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Dilapidations are a fact of life in leased property says commercial property agent Prop-Search, but are now becoming a more frequent occurrence in the life of a building.
Over the last decade, the length of commercial leases has diminished with the traditional ‘institutional' 25 year lease all but gone. These leases have been superseded with three to 10 year terms, usually with an early option to terminate by way of a break clause. This, of course, is at the behest of nervous tenants who don't want to over commit when the longevity of their business cannot be guaranteed. It also works for those tenants in the fortunate position of anticipated expansion and not wishing to be saddled with a property they will soon outgrow.
Ian Harman, a Director at Prop-Search, comments: “The frequency of dilapidation claims has increased against the general backdrop of falling lease terms and the prevalence of break clauses giving tenants an early opt-out. The economic downturn over the last few years has also become a more significant catalyst for the volume of dilapidation claims in circulation.”
The last reported figures from the RICS found terminal dilapidations claims are often more than a year's rent. The survey revealed the average settlement figures were £9.54 per sq ft for offices, £7.27 per sq ft for industrial units and £21.54 per sq ft for retail premises. This equates to £19,000 on a 2,000 sq ft office building, £36,000 on a 5,000 sq ft industrial building and £16,000 on a 750 sq ft shop.
Dilapidation claims are, in effect, damages claims against the tenant for not complying with the repairing obligations in the lease. But it doesn't stop there. Claims can include the cost of cleaning and redecorating, stripping-out alternations, reinstatement works and the rent lost whilst the work is being done. The landlord can also usually claim his surveyor's fees and solicitor's fees in making the claim.
Ian Harman adds: “In light of the economic downturn, landlords are looking to protect their investment and force the tenant to observe their repairing obligations during the lease term, rather than wait to expiry to claim damages. As a result Interim Schedules of Dilapidations are more common now than ever and landlords are increasingly making use of the self-help provision commonly found in modern leases.”
Often cited as ‘Jervis v Harris' after the celebrated 1996 case which gives landlords a fallback position should a tenant fail to adhere to the landlord's repairing notice. Usually served by the landlord's solicitor, and giving the tenant a strict timeframe for compliance, the onus is then firmly placed on the tenant to deal with the repairs within the stated timescale, or risk the landlord re-entering with his own contractors before sending the tenant the bill. The bad news for tenants is that this is charged as a debt rather than damages, and can be recovered as rental arrears.
As landlords have become more aggressive in pursuing tenants, be it mid-term or at lease expiry, tenants have become equally robust in defending their position or appointing a specialist dilapidations consultant to do so on their behalf. Those savvy tenants, who have usually had their figures burnt in the past, are only too aware of the potential financial ramifications of shirking their obligations, so they will either comply or build a good case to defend their position.
Those taking on premises in a far from perfect condition should see to mitigate the magnitude of any future claim by putting measure in place before a lease is even signed. This includes careful drafting of the repair, decoration and reinstatement clauses, and where the landlord is agreeable, engrossing a detailed Schedule of Condition to use an evidential benchmark for the pre-existing condition.
Ian Harman concludes: The recent economic conditions have conspired to increase the frequency of dilapidation claims but also polarise the respective positions of landlord and tenant as each becomes increasingly truculent in defending their stance, and indeed their business. After all, there can be a lot at stake.”
Further information or advice can be obtained from Prop-Search - Tel: 01604 492000 / 01933 223300 or its website: www.prop-search.com