The majority of commercial leases require tenants to repair, redecorate and reinstate alterations to premises at the end of a lease term. A tenant failing to comply with these obligations has breached its contractual obligations and may face a claim for damages through the dilapidations process.
These reinstatement conditions apply regardless of a landlord's long term refurbishment or redevelopment plans. As such, tenants are contractually obliged to carry out work, which may be entirely unnecessary. Many would quite rightly question why this should be the case. But there would need to be a very significant culture shift in the marketing environment and in tenants’ mindsets to encourage them to take on a building with the former occupiers bespoke fit out in place.
Perhaps surprisingly, because of the legal agreements in place, there is rarely an option written into the lease for the landlord to intervene on a tenant undertaking the works to which they are obliged to carry out.
To avoid the tenant completing unnecessary works, it has become commonplace for a landlord to initiate the dilapidations and reinstatement negotiations regarding a financial settlement towards the end of a lease. However, the onset of early negotiations can see both parties strategise on how to maximise or minimise the claim. Landlords’ robust claims can still drive tenants to undertake works that, ultimately, both parties know are not in landlords’ refurbishment plans, but tenants comply as this is the most economic route of compliance and risk mitigation.
While a financial settlement for dilapidations liabilities is often reached and this avoids waste, there are plenty of occasions where the outcome is financially and environmentally inefficient. Surely reversing this trend would be welcomed by both landlords and tenants?
A potential solution to reducing waste and inefficiency is increased correlation between tenants’ obligations and landlords’ subsequent action post lease, or more obligation on landlords and tenants to go through this cycle in the most efficient manner possible. Maybe it is time that an alternative approach is considered by those drafting heads of terms or leases? Could consideration be given to adopting any of the approaches outlined below?
None of these solutions are perfect, but given more careful consideration it may be possible to construct lease covenants that compel both parties to be more aligned in their actions regarding dilapidations, reinstatement and the subsequent refurbishment cycle. This would surely help this cycle from a sustainability perspective and reduce unwanted waste of resources and money.
About the author
Simon Brown, Director, CBRE Dilapidations team
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