Dilapidations update 2019

What’s new indilapidations? In this dilapidations update we offer our thoughts and observations on the past year’s dilapidations news.

The headlinesTo kick-off, here’s a round-up of a few headlines relating to our dilapidations service as a whole. We’ve clearly been extremely busy, but once you start delving into the data; new trends emerge … and there are always a few surprises…

Last year we surveyed almost 8 million ft2 of space.

By square footage, over half

was industrial, roughly a quarter

offices with the majority of the

remainder being a mixture of

retail and leisure accomodation.

We recovered over £42 million through

dilapidations claims for landlords – and saved over

£6 million for tenants.

Average settlements across the UK for landlords by sector:

Industrial - £12.38/ft2 (up from £9.05/ft2 in 2018)

Offices - £15.65/ft2 (up from £15.17/ft2 in 2018) Retail - £10.36/ft2 (down from £11.65/ft2 in 2018)

For tenants the average saving

over the original claim was 56%!

One in every six schedules served by

landlords resulted in new

terms being agreed.

Having a Schedule of Condition in place reduces

settlement rates across all sectors by:

£5/ft2 for industrial

£9/ft2 for office

£4/ft2 for retail

Our analysis shows a marked preference

for tenants to agree a financial settlement,

rather than undertake the works, only one in every three tenants do any

work prior to vacation.

Dilapidations update 2019

OtherRetailOfficeIndustrial

Hot topicsBoth the current economic climate and changes in tenant expectations are driving significant changes in the dilapidations world.

Here we explore two areas: the rise of CVAs and the “WeWork” effect:

Avoiding a £1 dilapidations value in CVAs

Struggling retailers are increasingly turning to Company Voluntary Agreements (CVAs) as a cost-effective way of restructuring their property portfolios. Indeed, recent research by Colliers has found that almost 1000 stores (including household names such as Carpetright, Mothercare and Homebase) have been shut under the premise of CVAs since 2017. This often leads to landlords facing the prospect of not just having rents slashed or empty units on their hands, but also potentially forfeiting vast sums in lost dilapidations claims. For landlords the answer could lie in having potential dilapidation schedules pre-determined, and therefore becoming “ascertained”, thereby retaining significant and important voting rights in the CVA process. Here we explain how.

The “WeWork” effect

Gone are the days of commercial landlords securing leases for 20-plus years with no option to break and regular upwards-only rent reviews. Tenants are seeking out future-proof, flexible space with the capability to host “plug-and-play” office layouts and “all-inclusive” rental structures. Traditionally, landlords have recovered the cost of modernising commercial property through long-term FRI leases. The model allows the landlord to recover a lump sum from the tenant (by way of a dilapidations payment) at the end of the term which can then be funnelled back into maintenance and modernisation. However, research by MSCI shows that 42.1% of new leases (to end 2017, up from 39.4% in 2016) are for less than five years and even in central London new office leases are now averaging at 7.7 years. With average lease terms shrinking and the advancement of tenants demanding buildings with “plug-and-play” capability the model seems to be changing across almost all sectors.

Read more in our recent article.

Dilapidations update 2019

Market observationsJust as the property sector continues to evolve and adapt to the ever-changing economic outlook, the desire to “green up”, and the power of modern technology very much also ripples through to dilapidations. These are some of the trends we’ve been aware of over the past year:

Increased supersession in landlord claims due to refurbishment works

This may well link back to MEES (the requirement for let buildings to meet minimum energy efficiency standards) and, increasingly, landlords simply striving for greener buildings to provide what tenants are demanding.

Increased use of technology in data capture

This can come in many guises such as drones, 3600 cameras and laser scanning. At Hollis we’re using them all (and more) – we even have two full-time drone pilots!

Dilapidations assessments

The current squeeze on profits of many occupiers, particularly retailers, means that reducing tax burdens could be a vital part of any forward trading plan. An occupier’s dilapidations provision is deductible for corporation tax purposes if certain Financial Reporting Standard 102 criteria are met, such as a professional assessment of the cost of dilapidation works together with robust supporting evidence. We have seen a growing trend in occupiers commissioning liability assessments early in their lease terms.

