Avison Young's commercial real estate blog
Dilapidations – The elephant in the room?12 Jan 2021
Whether amicable or not, the end of any relationship is a sensitive matter, with issues needing to be resolved on both sides. The end of a landlord/tenant relationship is no different, and the topic of dilapidations can be a thorny subject, with the ability to catch out the unwary.
In the current rapidly evolving business environment, there has been a sea-change in the way many companies view their office accommodation, with some even opting for 100% home working, and seeking to offload their lease commitments. In some cases, they may have a lease expiry or break option to make the process easier, in other instances they may have to continue paying rent while marketing the space and trying to find a sub-tenant or assignee to take it over.
In most instances, the tenant will be liable to reinstate the accommodation at the lease expiry, or to compensate the landlord for the cost of doing so in the event they fail or choose not to carry out the necessary works themselves, reaching what is known as a dilapidations settlement. The principle being that under a standard Full Repairing and Insuring lease, the landlord is entitled to receive the accommodation back in a fit condition to be let out again, with any defects or tenant’s fittings removed and made good. In many cases this can lead to costly partitioning and other items being consigned to a skip, rather than being re-used by an incoming tenant.
From the tenant’s perspective, getting proper advice before they sign a lease is crucial to avoid any unpleasant surprises when exiting the property. Over the past few years, many leases have become more ‘tenant friendly’ with break options making it much easier for a tenant to leave without having to wait until the lease end, however here too there can be pitfalls for the unwary, and getting proper advice is essential to ensure that the process is managed correctly.
We are now seeing an increasing number of landlords offering fully fitted ‘plug & play’ space, and in most instances this will be coupled with a simplified or inclusive lease package, which is likely to also set out fixed parameters for any dilapidations liability at the lease end; for example in one instance we’ve dealt with recently, a fixed per sq ft sum to be paid in respect of reinstatement at the lease end, which allows the tenant to easily budget for their exit costs.
Regardless of the legal basis, good communication and taking proper advice are key, and if there is an ongoing rebalancing of the landlord/tenant relationship towards partnership and away from the previous often adversarial approach, this can only be a good thing for all parties.
Paul Williams is a Director in the National Offices Team, based in Bristol.
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