Articles 21st March 2023 dilapidations

From assessing defects to assembling a specialist team of consultants, to ensuring that inflation is considered in pricing, the dilapidations process is now more complex than ever. But it can be navigated with expert advice, Chris Wilkins, Partner and Head of Dilapidations, writes for BE News.

Dilapidations have become far more complex – and potentially costly – than at any time in my career to date. Amid rising inflation and the economic uncertainty of 2022, Workman settled almost 2m sq. ft of dilapidations, almost doubling the area settled in 2021.

Analysis of defects has become a more sophisticated process with the evolution of modern construction methods and increased tenant expectations in terms of advanced mechanical and electrical installations, particularly in relation to the hastening drive for sustainability improvements.

The regulatory bar is also higher, and rightly so. For example, legislation brought in with the Fire Safety (England) Act 2022 places increased requirements relevant to statutory compliance, whereby a fire engineer or fire door survey may be appropriate. Breaches of statutory compliance or disrepair in relation to fire safety can involve very substantial costs, and it is crucial they are correctly quantified and incorporated within the dilapidations claim.

Specialist support to quantify a dilapidations claim

Then, of course, there is cladding to consider. Modern buildings with cladding and occupiers with full repairing and insuring (FRI) liability can often require the input of specialist cladding consultants to technically appraise the condition and specify remedial work that can be incorporated into the claim. It will come as no surprise to many that the level of attention to the condition of cladding has dramatically increased – but whether that has resulted in due attention to the impact on the dilapidations process of cladded buildings is less clear.

All these specialist considerations come at a cost. The role of the dilapidations expert is to review the lease or licence documentation, assess the building construction, and then advise accordingly on the appointment of expert consultants to secure the best settlement. Whereas historically, mechanical and electrical consultants were regularly involved in the process of settling dilapidations, today we also need to call upon the expertise of fire engineers, cladding consultants, fire door surveyors or other professionals relevant to the claim.

Bringing in specialist support to further quantify the claim – in forensic detail – means that rigorous testing and investigation will be carried out to provide enough evidence to convince the occupiers that there’s a claim.

Ordinarily, these fees are recoverable as a consequential loss of preparation of the schedule, and the investment in true dilapidations specialists can pay dividends in this respect. Of the £24m of settling dilapidations claims Workman handled in 2022 (of which offices accounted for 48%, industrial 27%, retail 9% and mixed use 16%), more than 95% of fees were recovered for clients.

Timing is critical in dilapidations schedules

Another cost-critical consideration that is more pertinent now is timing. While our advice is always to consider the process of settling dilapidations early, this has become increasingly important – given the significant impact inflation can have on costs. The effects of increased construction costs have yet to be fully realised by many occupiers, and even some surveyors. In days gone by, an office refurbishment could be achieved for £15 per square foot; the reality is now very different.

Dilapidations schedules are often prepared more than six months before a settlement is reached and are usually initially prepared based on empirical price data and BCIS cost information. Taking into consideration landlords’ intentions, the next step is to tender the works, but this is not always the case. Indeed, sometimes settlements are agreed before this exercise has even taken place. In a market where costs have been rising exponentially due to the geopolitical landscape and inflationary pressures, agreeing settlements without the benefit of real-time, real-world pricing carries serious risk of settling for less than the true cost.

So, it is crucial that works are tendered as early as possible, with a sensible period of time allowed for contractors’ costs to be locked in. Should this be exceeded, it is worth negotiating with contractors to hold costs or make allowances for the settlement figure to be adjusted.

Rising construction costs, ESG installations, the highest inflation levels in a generation and more demanding safety legislation are a challenging mix of ingredients that can create a dilapidations headache, but with foresight and expertise, associated costs can be minimised.

By Chris Wilkins, Partner & Head of Dilapidations, Workman

This article originally appeared in BE News