Dilapidations To The Landlord & Their Asset Managers With Graham Cardoe

Perito:      Welcome to the Cardoe Martin Podcast, the A-Z of Building Surveying giving you the lowdown on the world of building surveying.  Now in this episode we are going to have a chat with Graham Cardoe, Chairperson at Cardoe Martin.  Welcome Graham.

GC:           Thank you it’s good to be here.

Perito:      (0.14)  This isn’t your first podcast but it would be useful to refresh everyone on who you are and what you do at Cardoe Martin.

GC:           I’m current Chairperson at Cardoe Martin, I’m involved the business in terms of its overall direction, I attend Board Meetings and assist the main team with the running of the business.

Perito:      (0.32)  So you’ve endured the quick fire round before so we’ll give you a sporting chance by asking you some super random on the spot questions, so No. 1, what’s the most interesting thing you’ve learnt this week, it could be about any topic?

GC:           Well that you never stop learning early because some of the questions that I’ll be presented with today I’m sure will be a test for me so despite the fact I’ve been working in the property industry since the 1970’s there’s always plenty to learn and that’s what makes it fresh and exciting.

Perito:      (1.01)  What are the most interesting future built environment concepts, so what kind of thing in the future kind of makes you go gosh I wish we had in the 70’s?

GC:           I mean in terms of way buildings are put together now I think back in the 70’s it was a much more traditional sort of built environment but I’m always inspired by buildings that I see now as I walk through the City, the walkie-talkie building and all these huge buildings clad in glass and how maintenance of these buildings is so much more efficient then it was in the past.

Perito:      (1.32)  Snooker or darts?

GC:           Snooker.

Perito:      (1.35)  Ant or Dec?

GC:           Dec.

Perito:      (1.38) (laughter) Why?

GC:           (laughter) Actually I like both Ant and Dec, I think they’re a great double act and I think when one of them was missing I really noticed the difference so I think they’re great.

Perito:      (1.49)  Thanks graham.  Join us now for a journey through time and materials as we give you the lowdown on Dilapidations to the Landlord’s and their Asset Managers.  Kicking off then first question, tell us Graham what is a Schedule of Dilapidations and when will I need one?

GC:           Well dilapidations are works of repair, reinstatement and decoration which arise during the course of a Lease and also at the end of the Lease and those dilapidations are then put together in a Schedule which is served on the tenant usually by the landlord’s solicitor.

Perito:      (2.23)  That’s use thank you.  Can I expect to receive all the money calculated in the initial claim?

GC:           It’s rare that you would receive all the money in a dilapidations claim this is because dilapidations are a complex, there’s a lot of case law involved, there’s a lot of legislation involved, there are different views upon the level of repair required, the scope of the repair, the cost of repairs and there’s also a method of assessing dilapidations not just in terms of the cost of the repairs but also on the effect on the value of the landlord’s interest at the end of the Lease.

Perito:      (2.58)  So it sounds like the figure is not plucked out of thin air, how is that actually calculated then, do people over estimate the price and then negotiate down?

GC:           Well there is a dilapidations protocol and it’s not considered good practice to inflate the claim, you know, with a view to coming up with a figure that is above what it should be but I’m sure that, that kind of practice is in people’s minds from time to time, but the costs have to be prepared carefully and I always tell surveyors and my colleagues that they have to prepare their costs on the basis that they may have to stand up in court and defend those costs.

Perito:      (3.38)  That’s probably a good minimum standard isn’t it that, okay excellent.  So say for example I’m a landlord then, coming back to my previous episode about the commercial real estate in Plymouth, if with tenants left and we’ve arranged for the money, how long does it take for me to receive their payment and do you know anything about how that payment go through or does it go through custody of some, like other solicitors?

GC:           You mean after you’ve achieved a settlement figure?

Perito:      Yep.

