Insights 2nd June 2021 Building Consultancy

Understanding what are dilapidations and six ways to achieve success.

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

Our dilapidations team worked tirelessly. They ensured we could overcome restricted access challenges. Our clients, like Federated Hermes, Blackrock and Columbia Threadneedle, stayed protected. Lease expiries and notices to quit posed no threat to them.

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

1. What are dilapidations?

The term “dilapidations” refers to necessary maintenance and repairs throughout and at the lease conclusion. How a dilapidations claim is approached is influenced by property market dynamics. This includes the current demand for a specific asset class.

During a downturn, a surplus of space or diminished demand provides occupiers with the leverage to negotiate improved incentives, lower rents, and flexible lease terms for new agreements. Conversely, in a thriving market with limited supply, landlords can negotiate favourable terms given their strong position.

2. Common pitfalls when dealing with dilapidations

Misunderstanding the landlord’s intentions at lease expiry is a major pitfall. This leads to serving an unrealistic schedule. This causes delays to the process and also means unrealistic expectations are set. To enhance efficiency, wait until property intentions are clear before serving a reflective schedule.

When creating a schedule, one must consider s.18(1) of the Landlord and Tenant Act 1927 (diminution). This section assesses the theoretical state of property repair. Occupiers sometimes use this tactic to argue repairs are unnecessary, considering market conditions. Landlord’s representatives need to consider this carefully. However, there’s a misconception that this report always weakens the 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. In essence, a court values tangible evidence of completed works over hypothetical worth scenarios.

3. Planning for a successful outcome on dilapidations

Initiating with a business plan is ideal. At Workman, we commence by engaging with the owner promptly, comprehending their goals and intentions.

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 an agreement on dilapidations 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 dilapidations?

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. The impact of Covid-19 on dilapidations 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