How Workman settled 3m sq. ft (or £30m) of dilapidations during 12 months of covid
The past 365 days have been like no other year. The changes, challenges, and crises have often seemed insurmountable. But, despite 12 months of covid lockdowns, Workman has resolved a total of 402 dilapidations instructions covering 3m sq. ft, with a total value of £30m, through its 12 offices nationwide. Of all the claims, 85% were settled within six months.
Despite the strict rules imposed by PM Boris Johnson in March 2020, our dilapidations team has worked tirelessly to ensure that 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.
During the course of the past 12 months, our dilapidations team has delivered instructions on seven mixed-use sites, 91 industrial properties, 114 offices and 190 retail spaces. Often doing the work is the best way of demonstrating loss, and where clients have taken this route, we have seen settlement tracking closely to the original claim value.
Retail (190 or 47% of settlements)
It is a reflection of the market that the biggest sector for dilapidations over the past year has been retail. Out of all the types of units, sadly these are the most likely to be seeking a break clause or CVA. And this is at a time when retailers are still protected by government rulings against eviction, so this is a situation likely to worsen as time progresses.
Retail tenants are using 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, because a court will give more credence to evidence of action, rather than simply a hypothetical valuation.
Offices (114 or 28% of settlements)
The office space market remains a grey area as the nation waits for workplaces to return to their busy collaborative selves. And although it is still too early to predict employers’ and workers’ behaviour when it comes to reoccupation, it’s clear that offices hold significant value.
Here, the level of settled claims has been steady, because owners’ plans for the space align more closely with a dilapidations-level spec. Where office stock was once simply a case of refurbishment and bringing back to the market for letting, this now requires much closer consideration in terms of subdivision or even alternative use.
Industrial (91 or 22% of settlements)
In the past year, the industrial sector has represented some of the most productively settled claims. Here, landlords are happy to invest because re-lettings are more assured. With an industrial dilapidations instruction, the Workman team can manage a schedule of works, complete the refurbishment, and find that the site is let again very quickly. Where dilapidations have been settled and the refurbishment is underway, lettings are often completing even before the refurbishment is finished.
Mixed Use (7 or 3% of settlements)
Mixed use has seen the least occupier movement in our experience. This is perhaps due to a more resilient ‘safety in numbers’ profile of residential, retail and workspace, which can often lead to reciprocal benefits. Indeed, we are seeing signs that this may be an upward trend as real estate re-emerges from lockdown.
How does Workman successfully manage dilapidations?
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.
It is always best to start with a business plan, so at Workman we begin by having a dialogue with the owner at the start 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 is restricted to 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 on budget.