GC:           Well you should be paid pretty quickly once the surveyors have actually agreed the final level of damages to be paid, the delay tends to occur in reaching that point cos as I’ve said there are so many variables involved, sometimes there’s a vested interest in one party to protract the negotiations to possibly see what the landlord intends to do with the building after the Lease is finished, they may be thinking that this property could be right for redevelopment let’s protract the negotiations as long as possible to see what happens.

Perito:      (4.39)  So what’s the longest negotiation you’ve ever partaken in?

GC:           Well it runs to years and some of them fizzle out eventually that you negotiate and, you know, you put your arguments back to the landlord and eventually they decide it’s not worth pursuing but I would never write to the landlord and say is this case now closed because that would probably be a red rag to a bull and they’d probably recommence so they just sort of fizzle out after a while.

Perito:      (5.06)  So next question, so can I claim for dilapidations if I’m thinking of developing the property after the tenant leaves?  A follow on from what you were talking about.

GC:           Well there is a lot of case law on this subject and legislation and the key section of legislation is Section 18 of the 1927 Landlord and Tenant Act and if works of demolition or structural alterations are to be undertaken to the property they will negate any claim in that respect so I think that the key thing here is to take professional advice, get some legal advice possibly with some advice from a building surveyor as well in that situation.  In my experience if a building has development potential at the end of the Lease it will tend to frustrate and protract the negotiations.

Perito:      (6.03)  Is that cos there’s lots of question marks over what if I have to, say as a tenant, I have to fix things back up and then there’s obviously question marks how long that stuffs going to be lasting?

GC:           Well exactly I mean, you know, you can’t really claim for items of repair to a building if those elements of repair are going to be removed as part of a refurbishment, a redevelopment demolition so that’s absolutely key that the legislation says you can’t claim for those items and there’s case law as well so that’s why the parties tend to be very cautious in that situation and not want to pay out for dilapidations and then see the building demolished and redeveloped.

Perito:      (6.45)  Well yeah, it’s a waste of environmental resources as well isn’t it.  So thinking of dilapidations claims in general what sort of things would I expect to see included in a dilapidations claim?

GC:           You’d see repairs, works of decoration, works of reinstatement, now those works of reinstatement will typically cover works of alteration that tenants have undertaken, they might have put in air conditioning to a boardroom or a computer room, they may have put up partitioning, now the reinstatement of those alterations by the tenant are usually subject to the landlord’s consent to remove, you can’t assume because as a tenant you’ve put those works of alteration in place that you can necessarily just remove them without consent.  You could also find items relating to statutory compliance so you may need to prove that the electrical installation is safe and fit for purpose, provide certification to that effect.  Similarly with the fire alarms, asbestos and other matters that would be relevant to an incoming tenant.  You could also claim for professional fees, these are usually covered in a clause of the Lease so that the fees that your surveyor incurs in preparing a Schedule of Dilapidations and negotiating it, the cost of the lawyer to serve the schedule on the tenant and also loss of rent, it’s a relatively difficult one to claim in many cases but it is still a relevant head of claim and should be considered.

Perito:      (8.17)  So just going back to that idea of a tenant, say that for instance they’ve installed a new kitchen and in order reinstatement by, I take reinstatement by returning to how it was, they can’t just rip the kitchen out in order to return it to how it was, they’ve obviously got to say I’m going to take out the kitchen, is that true and what does that look like, do they have to put that in writing as to what they’re going to do before they go ahead and reinstate?

GC:           Usually there are provisions in the Lease for reinstatement of tenant’s alterations and may also be that a Licence to Alter has been entered into between the landlord and the tenants which will set out what the requirements are, often the landlord will leave that decision to the end of the Lease before deciding whether to require the tenant to remove the alteration or leave it in place and the tenant’s alterations often are left in place and then they become part of the building going forward for the new tenant.

Perito:      (9.11)  What if the premises were in bad condition when the tenant moved in or if they have improved the premises?

