BUILDING SURVEYING FOR PROFESSIONALS PODCAST
DILAPIDATIONS FOR TENANTS WITH ALEXANDRA REDMOND
Host: Welcome to the Cardoe Martin Podcast, the A- Z of Building Surveying giving you the lowdown on the world of building surveying. In this episode we are going to have a chat with Alexandra Redmond a Director at Cardoe Martin. Welcome Alex.
AR: Thanks James.
Host: (0.13) Well good to have you on board first things first then, we’ve be on before but tell us a little bit about who you are and what you do at Cardoe Martin?
AR: Well I’m a Director at Cardoe Martin and I head up the commercial team and just looking at all the commercial property and looking after all our commercial clients.
Host: (0.32) That is great thank you very much. So you’ve already been through the hailstorm that is the quick fire round in previous episodes so we’re going to try something a little different. Are you ready for this?
AR: Go on.
Host: (0.45) Right what’s the last building you surveyed?
AR: My goodness only last week, oh it was a lovely terraced Grade 2 Listed mixed use building that was the former Head Quarters of the Premier League in Gloucester Place very nice building.
Host: (1.00) Lovely sounds good, what’s the most interesting thing you’ve learnt, this week’s quite early in the week so why not last week as well?
AR: Well there’s actually something interesting I learnt this week but I don’t if anyone will find it interesting, it was about when you do and you don’t charge VAT on expenses and disbursements, a pretty dry topic but something I didn’t know before and found quite interesting and enlightening.
Host: (1.23) Any key points to take away?
AR: Yes sometimes VAT applies, sometimes it doesn’t, you have to read the HMRC Guidance.
Host: (1.30) What future concept do you find most interesting? That’s all to do in the built environment.
AR: I suppose how technologies made such a huge impact on buildings and the built environment that we live we live and how interesting it’s going to be see how the current built environment stock adapts to embrace technology and adapts to suit how we live in the future.
Host: (1.52) Okay great thank. Now last question, which do you prefer Rick or Malty?
AR: I think that’s obvious, I don’t think anyone prefers Malty it’s obviously Rick.
Host: (laughter) (2.02) Yeah okay great. So join us now for a journey through time and materials as we give you the lowdown on dilapidations for tenants. So our first question today is what is dilapidations?
AR: Well that’s a very good question to start with dilapidations is derived from the word dilapidated which if you’re not aware of what means it’s basically the description for a building in a very poor state of repair and in need of lots and lots of repairs to put it back into good and condition for somebody to occupy and dilapidations in the sense of the topic of the podcast relates to breaches of Lease Covenants relating to the condition of the property during the term of a tenancy or when the Lease ends. It’s usually recorded in a Schedule of Dilapidations which may be received or issued by the Landlord during the tenancy or at the end of the Lease. Dilapidations are recorded in a Schedule of Dilapidations which is basically a schedule which sets out all of the list of the breaches which a surveyor has picked up within a property which are to be remedied by the tenants and is usually used to set out the basis of a claim for those breaches to be remedied by the tenant by either carrying out the works or paying a financial settlement for the landlord to carry out the works after the tenant has vacated. The expectations for the process for dilapidations is set out in the dilapidations protocol which sets out the standard for the timescales, documentation and the negotiation process involved.
Host: (3.34) That is really useful, thank you very much for that review. So I’m guessing then when we’re talking about tenants we’re not talking about me renting a flat somewhere as a private individual, we’re talking about commercial stuff then aren’t we. So how do I know if I am a tenant and that actually kind of fits my bit?
AR: Well it’s not unlike a residential tenancy in the sense that you’re renting a building for a period of time from a professional landlord that you’ll be using it for commercial purposes, so you’ll be using it as a place of work or an office or a shop, maybe a restaurant and you’ll be entering into a slightly different type of arrangement with the landlord for a commercial premises because you’ll usually be taking a Lease on a longer or fixed term basis, so normally from anything from 5 years I’ve seen Leases that go up to 100 years in the past so when you’re involved in a Lease for a commercial property you’ll be usually as a named party on the Lease alongside the landlord, you may also be an assignee or a sub-tenant, which means that you’ve taken on a Lease that somebody else originally signed with the Landlord and by taking on that Lease you may also have taken on some of the liability for dilapidations as well.
