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The greener new world of dilapidationsBy: Neil Gilbert

The way dilapidations claims are handled by surveyors has changed significantly in the past few years. More tenants are now taking early advice on likely claims and the cost of reinstatement is changing the way claims are dealt with. This change is most welcome: the days of long drawn-out negotiations are long gone, and financial settlements are no longer made wholly on the basis of the schedule of dilapidations alone. Negotiations are increasingly taking into account the concept of actual loss and of the landlord’s intentions for the property at lease expiry. Landlords and tenants alike are becoming more and more forward-thinking in their approach.

Commercial leases being entered into now have also changed considerably. In general, dilapidations surveyors have been kept busy during the economic downturn with a steady stream of terminal dilapidations claims arising from the expiry of long and more recent shorter leases, and where tenants wish to surrender leases, exercise tenant breaks, or either sublet or assign leases. All of these are a result of the recession and the need for tenants to take stock of their portfolios, and make changes. Shorter leases with more frequent break options are now commonplace and will keep dilapidations surveyors busy in the foreseeable future.

While the age-old requirement for dilapidations surveyors to maximise claims for landlords and minimise claims for tenants remains at the forefront during a recession, the RICS Guidance Note on Dilapidations, and the Dilapidations Protocol by the Property Litigation Association encourage a fairer, less adversarial approach to dilapidations. Either party can be at risk on costs if courts witness blatant disregard for either document.

It is reassuring to see more tenants taking earlier advice on likely dilapidations claims, by commissioning Dilapidations Assessments to enable compliance with the Financial Reporting Council’s accounting standard FRS12, which requires occupiers to budget for dilapidations in their accounts. Putting a strategy in place early on, even as early as signing the lease, can help to mitigate liability. For example, tenants should carefully consider the design of fit out versus the cost of reinstatement, and instigate a programme of planned maintenance to address not only lease-end dilapidations, but also the more widespread threat of landlord’s repairs notices being served during the lease term.

Against the background of a stuttering economy, the cost of reinstatement, both financially and environmentally, is leading to a change in the way dilapidations claims are dealt with. They will continue to change in the future with the gradual introduction of “green” provisions in leases (commonly referred to as green leases or a memorandum of understanding). As is often the case, landlords insist on tenants’ alterations being removed, only for a similar alteration to then be made by an incoming tenant. This approach is by no means sustainable from economic and environmental perspectives. Green leases can be designed for landlords and tenants that want to take a reasonable approach to reinstatement obligations and reduce wastefulness.

In the wake of the economic crisis, landlords and tenants signing up to green leases may be wishful thinking, but hopefully those that do will consider upgrades to failed landlord’s fixtures and fittings with the additional cost of such upgrades being shared between the two parties. Upgrading boilers, for instance, is a good example because an upgrade during the lease will increase its life expectancy, carry lower running costs, and have other positive impacts, such as improving the overall energy performance certificate rating of that building.

Green leases would go a long way towards a more collaborative landlord-tenant relationship: the tenant would benefit immediately, and during their lease; the landlord would see benefits in the longer term following lease expiry or if they decide to sell their investment. Current fully repairing and insuring (FRI) leases do not allow such future-proofing to take place, but the more forward-thinking landlords are increasingly looking for green leases that include the ability to act more sustainably.

Repair versus renewal of building components has always been a source of debate and dispute between parties to a lease, but the environmental implications of renewal where a component can be economically repaired must be considered more fully. It is simply not sustainable, and often not contractually enforceable, for components to be replaced if they can be repaired.

The specialist area of dilapidations has changed and continues to change to meet the demands of the commercial property market and the requirements to comply with best practice. Green leases will not only present an opportunity for landlords and tenants to act more sustainably during a lease, but they will also help begin to change lease-end dilapidations negotiations in the future. 

About the author

Neil Gilbert, Tuffin, Ferraby Taylor

Neil Gilbert is a partner at Tuffin Ferraby Taylor in Bristol, where he chairs the dilapidations working group. He is a member of the Royal Institution of Chartered Surveyors Dilapidations Forum and lecturers nationally on dilapidations.

Features July 2013

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