Interim schedules of dilapidation in a rising market have benefits for both landlord and tenant in a commercial lease.
In 15 years of producing schedules of dilapidation, I’ve found that the receipt of terminal schedule has usually come as a surprise to a tenant. This shouldn’t really be the case as a lease outlining the terms and conditions of the letting is entered into by all parties. There should be a clear understanding of the obligations (landlord and tenant) relating to a property rented under a commercial lease (rent payment, statutory compliance, repair, etc.). While there is no legal obligation on a landlord to produce a schedule of dilapidations, it is the responsibility of both parties to ensure that they comply with their own requirements under a lease. It has become common practice.
A schedule of dilapidations is produced based on certain lease clauses, and outlines one party’s interpretation of what is required to deliver compliance with the lease. The requirement to comply with the lease exists throughout the term and, as such, a tenant or landlord can be put on notice and requested to deliver compliance at any time. Over the last two years there has been an increase in the number of interim schedules served, putting landlords/ tenants on notice to perform during the term of the lease.
IN A RISING MARKET, COMMERCIAL PROPERTY IS NO LONGER SEEN AS JUST A RENTAL VALUE. IF THIS VIEW IS TAKEN, THE PROPERTY WILL SOON FALL BEHIND THE REST OF THE MARKET.
In a rising market, commercial property is no longer seen as just a rental value. If this view is taken, the property will soon fall behind the rest of the market (in terms of quality). This is particularly relevant with the increase in break provisions within leases (5-10-15 year breaks), along with an on-stream supply of new and refurbished space.
If a tenant vacates and a property is not ready for the market, there will be a void period with zero rent, along with landlord capital expenditure, before a new occupier is found – and don’t forget about the obligatory rent-free period. Consequential loss within a dilapidations claim is difficult to substantiate and a landlord must mitigate their loss; capital expenditure is inevitable. An interim schedule of dilapidation can assist in maintaining asset value and keep a property in a lettable condition.
Interim dilapidations will usually deal with specific breaches likely to cause a diminution in the property value or a threat to health and safety. An interim schedule will not usually contain costs against listed breaches, as the intention is to implement work rather than claim damages.
From experience, a visit during the term by the landlord’s building surveyor often instigates a programme of work by a tenant. In a number of cases positive feedback has been received from the building user who, as a result of company protocol, is not in a position to complete operations expenditure (opex)/capital expenditure (capex) unless there is an official request to do so. An interim schedule assists in firmly and formally advising a party to the lease of their obligations.
What we have also identified is that tenants are likely to complete more work than they are actually obliged to do under the terms of the lease because they are going to get the benefit of the work during the remainder of the term. This reduces the end-of-term dilapidations argument of repair versus improvement.
Asset protection and cost reduction
From a review of in-house dilapidations data, it is clear that there are a number of common breaches under most terminal dilapidation claims. If repair/maintenance had been completed earlier, the end-of-term argument and cost exposure would have been significantly reduced, if not removed altogether: a win-win for all parties.
For example, early repair to a roof covering can increase its serviceable life and reduce cost exposure. This is particularly true in the case of cut edge corrosion, with cost variation of €40-€55 per metre, subject to the level of deterioration. Fire compartmentation and detection is also very important in a property; however, there are still buildings with no fire detection. under the terms of a standard lease a tenant only needs to comply with statute while in occupation. If an interim schedule is issued, they would be obliged under the lease to comply with statute and install a fire alarm. This would not be the case at term end. We need to be mindful, however, of reinstatement, as the tenant can legally take the alarm system with them at term end subject to the wording of the yielding up clause.
Section 65 of the Landlord and Tenant Amendment Act 1980 restricts a terminal dilapidation to the actual value of the landlord’s reversionary interest in the premises and is a claim cap. This piece of legislation cannot be relied upon under an interim situation, as there is no claim for loss, simply a notification of required work under the terms of the lease.
There are also a number of tactical reasons why a landlord might wish to issue an interim schedule or have early discussions with a tenant. Where a break option is approaching and the tenant could actually leave, it may persuade them not to if the interim schedule shows that they will be encumbered with a large capital cost. As part of issuing the schedule, the landlord may need to identify what work they would accept as being completed over a phased basis, to ease the burden.
An interim schedule can also be utilised to formalise paperwork and ensure that correct standards are achieved, especially where a tenant has completed alterations without obtaining landlord approval, or where work was carried out to an inappropriate standard. Poorly completed work could have a negative impact on the building, or on other tenants in a multi-tenanted building. There is also a concern that work completed without full consideration could impact negatively on the building insurance.
An interim dilapidation schedule presents a controlled opportunity to reaffirm the requirements under the terms of the lease. It allows time and options for all parties to complete work under their control or to put in place deeds of variation to provide clarity on lease interpretation. This could assist in reducing end-of-term arguments and lengthy legal disputes where communication may have broken down and a financial settlement is the only option.
Director at McGovern Surveyors