Host: (4.47) That is great thank you, so why does dilapidations apply to me then, I’ve taken over a commercial unit on an industrial estate on the outside of Plymouth and I guess the tenancies coming to an end, what does it mean, what have I got to do?
AR: Well it’s important to note that dilapidations doesn’t apply in all cases, it really depends on the wording of your Lease so it’s very important initially to check the wording and the terms of the Lease that you’ve signed and make sure that you’re aware of what your obligations are but if dilapidations do apply it will be defined within the Lease for the premises. The general principle behind dilapidations is that a tenant should return a Lease property to the landlord in the same condition that it was at the beginning of the Lease. The fine print of the Lease will generally set out the landlord’s expectations on this, including things like how to decorate it at the end of the Lease, what you should remove at the end of the Lease so any furniture or fixtures and fittings, anything you’ve installed which might even include carpets, kitchen, signage and also a sort of coverall term to yield up the premises at the end of the term.
Host: (5.54) I’ve put a lot of my money into this commercial unit outside of Plymouth we’ve been there for 15 years am I just going to rip it all out and it’s going to the tip?
AR: Not always, it depends really on what sort of condition you took it on and what the use of the premises is, if you took it on to use it as something quite specialist and quite a niche industry then you might find that the landlord would find the premises fitted out to your specification difficult to let to another tenant so the chances are they’re going to want it returned back to them as something that can be easily customised by the next tenant coming in.
Host: (6.30) Yeah that I understand cos from a landlord’s point of view that makes a lot more sense doesn’t it, that they’re gonna want something they can sell back as well.
AR: Essentially yes and if you took it in a condition where the property was empty and there was nothing in it at the beginning of the Lease then the landlord will probably want it back in that condition when you hand it back to them at the end.
Host: (6.50) So we’re talking about schedules here and so what is a Schedule of Dilapidations and when would I receive one?
AR: Well there’s a couple of different types of Schedules of Dilapidations and they have key differences, the less common schedule is an Interim Schedule of Dilapidations which generally covers items of disrepair and won’t normally be presented with any costs and this could be issued at any time during your Lease. You may receive one of these if the landlord is concerned that you aren’t maintaining the property properly or there’s a lot of disrepair and they’re worried that you’re not going to address these issues whilst you’re in occupation and at the end of the Lease there will be a lot of work to do so that’s occasionally something that happens although it’s not as common as the Schedule of Dilapidations which you would receive at the end of the Lease which is referred to as a Terminal Schedule of Dilapidations and this is a much bigger document includes items for reinstatement so the removal of any, you know, your installations for instance you mentioned at your commercial premises in Plymouth that’ll be to reinstate it back to the condition that it was and the fit out that it had at the beginning of the Lease. For decoration as well so if you’ve not decorated the premises in accordance with the Lease terms and also for disrepair items similarly to the interim schedule and you’ll often find that a terminal schedule is a costed document.
Host: (8.11) What do you mean by costed?
AR: Well the Costed Schedule is essentially what the Schedule of Dilapidations has presented as an itemised list of all of the works that you’d essentially be required to do to meet your Lease obligations.
Host: (8.25) I understand so Point 1 would be paint, 2 would be rip up carpets, replace with lino say.
AR: Precisely and that would have a cost associated with it so in the event that you wanted to do the works yourself you understand what the landlord would want you to do, but if you haven’t got time or you don’t want to do it within your Lease term then there’s an option to settle financially with the landlord.
Host: (8.47) So do you find most people will do the like is there an easier option that probably most people take like 80/20 rule, 80% just pay up and the landlord has to take the work on or what do you find in your career?
AR: It really depends on what suits the tenant so some tenants may have premises lined up to move onto and have enough time left on their current Lease to be able to get a contractor in and to do all of the works that are listed within the schedule, and if they’ve got a rent free period at their new premise then that gives them an ideal opportunity to not have to pay for two premises at the same time and complete those works which can sometimes which can sometimes be cheaper if you know a contractor or you work with contractors as part of your job but some people would prefer to say in occupation, use the premises for as long as possible and then on the end of the day just hand the keys back to the landlord and leave it to the landlord to do any reinstatement works and then cover the costs for the landlord to do that.
Host: (9.44) Yep, okay understood. So why would I have to pay for all of that, what’s my responsibility?
