Just Enrichment

All too often, businesses that are meticulously nurtured lose (or literally give away) huge sums as tenants.

This could be at the start of a lease (for example, a poor or no Schedule of Condition) or during the lease (for example, poor rent review advice or representation at arbitration). Whilst we counter against all of these for clients through this and our sister consultancies, this article focuses on sums wasted on dilapidations at lease end or break.

The common scenario is of a tenant instructing a Building Surveyor to negotiate on their behalf, eventually settling at a figure which falls about mid-way between the landlord’s initial (exaggerated) claim sum, and their own Building Surveyor’s initial (downplayed) response. The tenant has a budgeted “provision”, which fits with the Dilapidations Liability Assessment (DLA) advice (deliberately “cautious”, i.e. “exaggerated”) provided by their Building Surveyor a year or two earlier.

If they can get at or a bit below that figure, they’ll settle.

Simples.

We estimate that, on average, this approach leads to settlement at over 40% more than it could and should have been concluded at. Here’s how to better avoid just enriching your ex-landlord:

1) Have a different specialist to your Building Surveyor advise whether the so-called “Section 18 (Diminution in Value) cap” will get you a lower settlement sum?

This is the legal defence that only applies if known about and used by tenants, mainly that the amount of dilapidations damages payable to a landlord will be the lower of the cost of works negotiated between building surveyors OR the amount (if any) by which the disrepair, etc, reduces the Property’s value.

The Building Surveyor is not qualified to know the answer. Rather, this is the sole expertise of the chartered valuation surveyor (Valuer).

The Diminution in Value cap (DV) almost always comes out at far lower than the two building surveyors ultimately agree. This is because the building surveyors must identify breaches of covenants to repair, redecorate and reinstate alterations and agree on fixes & costs to put the Property into great order in the form & specification as you originally took it.

But more often than not, as only the Valuer would properly know through their market transacting experience, this would be outmoded and unlettable. Optimising its attractiveness today requires works that not only fall to the owner, they will likely snuff out (override) many claimed dilapidations items. Some examples are:

• Repairs, decorations, etc, to offices (be those standalone, floors in an office building, or as part of a warehouse/industrial unit), which are trapped in a time warp anyway and so require gutting and refitting with modern kit & finishes throughout (including WCs, M&E, ceilings, lighting, etc).
• Repairs, decorations, etc, to floors above a shop, which are no longer required by a ground floor occupier and often have greater value in being converted to residential.
• See numerous Dialpsolutions Case Study and Radius Case Study examples.

Further, other items which building surveyors agree costs to remedy, the Valuer knows have little to no material impact on lettability/value, as they would be expected in the open market for a property of its age & character, so accepted without price adjustment.

SO THAT the Valuer can legitimately strike out a swathe of items that your building surveyor must put costs to. Hence, the notably lower settlement sum is achieved by using a valuer as well as a building surveyor.

2) Use FRS 102

This is Financial Reporting Standard 102, which allows companies with leasehold premises to set aside an annual sum in the profit and loss account to accrue to the professionally estimated dilapidations liability sum at lease expiry or break.

This annual provision gets full corporation tax relief. A gift.

To achieve what HMRC will accept, you need a professional Dilapidations Liability Assessment (DLA) prepared by a specialist chartered surveyor.

Please get in touch with me by phone, email paul@dilapsolutions.com or WhatsApp via the button on the website with any queries you may have. My colleagues and I are here to achieve the best for you.