GC:           Well repair is a wide ranging term and the term repair usually includes to put in repair and also extends to renewal of an item not just repair of an item, obviously the strength of the repairing covenant can vary from Lease to Lease but it’s important to remember that in most cases if a property is in a poor condition and poor repair at the commencement of the term the tenant will be required to put that property into repair during the course of the term and at termination, now the tenant can reduce their repairing liability by agreeing a Schedule of Condition setting out the condition of the property at the commencement of the term but that Schedule of Condition has to form part of the Lease and be referred to in the Lease, it can’t be just some informal casual document that is in place or in the tenant’s possession, it has to be agreed between the parties.  In terms of improvements it’s difficult to reduce your dilapidations liability as a result of tenant’s improvements there are provisions in the Landlord and Tenant Act 1927 for compensation for improvements but they’re very rare in dilapidations terms and again if a client is considering going down this route I will suggest they get legal advice first.

Perito:      (10.42)  Lovely thank you.  Can I claim for dilapidations early if a tenant is not maintaining the property during the course of the Lease?

GC:           Yes but these sort of claims are much more difficult to enforce, they typically relate to items of an urgent nature so for instance say a tenant’s had a Lease of a property and they vacated, maybe after a few years they decided they didn’t that building but the building was vacant and because there was nobody looking after the building on a regular basis the roof started leaking, leakage of that kind could then cause extensive damage, dry rot, damage to services, finishes etc. the landlord would be fully entitled to minimise that continuing damage to his interests, that is his end interest at the completion of the Lease or termination of the Lease by preparing a Schedule of Interim Dilapidations to serve upon the tenant.  Enforcing less urgent items such as decorations etc. are much more difficult to achieve so again I would suggest that professional advice is obtained prior to embarking on such an exercise and incurring costs of a surveyor to prepare a Schedule of Dilapidations which may have very little chance of success.

Perito:      (11.59)  Just going back to that idea that a building’s in peril because of the way the tenant is managing things, cos what I’m thinking here is that the building’s in peril so therefore the tenant will have to pay for fix it and that would be the recourse of action through this but what if they haven ‘t got any money, is there like an insurance backup that would then be claimed on to rescue the building?

GC:           Well the landlord could actually enter the property and do the repairs themselves in such a situation to mitigate their loss, in terms of solvency of the tenants, I mean that’s another issue and it’s perfectly possible for a landlord incur a financial loss because a tenant goes out of business both in terms of rent and the condition they’d leave the building in.

Perito:      (12.42)  I think that adds a lot of weight to doing this process properly.  So what should I do to make sure I can claim as much as possible in future dilapidation claims?

GC:           I think the problem really is in the question to claim as much as possible is contrary to good practice and the dilapidations protocol and as I mentioned earlier if you have to stand up in court and defend your costs and they’re deemed to be excessive it won’t help your client’s case.  I think you have to be reasonable and prepare costs that you can justify in the marketplace.

Perito:      (13.16)  Cheers Graham that’s really useful, any final tips to Asset Managers and Landlords out there?

GC:           I think dilapidations is a complex area as I’ve mentioned there’s a lot of case law legislation and there are different methods of actually assessing the damage in a dilapidations case, both in terms of the cost of the repairs and a valuation based approach so it’s important to get good professional advice in terms of legal advice prior to embarking on the claim and during the claim often legal points arise on a regular basis and have to be commented upon by the lawyer or the barrister and similarly a good building surveyor is important as well, somebody who’s experienced in dealing with dilapidations claims.  I would also advise that you should really be prepared to negotiate and compromise in dilapidations cases, I mean the majority of dilapidations cases don’t go to court but the costs can be phenomenal if matters do go to court so most parties try and agree to reach a settlement informally but some compromise is needed in that process.

Perito:      That’s great thank you.  So you’ve been tuned into Cardoe Martin’s A-Z of Building Surveying Podcast, thanks for listening and thank you very much to our guest Graham Cardoe for joining us today.

GC:           Thank you.

Perito:      And for giving us the lowdown of dilapidations for Landlords and their Asset Managers.