Today’s announcement by M&S that it is to bring forward the closure of 67 department stores is no surprise. What we are seeing in the retail property market generally right now is that even pre-existing planned store closures are being accelerated. Quite simply, stores which were borderline profitable a few months ago, are now losing money because of meteoric energy cost inflation. This perfect storm of prevailing high utility costs for business (which disproportionately impacts older, larger high street properties relative to modern more energy-efficient retail park space), rates bills, rising wages and forecast falling consumer spending, means that once again we will be seeing an increase in shop closures at lease renewal/break.
Which triggers one of the biggest single-cost events by way of the terminal dilapidations claim.
Whilst M&S use our sister practice Radius Consulting to provide Section 18/Diminution in Value (DV) input to minimise their eventual settlement sums, it remains anathema to me just how many retailers prefer to “save” that additional fee, and instead pay many tens of (often hundreds) of thousands over the odds!
Whilst the traditional and initial way of assessing damages payable in dilapidations is the cost to remedy all of the breaches (of lease covenants to repair, decorate and reinstate alterations), assessed by negotiations between building surveyors, the legal cap on all three (repairs by Section 18 of the LTA 1927, and the other two at common law) is applied by a specialist Valuer.
The principles are simply common sense.
In virtually all cases, if only the breaches are remedied, the property will still be unlikely to ever re-let. Especially, but not only, for department stores, as there is no longer any market for them. Indeed, even the average high street shop with two or three upper floors is unlikely to let as one again. The upper floors will likely be either voided (tenants do not require the space), or converted to residential, and the ground floor shop, if bigger than around 1,500 sq ft in many locations, will probably be more lettable split into two (generally independent traders, of limited affordability, these days).
So with virtually every vacated retail property, it is likely that significant elements of claimed fixes have no bearing on value at all. They will likely be snuffed out (superseded) by the property’s eventual evolution, or repurposing, to its next life.
Only the specialist Valuer can successfully argue this, not the building surveyor. Two different and distinct disciplines.
And remember, if the landlord claiming damages hasn’t actually done about all of the works exactly as claimed – which is very common, if you check – the Dilapidations Protocol (in paragraph 9.4) actually states that the loss (if any) owing to dilapidations must be assessed on the basis of Section 18/Diminution Valuation (not, Cost of Works).
At Dilapsolutions, we uniquely provide both the building surveyor and valuer from the outset, thus enabling a seamless and reliable path to minimised settlement sums.
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