Heed the old adage ‘dilapidations negotiations begin before you sign the contract’, says Matt Blaydon, partner and a member of the building consultancy team at property consultants Matthews & Goodman.
A recent survey concluded that, post-pandemic, nearly half of the companies interviewed would like to downsize their workplace.
Every workplace move is always accompanied by great promise. Move to a better location for the same price; move to a location with reduced fixed costs (such as rent and business rates); or move for strategic reasons – such as being closer to clients and/or partners.
But every workplace move can also bring pain. The pain of disruption; financial pain (removal firms, fit out costs for the new premises, new coms contracts, etc); the inevitable pain of colleagues battling for premium spots in the new location.
However, there is one ‘exit cost’ which is often overlooked – dilapidations: a claim made by a landlord against a tenant towards the end of a lease or after the lease has ended. It is typically the cost of the tenant complying with their lease covenants to repair, redecorate and reinstate the premises.
A costly clause
Importantly, it is not a cost to be overlooked as the amount claimed can often be more than the cost of 12 months’ rent.
Dilapidations are unavoidable and often contentious. They are triggered by the landlord presenting a departing tenant with a claim document - a ‘Terminal Schedule of Dilapidations’ – which contains references to physical alterations and to their reinstatement, repair and redecoration. The cost could also include a claim by the landlord for the loss of rent, whilst remedial work is being undertaken. For some poorly advised tenants, this schedule can be an unwelcome surprise and something they had not allowed for when calculating their exit expenditure.
Subsequent landlord-tenant dilapidation-related exchanges can often be combative as landlords inevitably try to maximise their claim (to ensure that the premises are left in A1 condition) and secure the most advantageous financial settlement for them, whilst tenants try to minimise the value of the claim and therefore minimise their outgoing.
Reduce the stress
One way to reduce unnecessary moving-related stress and money is to appoint a dilapidations expert to negotiate a mutually equitable settlement on your behalf.
- Read and understand any clauses related to dilapidations in the lease – especially at the heads of terms stage – well before you sign the contract. This will reduce your financial risk exposure;
- Create your own ‘Schedule of Condition’ and incorporate it in the lease at the outset; if compiled by a dilapidations specialist it will act as a ‘third party endorsement’ to underpin the efficacy of the schedule;
- If altering or fitting out the premises, ensure you have read the lease first; you might require the landlord’s approval to undertake any work and you might have to remove any alterations/revert the premises to its original condition/format at the end of the lease term; and
- Consider your ‘dilapidations exposure’ well before the end of the lease, as repairs can usually be undertaken more cost-effectively by you than by the landlord.
Maintaining the fabric and the property during occupation will prove highly beneficial at the end of the lease.
The excitement of finding new premises – which can be ‘crafted’ to reflect the organisation’s culture, brand and philosophy – can be intoxicating. And developing new hybrid workplaces in a post-pandemic age can be challenging.
In addition, organisations with their eye on their next premises have to create excitement amongst the team for the move whilst ensuring that dull housekeeping chores, such as culling unnecessary paper/files, are completed on time. This can prove stressful for everyone. This is why management of exit costs is often overlooked.
Added to this is the unfamiliarity with both the word and the concept of ‘dilapidations’ and you often end up with a cost that could be in excess of 12-months’ rent. Often, negotiations take place at the 11th hour and are settled in haste and at great expense to the tenant.