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Understanding The Jargon Of Office Dilapidations

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Rap Interiors

Q. What does Dilapidation mean?

noun: dilapidation
The state or process of falling into decay or being in disrepair.
  • repairs required during or at the end of a tenancy or lease.
  • Law; a cause of action to force a tenant to pay for dilapidations.

In the commercial and construction world, ‘dilapidations’ means the breach of a lease covenant relating to the condition of a property. This includes the processes of remedying those breaches.

But do you really understand all the jargon associated with office dilapidations?

Our Q & A collaborated with Emma Catterral from Micheal Parkes Chartered Surveyors will help.

Read the questions and answers below.

Q. What is a lease?

noun: lease

A contract where one party has the rights to use a property or land for a specific time in return for paying rent.

In England, we have freehold land and leasehold land.

The usual length of a lease is approx 3-5 years, although some will take a lease for longer, for example, a restaurant may take a 10-20 year lease because their business plans are over a longer period of time.

You can have a lease with the protection of the law which in surveyor’s terms we call “inside the act”. This means that you have the right as a tenant to renew your lease again by negotiation with the landlord. There are only certain examples of why a landlord can refuse to grant you a new lease, this may be to do with redevelopment or persistent late payment etc.

Office fit out project with a client area and waiting furniture Office fit out project with a client area and waiting furniture

Q. Most tenants tend to want a shorter lease… Why?

Normally because they do not know what their business will be like in 3-5 years.

  • On the positive side: they might have done so well that they have outgrown their premises and need something bigger.
  • On the downside: they might have failed in 2 years but they still have the responsibilities under the terms of their lease. Then they are looking at trying to assign their lease to someone else. This means they need an agent to market the unit and for someone to take on what is left of the lease on exactly the same terms.

In many ways, I think a longer lease is better if you can be sure of your business because then you avoid paying legal fees and possibly surveyors fees for negotiating another lease.

If you are going to spend a lot of money on the interior of the property it is likely that you will want to get your monies worth from the property so you might want to guarantee that you have that property for more than say a year as an example.

Office meeting room with a modern industrial trend Office meeting room with a modern industrial trend

Q. Is the rent more negotiable on a longer lease?

Yes to an extent it is.

I would recommend to my client, a landlord, that they accept a slightly lower rent for a longer-term lease, providing they can be sure that the tenant is likely to be successful.

Rent is based on market evidence for similar properties in a similar location. There will always be differences in property though, for example, size, location, the state of the property, the amount of service charge etc. This is where a surveyor can really help because it is their job to know about these things.

Most tenants think that they can negotiate terms themselves without a surveyor. Don’t get me wrong, there are many successful tenants out there, but a surveyor may be able to get savings for you on the asking rent due to their expert knowledge on the market.

You never know, the year 1 savings might pay for the surveyor but as the tenant, you will benefit from that for the next 4 years.

Commercial Office Furniture with Shared Desks and Task Chairs Sourced and Installed by Rap Interiors Commercial Office Furniture with Shared Desks and Task Chairs Sourced and Installed by Rap Interiors

Q. When should a prospective tenant attempt to negotiate the lease?

I would always advise that a tenant instructs a surveyor unless they have a good knowledge of the property market and leases themselves.

It is important that a tenant can get on with the running their business as they rely on accountants for accounting expertise and solicitors for legal expertise so it should be the same for them to rely on surveyors for property expertise.

Q. How can you get out of a lease?

You cannot get out of a lease unless there is a break clause or you can assign the lease to someone else is the lease allows.

There are important things to know about both these scenarios though.

There is a huge amount of case law about break clauses. You have to follow what the lease says to the letter of the law. For example, if the lease says you might write to the landlord giving 6 months notice on pink paper, then you must write to the landlord giving 6 months notice on pink paper.

The courts take a really strict view on this and lots of people, even the big brands like Marks and Spencers, have gone to court over break clause issues.

Advice

I would advise that you have a solicitor to help you because some break clauses can be ambiguous and the penalty for getting it wrong can be expensive. There can be issues on:

  • the length of the notice
  • who you write to
  • have you paid all rent and interest
  • have you repaired the property in accordance with the terms
  • have you ensure you have completely removed everything and “yielded it up with vacant possession
Office-reception-area-with-company-signage Office-reception-area-with-company-signage

Q. When you take space over and it’s in a mess, what is the landlord’s responsibilities to let it to you in a good state?

