The Government’s announcement that Local Authorities are to be empowered to force Landlords to let empty shops (by Compulsory Rental Auctions) probably creates more problems than solutions for both owners and recently departed Tenants alike - especially for dilapidations claims. From my background as a retail agent over approaching 20 years of inexorable growth in bricks and mortar retailing up to 2008, then the terminal decline since the recession triggered by the collapse of Lehman Brothers Bank that September, I know that no legislation is going to recreate demand now gone.
As a consequence, what I have witnessed over the past 10 years or so is that retail property (High Street, Shopping Centres and Retail Parks) has increasingly evidenced the raison d’etre of the ‘Diminution in Value’ (Section 18) cap on dilapidations damages. The impact of the dilapidations on a vacant shop’s value is almost invariably significantly less than the cost of fixing everything. This is for a whole host of reasons, but commonly because the most significant single factor impacting the value of the vacant shop is the sheer lack of demand for it. Often it is more or less functionally obsolescent – be that a purpose-built property for which there is no longer any demand (Department Store, former Argos or even the standard 4,000-7,000 sq ft shop for fashion retailers now gone) – or simply that the supply (of many similar empty shops) is so high, relative to little or no demand.
A common quote used in dilapidations cases is that the standard of repair required is that which fits with the age, character and locality of the property, and which would be expected by the likely ‘calibre’ of the new Tenant. So it will be appreciated that making the average vacant shop near perfect, or simply wind and watertight and tidy is unlikely to make any difference to the ‘calibre’ of Tenant attracted if any. Today’s precious few Tenants tend to be weak covenants, offering low (to no) rental, wanting very short leases with Schedule of Condition and more often than not, wanting some or all of any old shop fit left in place for them to reuse. They usually do not want redundant and surplus upper floors.
The counterargument from Landlords is, of course, that, at least in theory, only the best-presented shop will have any chance of reletting. That they, therefore, require most to all of the dilapidation items remedying. In some, but few, locations this is true to an extent. The ‘white boxed’ unit will be what a new Tenant requires. But this can of course be created once a new Tenant presents – attracted in the first place by more inventive and skilful marketing/images than the bland status quo – rather than potentially wasting money now, if a potential occupier instead wants the previous shop fit retaining, or consent is obtained for a viable residential scheme to the upper floors.
The Government’s initiative is not going to compel owners to do works that are simply not economically viable in the context of what they are likely to be ‘offered’ (as rent, covenant strength, lease length etc). I, therefore, see this as having a little positive impact in terms of regenerating the High Street, while ramping up erroneous arguments in already heated dilapidations cases.
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