Blog | Lease Advisory | Owner | Owner Dilapidations
Tackle dilapidations early to reap the rewards at the end
Tenants are moving more often, with shorter leases or break options, which is great for tenant flexibility but which squeezes the return on investment to property owners. Meanwhile, with a flight to quality by occupiers, aimed at satisfying staff expectations and boosting productivity with a return to the central workplace, refurbishing space has become more important than ever.
And higher standards of workplace are necessary to meet both these tenant needs as well as investors’ wider ESG commitments, all at a time when constructions cost are spiralling. All of which means more pressures on developers to deliver. So, what can they do? Simple: you need to plan for the end from the start. A properly considered strategy on dilapidations could reap the rewards and ensure that refurbishing and improving your space after the lease terminates is a much easier expense for which to budget. The opportunities within a well-considered dilapidations strategy based on market insights are increasingly clear. Allsop have found their dilapidations workload increase substantially as a result. The number of claims advised on by Allsop has gone up by 400% in the last five years. While it’s no panacea, and no one particularly wants to think about the humdrum of yielding up and tidying up when you’ve signed a shiny new deal, every landlord needs to consider dilapidations consequences right from the outset. What exactly should they consider? These are our top tips to ensure you can get dilapidations right – and be in a much better position to pursue the improvements route once a tenant has decided to vacate.
Navigating dilapidations for a landlord is more complex than simply negotiating a claims schedule. Consider the tenant’s objectives and yours, as this will help determine the most suitable strategy. For example, if you’re planning a major refurbishment as a means of future-proofing the letting of the building against EPC regulations – and your occupier knows it – they might try to delay discussions in the hope that the proposed dilapidations works end up being superseded by the more all-encompassing refurbishment works. The landlord may also feel pressure to simply forgo dilapidations simply to avoid delays to a renovation programme. Given the flight to quality, this pressure may be increasingly present as owners get more concerned about their building being left behind by the competition. In these scenarios, it has become increasingly important to go beyond the traditional building surveying approach by incorporating specialist market knowledge to assess market trends and align with the bigger picture. Take an example of a recent job in Moorgate EC2, a job which was negotiated from start to finish in just nine weeks. Acting for the landlord we argued a scope of works for a full strip out and reinstatement using market intel to justify our stance. The tenant was encouraged to settle for a no-strings, hassle free obligation to leave the floor in just a simple, clean and “broom– swept” state in return for a cash settlement; the tenant paid a healthy £27 per sq ft. With a Deed of Release in place our agency team were then at liberty to market the floor “as is” with quality fit out remaining in situ without repercussions.
Plan early, act early
The timing of the first contact with the occupier is a key factor. If you find yourself in a position in which your dialogue with the tenant is only shortly before the expiry or termination date the chances are they’ll assume that you are not serious about the works in your dilapidations schedule and that you’re simply trying to extract money. Early action is imperative. It should hopefully bring about an early outcome of the claim. This in itself will free the landlord up to execute the works needed soon after the point of vacant possession at its own pace, i.e. free from unwanted interference from the tenant. And an early outcome can be mutually beneficial to the occupier too, in particular in de-risking their position where they have exercised a break option and want the security of knowing their dilapidations, once resolved, cannot compromise or invalidate any break option conditions.
Planning the end means other benefits
If a landlord does indeed think strategically and plan early, it is much less likely that a claim will drift beyond the lease termination date. They will have a clear run to reduce holding costs that kick in the day after the lease ends and be more ready for refurbishment, which further means instant action for mitigating other costs can be set in motion, e.g. by initiating rateable value deletion processes to remove punitive empty rates holding costs. A landlord settling dilapidations early will also have more time to establish the works required to make the returning space fit for purpose for the next occupier. This will give them the opportunity to meet the requirements from MEES and EPC regulations, further making it easier to re-let and shortening voids on future letting campaigns. Planning ahead for dilapidations not only means that both property owner and occupier will spend much less time and effort on negotiations, but that the owner’s initial planning will enable a much smoother refurbishment and reletting process. Furthermore, it addresses value erosion caused by obsolescence thereby making a positive financial impact on the return on investment. Planning for the end at the very start could then pay off big.
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