Top Ten Tips for Dealing with Landlord Dilapidation Claims

Building surveying and construction advisory is a sector where I advise clients on minimising risk in building, property or construction-related matters. At Terence Anderson Chartered Building Surveyors, we believe the application of our three core values on every job is vital to our continued success and repeat business:

Integrity

Accountability

Trust

As an experienced dilapidations practitioner, I am often asked by commercial and industrial property tenants and real estate advisors for some practical tips on mitigating financial risk in landlord dilapidations claims.

Over a Terence Anderson mug of tea, I put together the following tips designed as a rest bite read over a tea break.

?Top Ten Tips for Tenants Dealing With a Dilapidations Claim

?

1.??????Before an organisation puts pen to paper with a landlord and signs a commercial property lease, early engagement with an experienced commercial property lawyer is vitally important. An experienced property lawyer can provide expert input and respond with your property advisors to the landlords' Heads of Terms and make comments and amendments on the proposed draft lease covenants in the Landlord's lease agreement. It is essential to try and dilute the repairing obligation and maximise protection against landlord claims. An experienced property lawyer will also explain what the lease covenants mean and what you will be obligated to do and perform if you sign the lease agreement. A professional property lawyer will also highlight the strategic legal defence during the currency of the lease term and at lease expiry to mitigate landlord action should any breach of contract occur.

?2.??????If an organisation signs an FRI lease without exception, then the organisation takes the full repairing responsibility and more onboard. In other words, it's a bit like owning a house outright; the organisation is totally responsible. Before an FRI lease is signed, it is vitally important to undertake a comprehensive technical due diligence exercise at the property to mitigate financial risk. This should include, as a bare minimum, an assessment of the building structure and fabric, an evaluation of the mechanical and electrical installations, an asbestos survey, below ground drainage CCTV investigation and an environmental assessment of the site to determine full details of its previous usage. It's a fraction of the cost compared to the financial headache you may get if you don't and if problems are encountered once the lease is completed. You need to know what you are signing up to repair, maintain, and replace as a baseline as an organisation. This will allow you to implement risk mitigation measures to limit financial, health and safety, and business continuity risks.

3.??????If, as an organisation, you are signing a lease on an older building, then to mitigate the financial risk associated with dilapidations, seek to agree a Schedule of condition with the Landlord. The Schedule of Condition should provide a narrative record of the physical condition of the property, including below ground drainage and the operational state of mechanical and electrical installations and an accompanying photographic record of the property condition. A Schedule of Condition should be completed before lease commencement, and it should also be referenced in the lease agreement. Also, to prevent disputes during the lease, at lease commencement, It is important to be explicit and confirm which entity will complete capital replacement when component failure arises. A typical example of where disputes arise between the parties during a lease term when the lease structure is ambiguous, is the treatment of asbestos in industrial buildings, when asbestos cement wall and roof cladding has failed. Also, it is important to remember that any agreement with the Landlord must be documented formally in writing, ideally by your solicitors. Informal verbal agreements should be avoided. It is quite possible that ?you may also not be dealing with the same Landlord at lease expiry as you did at lease commencement.

?4.??????Suppose, as an organisation, you sign a lease on a new building that has been constructed to institutional investment standards. In that case, the Landlord will benefit from both design and building construction warranties. Your property lawyer should therefore seek to assign the benefit of all remaining design, construction and subcontract warranties to you as a tenant. Also, with industrial buildings, further lengthy warranties may be available, such as "Confidex" Cladding Warranties. Again the benefit of such warranties should also be attained. It is also important to remember that a building will not be free from defects just because a building is new. It is quite common to observe significant design and construction latent defects in new buildings, so pre-acquisition technical due diligence is essential to mitigate risk.

?5.??????Take the advice of an experienced property lawyer and property advisor and make yourself aware of the strategic statutory defence approaches available to defend Landlord Interim and Final schedules of dilapidations.

?6.??????Ensure that all important strategic dates are known to the key decision-makers within the organisation, i.e. notice period required to lease break and lease expiry dates. These dates should be at the forefront of your business risk planning and prominent on an organisational risk register.

?7.??????Business planning is vitally important in the final 24 months of the lease term. Strategic property decisions need to be made. Unashamedly borrowing the words from the Clash band's finest song - in my humble opinion….. The decision "should I stay or should I go" should be made.

8.??????Well organised businesses manage risk well. An end of lease dilapidations strategy for a tenant is essential to mitigate financial risk. An assessment of the dilapidations currently accrued at the property should be completed at the beginning of the final year of the lease term. This will also allow the tenant time to plan and complete any outstanding works they are obligated to do under the lease and mitigate against a Landlord's financial loss of rent claim and some of the Landlord's professional fees at lease expiry. A strategic approach to dilapidations may also consider an s18(1) valuation and other defences to the Landlord's claim.

?9.???????The management of risk is a vital component of organisational success. Dilapidations can be a significant financial shock to any organisation that is unprepared. Lease expiry and Dilapidations are not unknowns. They are knowns, that can be an effectively managed business risk, with appropriate preparation. Be prepared!

10.??Finally, use these tips to your benefit and make them "Part of the Deal" when you next lease a commercial property.

Whether you are a tenant or a landlord, using the services of a chartered surveyor during a dilapidations claim will prove invaluable. I'm always happy to talk to any commercial landlord or tenant to give them advice on the issues they might expect.

Please get in touch with me on 0161 660 0459 or email me directly at [email protected]

Terence Anderson Chartered Building Surveyors

Level 2 Oak Court

M60 Office Park

Clifton

Manchester

M27 8FF

#dilapidations #commerciallandlords #commercialtenants #commercialproperty