inside a clearly structured timeline.

4. What if agreement can’t be reached?

If agreement is not possible, there are several options, the most extreme being litigation, which is costly and time consuming for all involved.

Before that, there is the option for a landlord to serve a Part 36 offer. This generally only applies where a landlord has served a schedule, and carried out the works, but the occupier is still not engaging. Solicitors could then be instructed to begin proceedings known as a Part 36 offer. And from the specific point at which the Part 36 offer is made, legal costs are attributed to the occupier if the case is found against them. This often gets parties serious about entering into constructive agreement.

In some cases, a more efficient alternative is the RICS Dilapidations Dispute Resolution Scheme (DDRS) where arbitration takes place between surveyors from each party, with a panel of experts. This route is most suitable if the point of contention is technical, because the expert arbitrating is ultimately a Chartered Building Surveyor who is able to grasp the issues more thoroughly than perhaps a legal team would.

This is the argument for transparent and even-handed dealings from the start. If landlords serve unrealistic schedules, these can prove very uncomfortable when they later have to be defended in court.

5. How has the sustainability agenda changed things?

Re-using and recycling kit and equipment in buildings, as well as structural items, not only saves costs but can reduce the carbon footprint of the dilapidations process. The other main impact comes from Minimum Energy Efficiency Standard (MEES) Regulations, which govern the Energy Performance Certificate (EPC) ratings of a building. These are now a powerful tool in landlord and tenant negotiations, particularly where a sub-standard EPC exists or could be generated. An ‘E’, ‘F’ or ‘G’ EPC rating could significantly affect rent review, lease renewal or dilapidations discussions.

Of course, a landlord can’t let a property that’s not above the ‘F’ or ‘G’ EPC rating, and there have been cases where a building might come back to a landlord with an EPC of an ‘F’ or less, meaning  they can’t let it until they have replaced the boiler or maybe swapped the lights for LEDs.

This would give the occupier the chance to claim supersession, because the landlord would be required to carry out those works for the sake of sustainability regulations, not because of disrepair. In this case, Workman’s dilapidation specialists would collaborate with an EPC assessor, while understanding the landlord’s priorities. For example, would they prefer to forfeit a small amount of dilapidations costs, but achieve a better-performing building?

6. Covid-19 and changing market requirements

An occupier leaving a property is a challenging time for a landlord. Not only are they faced with the prospect of no immediate rental income, but there are also void rates to consider and potentially repurposing the building to suit a changing market.

Currently, the industrial market is very active. Here, we are seeing that landlords are willing to engage and proceed with work much earlier. This in turn leads to a quicker dilapidation settlement, because they are incurring costs which serve to crystallise the claim much earlier on. And when landlords are taking that action, they are often letting those units very rapidly.

In terms of offices and also retail, there’s a dilemma for landlords as to what to do with some properties at lease expiry. Looking ahead, the changing requirements of occupiers may mean that retail space is repurposed, or that open-plan offices are subdivided.

By Chris Wilkins, Dilapidations Lead, Building Consultancy, Workman