AR: Again, well the devil is in the detail of the Lease so at the beginning of your Lease you signed up to agree to carry out certain maintenance and repairs to the property during your Lease term and generally you’d expect similarly to a residential tenancy that you’ll keep the properly in generally good condition so that when you leave a tenant, like yourself, who can move in and enjoy using that premises straight after you leave, so mostly it’s because you signed up to it but there’s also an aspect that there should be an allowance for continuation of a new tenancy after you’re gone.
Host: (10.23) That is really useful thank you. So what if it was like this when I moved in or, and I know I’ve kind of brushed over this but if I’ve improved the premises, or certainly I think I’ve improved the premises, well I suppose what do we do?
AR: Well it’s quite common for a tenant to take a Lease on a property that isn’t in great condition at the beginning of the Lease, a lot of the time you’re quite keen to get moving, you want to take occupation as soon as possible so you can start or continue trading so you’ll kind accept the premises without it being decorated, with partitions that somebody else has installed, an old kitchen perhaps but a lot of the time because you’re in such a hurry and you’re really just keen to get started, this isn’t recorded so you’ve moved into a premises that doesn’t necessarily reflect what the landlord thinks that they’re handing to you which is normally shown in the Lease Plan. So you’ll get a Plan of the premises which will show the layout and if you do take it with partitions and kitchens those aren’t always shown, again it could be a previous tenant thinks that they’ve done someone a favour by putting cubicle offices in or installing a kitchen but a new tenant might look at the space and say well actually I’d like to have the manager’s office in that corner and I want an open plan office space.
Host: (11.33) Yeah or you just need an open plan working area.
AR: Exactly and you just want.
Host: As well like if you are doing metalwork.
AR: Exactly or you’re just sticking in workshops or desks or kitchen equipment so you can’t really rely on a tenant wanting to keep it but at the same time you might take a premises that’s already had something done to it which isn’t recorded so when you move in you might unknowingly be taking the liability for removing them at the end of your own Lease which can then add costs to your own dilapidations even if you don’t do anything to that premises whilst you’re in occupation the landlord may still include those items at the end of the Lease if there hasn’t been any acknowledgement or formal recording of the condition and fit out of the premises at the beginning of the Lease.
Host: (12.13) So I think you hit on like the recording element so how can I protect myself from having to pay all this money?
AR: Well I think the main thing is to get the best possible legal advice pre-Lease, make sure that you get a solicitor who is experienced, who understands both the conveyancing and Lease set up process but also the dilapidations process so that you can have those discussions up front, and definitely discuss dilapidations as part of the Lease negotiations so you both make sure that you understand what your obligations are but also that if there is anything that you can agree up front with regards to dilapidations, some Leases carve out any dilapidations liability entirely or if there is a specific installation that’s already there that you would use but because it’s already there you don’t want to have be liable for taking it out at the end of the Lease, then make sure that that’s talked about and then carved out of any Lease Agreements. If the premises are not in great condition or even in good condition you should think about getting a Schedule of Condition at the start of the Lease which you’ll need to do formally by a third independent party and make sure that that’s agreed with the landlord and then appended to your Lease document by the solicitors. Maintain the property during the Lease is quite important the more maintenance you do and the better records you keep especially with services so your electrical testing, gas etc. that’s pretty important because that will serve you well at the end of the Lease and then towards the end of the Lease if you are planning to leave have discussions with the landlord as early as possible and to see what they would want you to do on your exit so you can decide whether it would be better for you to do the work or for you to financially settle or if they might want to keep any of these fancy alterations or installations that you’ve made and then possibly if you’ve got them to the point where you’ve got a Schedule of Dilapidations and it’s a bit of a surprise and it’s really high and you think possibly it’s more than the value of the property you could consider getting specialist legal advice on a Section 18 Valuation which is where the value of the property is essentially lower than the cost of the dilapidations relating to repairs, so if you’ve got a lot of repair and disrepair items in there then that can also help reduce your claim if it is relevant.
Host: (14.19) So it sounds like it’s very easy to gear up for war with this one, do you find there’s a lot of battles and your kind of stuck in the middle of this, do people tend to be able to organise and up front of the Lease so that at the end there’s not this me versus you type situation?
