By Matt Blaydon, Partner and a member of the Building Consultancy Team at property consultants Matthews & Goodman.
As the ad and media industries review their post-COVID working practices and introduce new hybrid or WFH models, there is an inevitable drive reduce or reconfigure the workspace.
Doing so can trigger a clause covering ‘dilapidations’ which, if not managed correctly, it could cost as much as the equivalent of a year’s rent. So rather than reducing costs, a cost-saving strategy could end up costing more.
Dilapidations is an often forgotten ‘exit cost’. It is a claim, made by a landlord against a tenant towards the end of a lease, or after the lease has ended. It is the cost of a tenant complying with their lease covenants to repair, redecorate and reinstate the premises – and is often-forgotten cost of moving.
Therefore, whether looking for bigger offices, or smaller premises, or even redefining your workplace, all options exist within the shadow of dilapidations.
Dilapidations are unavoidable and often contentious. They are triggered by the landlord presenting an exiting 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 poorly advised tenants, this Schedule can be an unwelcome surprise or allowed for when calculating their exit expenditure.
Subsequent landlord-tenant ‘Dilaps’-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.
One route to reduce unnecessary moving-related stress and money is to appoint a Dilapidations expert who will 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 help reduce your financial risk exposure
· Create your own ‘Schedule of Condition’ and incorporate it in the lease at the outset –consider appointing a Dilapidations specialist to help you do this as their ‘third party endorsement’ will underpin the efficacy of your Schedule
o Keeping accurate records of the condition of the property at the start of the lease negotiations, will help your (‘Dilap’) negotiations at the end of the lease term
· 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 will probably have to remove any alterations/revert the premises to its original condition/format at the end of the lease term
· 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. In addition, any rental cost due after exit and before the remedial work is complete, can be minimised – if not eliminated.
Obviously maintaining the fabric and the property during occupation will prove highly beneficial at the end of the lease.
As a firm which has successfully advised many companies through this process, we know that the excitement of finding new premises, which can be ‘crafted’ to reflect the organisation’s culture, brand and philosophy can be intoxicating.
In addition, developing new hybrid workplaces, in a post-pandemic age, can be challenging.
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, we know, can prove stressful.
This is why management of exit costs, the poor relative when talk of moving to new premises is rife, are often overlooked. Added to this is the unfamiliarity with the both the word and the concept of ‘Dilapidations’ and you often end up with the perfect storm of a cost, which could be in excess of 12-months’ rent, being left to the eleventh hour and subsequently being settled at haste and at great expense.
Two final thoughts
There is an old adage “Dilapidations negotiations begin before you sign the contract” – heed the counsel well.
Secondly, consider the appointment of a Dilapidations expert (usually a building surveyor) very carefully. They understand the law: they understand leases and they are usually best placed to develop a cogent and compelling technical argument to reduce the landlord’s claim.