In the buoyant commercial property market five to six years ago few tenants, or indeed their landlords, were concerned at the prospect of a full repairing lease. These are the leases where the tenant is expected to bear the cost of putting a property into good repair. There were plenty of reasons for this – A tenant expected to be able to grow their business and sell the lease on to someone else. Their landlord in the meantime was sure of being able to re-let a property as soon as it became vacant, regardless of its condition.
With the recession that situation has all changed dramatically now.
Tenants are finding themselves served with eye-wateringly expensive schedules of dilapidations, listing each and every want of repair in the property. Their landlords realise they may have to enforce the repairing obligations to get their properties into a condition where they can hope to find a new tenant. Properties in poor condition just won’t be let when there’s a surplus of property and shortage of tenants.
What protections and remedies are available for Tenants and Landlords?
There are two situations here. The first is before they have entered into the lease. The second is where the landlord and tenant already have the full repairing lease in place.
‘Before the Event’
Unless the property is brand spanking new and pristine the tenant should insist in limiting their repairing obligation to not having to put the property in any better condition than at the date of the lease. This can be done by attaching a schedule of condition (easily produced with the help of a digital camera) showing all the cracks and defects. Alternatively, the tenant may limit the extent of property which is being let to them by simply taking the inner space of the building with the landlord keeping responsibility for the main structure. A tenant should be wary of any service charge for the maintenance of the main structure and cap a maximum limit for this in any one year.
A landlord is faced with a choice: do they compromise on repairing liability and adjust the rent to reflect this or do they insist on full repair? It’s far better to have a tenant paying something and occupying the property (saving the landlord from paying rates) than it is to have an empty property on the balance sheet. Even when a tenant is signed up to a full repairing lease will they have the funds to meet the repairs?
As always it’s one thing to have a legal right, quite another to be able to enforce it!
If the tenant is a limited company, and there is no security such as a rent deposit or directors’ guarantees, the company may simply liquidate and disappear.
Many would argue that at the moment it’s better to have a tenant, any tenant, as long as they are paying you rent, than no tenant at all.
‘After the Event’
A tenant faced with a hefty schedule of dilapidations will want to negotiate. The landlord’s initial pitch is bound to be expensive for the tenant. It’s worth remembering that a landlord can’t claim for something which goes beyond the loss in value of the freehold due to the repairs. A good surveyor with experience of the Dilapidations protocol is well worth their fee to protect a tenant here.
The landlord has a number of difficult decisions. Do they enforce the repairing obligation against the tenant or cut their losses, paying for the repairs themselves to try and re-let quickly – hopefully to a tenant who is financially stronger? If the landlord is enforcing the obligation do they get the tenant to do the work or do it themselves and chase the tenant for the monies? Is this a situation where the tenant may renew their lease? If so the landlord may want to leave the Dilapidations issue alone, all the time the tenant continues to pay them a rent.
With the current state of the market Dilapidations are going to be on both landlord’s and tenant’s minds for some time.