AR: It tends to be quite a confrontational process really, I think because Leases are so open to interpretation a lot of people don’t really understand exactly what they’re getting themselves into especially tenants who are small businesses or dealing with small premises might take that residential type view that they think that at the end of the premises so long as they’ve taken all their stuff and not damaged the property that everything will be okay but that’s not necessarily true it’ll be, it can be quite a lot more than you think it is so I think most cases are confrontational rather than easy peasy.
Host: (15.08) The other thing that occurs to me is this idea of say I let my mate borrow this, he’s in this Plymouth shed for three years but we sign an agreement so I’ve kind of sub-let it, is he going to be liable for the dilapidations via the sub-letter or is it going to still be me, the primary?
AR: It really depends on the terms of the assignment or sub-lease, a lot of the time the dilapidations liability is passed on but sometimes it isn’t so it really depends, I mean if you wanted to pass it onto your friends then you could but.
Host: (15.38) I could stitch them up quite nicely there could I?
AR: It happens quite a lot, I don’t think it’s an intentional stitch up necessarily but I think a lot of people who are taking the assignment because they might think well it’s for a Lease that’s maybe running for another 2 or 3 years that something like this won’t happen because it’s a small shop, lock up shop maybe, or a small restaurant and it’s been on a Lease that’s say 25/30 years by the original tenant and it’s been assigned or sub-leased several times and that can be where real problems arise because a lot of people don’t really know what they’re getting themselves into.
Host: (16.10) So the moral of that story is then no matter what stage in the, whether your sub-let, sub-let, sub-let you need to check your responsibilities and if it’s a bit cloudy then you need to get advice before you step into this then cos it’s.
Host: I think this could be very expensive.
AR: No matter what size property or what size Lease your taking get the best possible legal advice that you can afford before you sign any documents these are legal documents is critical to making sure that you don’t end up with a bill that you would expect someone else to have to pay because you’ve only taken it for 3 of the 25 years.
Host: (16.44) Back to the questions then, so it’s too late for all that, I can’t really rescue it, what can I do if I’m facing this sort of situation now?
AR: So you received a Terminal Schedule of Dilapidations for a lot more money then you thought, and you’ve read through the items and you’re looking at them thinking well hang on a second I don’t think that I should be liable for this and that seems like a lot of money for decorating a room, well then the best thing you should do is hire a good surveyor experienced in dilapidations to help you negotiate the costs that the landlord’s claiming, very important to get good honest advice, don’t, you know, accept advice that people promising that they’re going to save you 100% or 80% of the claim without having looked at it in detail, it is a case of someone who’s experienced in negotiating, also some of the items we touched on earlier such as the Section 18 Valuation might still be relevant and helpful and also if you can dig up any records such as your Gas Safety Tests and electrical testing records and any other Lease/pre-Lease documents you might have, if you’ve got any emails which evidenced the condition of the property before the Lease, there may be you’ve emailed the agents and said well the property’s in terrible condition but I’ll take it anyway then some of those things can help if the landlord is amenable but it doesn’t guarantee it. The best thing to do is just to make sure that anything like that is agreed pre-Lease but if you’re in that situation now the best thing to do is try and negotiate.
Host: (18.08) Okay so it sounds like there’s rule to this game, and you need to understand them before you go into or certainly as you are on the way on the exit for these. So any final tips to listeners out there who might be in any of the sort of situations we’ve talked about today?
AR: Yes I think the final thing to consider is to get a Provisions Report which basically is a report which at any point during your Lease you might be a landlord or a tenant but it’s very helpful for tenants to consider getting one because a Provisions Report will explain to you what the likely extent of your dilapidations liability might be for a terminal claim so and a surveyor will basically attend your premises, assess the condition of the premises, look at the terms of your Lease and provide a scenario of what the landlord’s claim might look like so it gives you an idea of how much dilapidations you might be liable for which helps you from an accounting point of view so you can make sure that your provisioning for it in your company accounts and also that you can prepare financially for perhaps doing the works at some point in the future towards the end of your Lease, or knowing that that’s potentially how much you might have to pay out when the Lease ends if you want to stay right up to the end day.
Host: Thank you for that, you have been tuned into Cardoe Martin’s A-Z of Building Surveying Podcast, thanks for listening and thank you very much to our guest Alexandra Redmond for joining us today.
AR: Thank you very much James.
Host: And giving us the lowdown on dilapidations for tenants.