Leasing business premises is so utterly different from renting a house. When the lease ends, a business can expect to pay hefty dilapidations costs, which the landlord theoretically then spends on returning the premises to its original standard of decoration, reinstatement and repair. Or the the tenant can opt to do the works itself.
There was a time, not so long ago, when landlords were able to profit through highly inflated dilapidations claims. Then the tide turned and tenants were given protection. So now, provided the tenant is properly advised, dilapidations costs are far more reasonable. Furthermore, whereas the key issue used to be returning the premises to their original state, the legal focus is now on the issue of the landlord’s ‘loss’.
Take the example of an office that is going to be converted into a flat. In the old days, the landlord could have expected to reach a financial settlement with the tenant and then put that money towards the cost of the property conversion. But nowadays a well-advised tenant would start by asking the landlord for a Declaration of Intention for the future use of the premises. If the conversion to a flat is revealed, the tenant may be able to leave without paying any dilapidations costs at all, because the landlord cannot claim a loss (the building will be converted anyway).
Similarly, if a roof is leaking and the landlord is contractually responsible for that roof, the tenant can reasonably claim that it would be pointless to redecorate an area that will soon have water damage.
One can also commission a ‘section 18 valuation’, which puts a figure on the value of the building now and a theoretical figure of value if it was in full repair. The difference between the two figures then creates a cap as to what the landlord is allowed to claim.
But when it comes to small businesses, dilapidations should be more straightforward than this. The key question is, given the terms of the lease - what is reasonable?
Generally, there will be a requirement to repair and redecorate (internally, and sometimes externally - the lease should make it crystal clear what is and is not included, for example, roofing, drains, boilers, etc). The lease should also detail the professional fees the tenant is obliged to pay as part of the dilapidations claim.
But let’s get back to the question of what is reasonable. Take, for example, a lease that stipulates that the tenant must wash the windows every month and use two coats of paint when redecorating every three years. If the windows are clean and the rooms do not need decorating, the landlord has no grounds for complaint. And if the tenant buys good quality paint, one coat of that paint may be better than three coats of watered-down cheap paint. The key point is, does the property look as it should or have you, the tenant, done something (or omitted to do something) that devalues it?
In my next blog I’ll outline my tips for tenants on how to keep dilapidations costs down to the bare minimum.
Mark Humphries is an associate director of chartered surveyors CS2 (Bristol office).