It really depends on what you have agreed on.

If you have a schedule of condition that carefully records what the property is like and the lease properly incorporated this into the repair clause, then usually you don’t have to put it back in any better state than when you took it.

However, be aware that if you took a property on in a mess, but the lease says “to Put and Keep in repair” then that is what you have agreed to do.

 

An office reception refurbishment with LED linear lighting An office reception refurbishment with LED linear lighting

Advice

Ask the landlord for things like the gas and safety check and boiler service, the electrical installation report, the Health and Safety Risk Assessment, the FRA, the asbestos management plan, etc.

These reports will show you if there are things that need to be done that you might not be able to see.

A landlord can let a property in any state in the same way that you can sell a house in any state – buyer beware!

Q. Do landlords have to contribute to office fit-out costs?

The landlord has nothing to do with the fit-out costs of the tenant.

Fit-outs are a tenants choice. The landlord will often have to agree with them though.

For example, the lease can say different things about alterations depending on what was agreed and drafted by the solicitors. Many will allow internal demountable partitions without consent but it is really important that you check. A surveyor or a solicitor can give you advice on this.

It is also possible to negotiate a rent-free period as an incentive to take a lease and this may pay for your fit-out costs. Another benefit of getting a surveyor to negotiate for you because they will have experience of what is possible.

A co-working workspace: one of our office design trends for 2020 A co-working workspace: one of our office design trends for 2020

Q. Who maintains the operation and maintenance of the building if you are the tenant?

You need to look at the lease.

a breakout area with a breakfast bar created bar office interior designers rap interiors a breakout area with a breakfast bar created bar office interior designers rap interiors

It’s been said several times but the lease really is the bible of who is responsible for what.

It is most likely that the tenant will be responsible but it depends if the property is part of a larger building. In which case, there might be common areas, such as hallways, stairwells, fire alarms etc, that the landlord will be responsible for.

They might have a managing agent, such as a surveyors firm, to manage all the maintenance. They then charge this out to the tenants via a service charge. However, if you occupy the whole of a building you may well be responsible for all of it.

Q. What is the biggest issue you find happens in taking a lease for commercial property?

Many tenants don’t really understand what they have taken on and what their responsibilities are.

It is good to have a solicitor and a surveyor to help them to understand. They could be taking on a huge financial burden which they may not have realised and, let’s face it, it could be the difference between the success and the failure of the business.

Advice

Ask lots of questions. Ask for all of the reports mentioned above. Check, double-check and triple-check that you understand and are comfortable with everything you are agreeing to.

If you get on really well with the agent and discuss various things, don’t forget to check that anything of major importance makes its way to the heads of terms and to the lease. That agent might not be around in 5-10 years time when there is an issue.

commercial office design with booths and meeting rooms commercial office design with booths and meeting rooms

Q. If you have spent a lot of money having the office refurbished, what happens when you leave but the space was in a poor state when you took it over?

It depends what the lease says.

Most landlords are quite sensible; if the tenant has made alterations and the licence for alterations says that the landlord can ask them to reinstate the alterations, then the tenant might have to do that.

Try to negotiate that the term says something like if the landlords directs… Because the tenant might have improved the property well and there may be no point in asking the tenant to reinstate.

However, there are some instances where an alteration is purely for the tenant’s benefits and it would hinder future letting and then itis reasonable that the landlord asks to remove and reinstate.

The solution for any tenant is to encourage the appointed agent to allow the chosen contractor to negotiate on the extent of the dilapidation for the outgoing tenant along with the new office design and fit-out required for the in-going tenant.

There is no point taking something down when a simple clear approach to designing the new tenants office space can work around the existing install. It’s about thinking clearly with a tight hold on the purse strings for both sides

Office Meeting Room with a Conference Desk at Prep World in Kent Office Meeting Room with a Conference Desk at Prep World in Kent

Need some further help with dilapidations?

For more information on the dilapidation process, check out our Dilapidation Service page here.

Talk to one of our team who will be happy to answer any further questions specific to your commercial premises and lease.

Call 0333 600 1234 or fill out the form below and we will call you back shortly to discuss in more detail.