How to reduce dilapidations liabilities

Our article on reducing dilapidations liabilities, which is featured in the Warehouse & Logistics Journal, can be read on page 7, and our advert features on page 15. 

Most warehouse and logistics occupiers are tenants, under leases making them responsible for all: repairs, redecorating and reinstating any alterations prior to exit. It is all but impossible in practice to fully comply, hence the standard “Terminal Schedule of Dilapidations” served on tenants by landlord’s solicitors close to expiry/break, scheduling all alleged breaches and costs to remedy.

This will rarely be less than £200,000 for a smaller warehouse, and can be many millions of pounds for a big box. Dilapidations can significantly damage a business’s cash flow. Below is a checklist of key points to assist understanding, and optimise outcomes:

KEY POINTS

• Dilapidations: is the damages, often amounting to £100’s of 1000’s, Landlords claim at lease end/break for breaches of lease covenants to repair, redecorate and reinstate alterations. In English law, the standard clause “to keep in good repair” means the tenant can be obliged to hand back in better condition than lease start.

• Use FRS 102: to obtain full corporation tax relief on capital set aside annually to accrue to a professionally estimated dilapidations liability sum at lease end/break.

• Use a Valuation Surveyor: in addition to a Building Surveyor, whose expertise is applying the underused statutory “Section 18” defence to cap settlement at the lower of the remedial costs negotiated between building surveyors OR the impact on the property’s open market value. This is usually significantly less.

• Schedules of Condition: can help mitigate, but are limited by inexorable decay. Section 18 is a more potent defence.

In more detail, a fundamental is that at law, the standard obligation “to keep in good repair” ordinarily means that the tenant is to hand back in better condition than at lease commencement.

FRS 102 is an accounting provision applicable in both the UK & ROI, whereby a company can obtain full corporation tax relief on the sums it accrues annually to meet the “Dilapidations Liability Assessment” provided by a chartered surveyor.

Tenants faced with dilapidations claims instruct their own building surveyor to negotiate to a lower sum. But this risks failing to properly apply the underused statutory Section 18 (“Diminution in Value”) defence which, only if known about and used, caps settlement at the lower of the remedial costs total negotiated between building surveyors, or the impact on the property’s open market value. This is usually significantly less. Applying this is outwith the expertise of the building surveyor. It is for the specialist chartered valuation surveyor (Valuer).

By analogy, if you have an injury or operation, it is down to both the input of the surgeon and then the physiotherapist to optimise your outcome. The same applies in dilapidations, with the first expert being the building surveyor then the second, the valuer.

The cap works because almost all vacated sheds require modernisation works to best present them to the open market, as well as to meet modern regulations (e.g. EPC). Those works inevitably snuff out (supersede) many of the dilapidations items costed and agreed between opposing building surveyors, often “big ticket”, ranging from new roofs, to brand new offices. Knowing and understanding the open market so as to fully apply this defence is the expertise of the Valuer only.

When taking new leases, Schedules of Condition can be helpful in reducing future dilapidations liabilities, so long as exceptionally well prepared, but are still limited by the inescapable facts of inexorable decay, and wear & tear. Section 18 is a far more potent defence.

For further information, please email paul@dilapsolutions.com.