THE CHANGING FACE OF DILAPIDATIONS
2nd November 2020
The dark art of dilapidations is one that is becoming more prevalent by the day, reflected in the increased workload Building Surveyors are seeing over recent months, despite the Covid lockdowns.
The reasons for this are varied, but likely driven by the ever shortening length of lease terms and therefore the increase in frequency of tenants moving property, or unfortunately in recent months, failing.
The property management software company, Released, recently reported that the average length of commercial leases had fallen from approx. 4 years in January 2019 down to approx. 2.5 years by June 2020. Some 10 months of that decrease occurred between February and June 2020, likely due to Covid.
The effect is an increasing churn of tenants through properties, which Released also speculates may be due to approximately 40% of leases now being of a periodic rather than fixed term nature, i.e. “easy in and easy out”.
How do landlords account for this change, and more importantly how will they manage it?
In respect of dilapidations, leases place varying degrees of liability on tenants; internal repairing being primarily internal repairs and decorations and generally nothing to do with the structure; full repairing, where the tenant takes responsibility for the whole building, inside and out, structure and all.
In light of shortening leases, landlords need to up their game and keep on top of tenant’s repairs throughout the lease term, as termination can otherwise come up very quickly.
The cost of a dilapidations claim usually comes as a surprise to a terminating tenant, and therefore easing this impact would both assist the tenant’s cash flow, and give comfort to a landlord that works are either being carried out, or monies accrued.
Traditionally, landlords have been afforded some protection by means of Rent Deposits, but this invariably covers only a small part of a dilaps claim.
One alternative might be an enhancement of the traditional pricing mechanism to differentiate between internal and full repairing leases, where the former attract a higher rent to reflect the landlord’s expenditure on external areas and structure.
A variation on this could be similar to that adopted by commercial agents on break clauses, where an element of penalty or reward pricing could be incorporated. This might work by again an enhanced rent, but with the overage being accrued by landlords and off-set against the eventual dilapidations claim.
It would be nice to hope that landlords and tenants understood each other’s positions in respect of dilapidations, when a lease is first completed. However, given the current system of leasing whereby both parties seek to protect their own position, this is unfortunately some way off.
The green shoots of change are out there, usually instigated by proactive and inventive landlords, and partially driven by the changing economic and commercial environment; there is hope that this will come to fruition more widely. The impact of Covid has already in a short space of time seen a massive change in the retail sector from market to turnover rents; such seismic change could yet happen in the dilapidations field.