Did you know?Almost 40% of leases now include a break clause.

Their popularity has grown considerably since the Global Financial Crisis of 2008, before which break clause levels stood at just 22.7%. The increase is particularly prevalent in longer leases of 11-15 years, in which break clauses are now found in over half of new leases.

Of course, incorporating a break clause into the lease is one thing: actually exercising it successfully is another! Any dilapidations issue involving a break clause demands extremely careful handling – that’s why there are so many break clause cases that have gone through the courts. Did you know?

There has been a 135% increase in the “flex sector” over the past year, with 5% of the UK’s office stock now taken up by such providers.

Dilapidations update 2019

Cases that have caught our eyeThere have been a number of dilapidations cases reaching court over the past year.

Here we focus on two, concerning specific performance and break clauses/vacant possession:

Blue Manchester Limited v North West Ground Rents Ltd [2019] EWHC 142 (TCC)

Manchester’s Beetham Tower is a £150m 47-storey glass

building housing a hotel with flats above. Eight years after

completion the structural sealant used to attach the glass

panels to the façade began to fail. Under the instruction of

the freeholder (who had given a covenant to repair to the

tenant) the main contractor, Carillion Construction Limited,

provided a temporary fix by installing stitch plates, before

going into liquidation. The tenant of the hotel called on the

freeholder to provide a permanent solution, citing concerns

about the safety of the temporary fix, obstructions to

access and overall appearance.

The freeholder argued that it had complied sufficiently

with its repairing obligations by providing the temporary

fix while it pursued claims against Carillion’s insurers and

a subcontractor (which, it hoped, would enable it to fund a

permanent solution).

At court the judge ruled that, as the stitch plates had

been designed to last for no longer than three years (and

required regular, disruptive inspection), the façade was

not in good or substantial repair and, in this case, given

the nature of the tenant’s business there were aesthetic

considerations too. So, the judge granted an order for

specific performance requiring the freeholder to repair the

building within an 18-month period so that it presented

substantially the same external appearance as at the date

of the lease.

Goldman Sachs International v Procession House Trustee [2018] EWHC 1523 (Ch.)

This case concerned, amongst other matters, whether a

break clause could operate successfully whilst tenant-

installed partitioning remained in-situ. The failure to

remove demountable partitioning in Riverside Park Ltd

v NHS Property Services Ltd [2016] EWHC 1313 served to

thwart a break requirement to deliver up vacant possession

on the basis that the partitions were held to be chattels

capable of being removed without damaging themselves or

the fabric of the building.

In the Goldman Sachs case it was ruled that, even though

the partitioning remained in place, the tenant nevertheless

successfully exercised a break clause. However, this was

because the reinstatement obligation in the yielding up

clause was found to be open to interpretation. As such

neither party could have proceeded with any certainty and

it was therefore not a suitable condition to be attached to

the break clause. The story may not end there, however,

as leave has been given to take the case to the Court of

Appeal.

Dilapidations update 2019

A dilapidations expert around every corner We have been market leaders in the specialist field of dilapidations for many years – but now our coverage extends even further. Our new office in Exeter brings our tally of offices across the UK and Ireland to 20. We continue to make strides across mainland Europe too: we are now undertaking dilapidations instructions in the Netherlands and Belgium.

We also continue to be supported by tier 1 ranked real estate QC Nicholas Dowding, making us the only UK real estate advisor with in-house legal counsel.

Our service continues to grow and evolve so that we can be sure that we are offering our clients – be they landlords or tenants – the very best advice. But, most of all, you can be rest assured that by coming to Hollis you are in very experienced hands.

Dilapidations update 2019

Contact usIf you would like to arrange a meeting or a CPD on dilapidations or other landlord and tenant related matters please contact:

Ashley WinterPartner

E: ashley.winter@hollisglobal.comM: +44 7912 274812

Web: hollisglobal.comTwitter: @hollis_globalLinkedIn: hollis-global

Dilapidations update 2019

Various topics are available but here is a flavour:

• Pitfalls to avoid with new leases

• The importance of getting tenant alterations right

• Factoring in dilapidations pre-purchase

• MEES and impact on dilapidations

• Dilapidations in Scotland