Dilapidation claims stem from the way a tenant uses a property. Should the tenant choose to alter the property, as many retail, industrial and office occupiers do, they pledge in their lease to return the property in the same condition that it was given. If a landlord does not feel that the property is being kept in a suitable condition, or if the property is not returned in adequate condition at the end of a lease, they can undertake remedial works themselves, and charge the cost back to the tenant.
Landlords rely on the ability to make dilapidation claims to put their properties back into a lettable state and maintain the infrastructure and fabric of assets. The most diligent of landlords will have worked in estimates and forecasts for likely claims on each of their assets as part of their budgets and financial planning. One of the biggest long-term financial dangers for them is, therefore, multiple occupiers exiting a space en masse in financial difficulty, leaving landlords with a diminished ability to claim for dilapidations. This could lead to gaping holes in their finances, running into the multi-millions across portfolios.
4. How Landlords can reduce their exposure
While the risk of occupiers closing is not something that can be controlled, there are a number of measures that landlords can take to try to minimise risks during this difficult time. In order to keep tenants that survive for the long term, landlords must be willing to work with them, without sacrificing the need to maintain the value of their assets. There is a real need, now more than ever, to inject some humanity into this situation, to mitigate the effects of COVID-19 on businesses.
5. Lease monitoring
Landlords should examine their tenants’ leases carefully. This is especially important for landlords with large portfolios – it is easy to let things slip through the cracks.
One of the most common (and costly) culprits is notice periods. Leases generally require tenants to remove alterations, and landlords must often provide notice to do so within a prescribed time frame. Failure to provide notice could result in the landlord missing its window for reinstatement claims. If lease renewal negotiations are ongoing, it is key to accompany the formal notice with a well-considered letter explaining why it is necessary to serve notice in this manner. This maintains relationships while also protecting the landlord’s position.
6. Break clauses
A break will often be conditional on providing vacant possession or, in some cases, complying with covenants in the lease. With the current ability to undertake works significantly hampered by government-imposed restrictions, and much of construction grinding to a halt, how will tenants comply? In a significant number of cases, it is expected that they won’t, but it is yet to be seen if landlords will seek to frustrate break clauses on this basis. Careful consideration and legal input should be obtained as courts may potentially take a dim view of a landlord’s actions depending on the particular circumstances. A short-term lease extension may be a feasible alternative.