In the commercial and construction world, ‘dilapidations’ refers to breaches of lease covenants relating to the condition of a property, and the process of remedying those breaches, however as a client do you really understand all the jargon associated with office dilaps.
Our Q and A collaborated with Emma Catterral from Micheal Parkes Chartered Surveyors will help.
Jargon busting the implications of Dilapidations when leaving your office space
1. What is a lease and is it better to take a long lease or a short one?
In England we have freehold land or leasehold land. A lease is a rental agreement where you have rights to use a property in return for paying rent. The usual length of a lease is approx 3-5 years now although some will still 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.
Most tenants tend to want a shorter lease. The reason for this is normally that they do not know what their business will be like in 3-5 years. On the positive side of things 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.
2. Is the rent more negotiable on a long 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 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 the size, location, the state of the property, the amount of the service charge etc and 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 and 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 with their expert knowledge of the market. You never know the year 1 savings may pay for the surveyor but as a tenant you will benefit from that for the next 4 years.
3. 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 of their business. They rely on accountants for accounting expertise, for solicitors for legal expertise and it should follow that surveyors are for property expertise.
4. How can you get out of a lease, what is a break clause?
You cannot get out of a lease unless there is a break clause or you can assign the lease to someone else if 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. As an example if the lease says you must write to the landlord giving six months notice on pink paper then that is exactly what you must do. The courts take a really strict view on this and lots of people even the big brands such as M&S have gone to court over break clause issues.
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”.
5. When you take space over if it’s in a mess whats the landlords responsibilities to let it to you in a good state?
This is a good question and it really depends on what you have agreed. So many people say to me things like “you should have seen it when I took it on…” and potentially that doesn’t mean a thing.
If you have a schedule of condition that carefully records what the property is like and the lease then properly incorporates this in to 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.
I would highly recommend that you ask the landlord for things like the gas safety check and boiler service, the electrical installation report, the H&S risk assessment, the FRA, the asbestos management plan etc because these reports will show you if there are things that need to be done that maybe you cannot 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!
6. 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 to 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 well 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.
7. Who maintains the operation and maintenance of the building if you are the tenant?
You need to look at the lease – I must have said this several times by now but it 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 inside such as hallways, stairwells, fire alarms etc which the landlord will be responsible for. They might have a managing agent such as a surveyors firm to manage all the maintenance. They will then charge this out to the tenants via a service charge.
If you occupy the whole of a building though you may well be responsible for all of it!
8. Whats the biggest issue you find happens in taking lease for commercial property?
Unfortunately I find that many tenants don’t really understand what they have taken on and what their responsibilities are. This is why I think 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 that could be the difference between success and failure of their business.
Ask lots of questions. Ask for all the reports I mentioned earlier – check check and double check that you understand and are comfortable with everything you are agreeing to. And remember you might get on really well with an agent, you might discuss various things, but you need to check anything of major importance makes its way to the heads of terms and to the lease. Also that agent may not be around in 5 or 10 years time when there is an issue.
9. If you have spent loads having the office refurbished – what happens when you leave if the space was in a poor state when you took it over.
Again – sorry to sound repetitive but it depends what the lease says. Most landlords are pretty 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.
I try to negotiate that the term says something like if the landlord 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 that tenants benefit and it would hinder the future letting and then its reasonable I think that the landlord says you need to remove and reinstate.
Julie Anderson – Design Director at Rap Interiors comments “ The solution for any tenant is to encourage the appointed agent to allow the chosen contractor to negotiate on the dilaps extent 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. Its about thinking clearly with a tight hold on the purse strings for both sides “.
Have your own office dilapidation project you need help with or even the fit out works surrounding your dilap then contact us today 0333 600 1234 and we will be happy to assist you.