So you own the Company, ok. So you own the premises, ok so far. So the Company leases the building from you. It’s all yours anyway, so you create a standard or possibly soft lease between the two. Does it really matter what the terms are, as it is only you who might have to rely on the terms and hold the benefits of the covenants?
STOP. Stop right now!
I have recently been involved in a Dilapidations case where the owner of a Company was forced to sell the freehold of the demised premises to a third party who became the Company’s Landlord.
Lo and behold at the end of the lease a Dilapidations claim in excess of £300000 was received from the Landlord. The original Lease was soft in favour of the Landlord. The Tenant was exposed to the full cost liabilities of repair redecoration and reinstatement ( excepting for those aspects of the sadly all too often usual overstatement and exaggeration by Landlord’s Surveyor). The Tenant had not sought to limit its liabilities properly and no schedule of condition had been prepared. Why should it? “I am both Landlord and Tenant” thought the one and same Company owner and Premises owner.But they are two separate legal persons.
A salutary and expensive lesson.
WOW (Words of Wisdom)
Always be aware one or both of the parties to a Lease could change. If the Company is the Tenant the Lease should always be scrutinized by competent solicitor and surveyor in order to see how its worst hard nosed enemy (s.o.b)might use its provisions and weaknesses to abstract the maximum of damages by way of compensation at Lease end.
I have recently prepared Ingoing Tenant’s Schedule of Condition for manufacturing Client who has taken 200000sq ft warehouse/factory unit in Lancashire. This comprised a comprehensive written Schedule, 100’s 0f digital photographs and high definition AVCHD Video.
The commission involved using a 22m rise 12m outreach access platform to enable the roof to be photographed and inspected. The usual problems were present- cut edge and spot corrosion, colour fade, grp roof-lights weathered and degraded to opacity, corroding valley gutters and the usual carrion debris and soiling.
The Schedule and Executive Summary advice I provided enabled the prospective Tenant to evaluate it potential liabilities and seek to limit the same.
No sustainable large claims at Lease end for this Tenant.
The project was turned round in a week.
‘All received safe & sound Andy, thanks very much for fast & efficient service. Regards TB Director’
WOW (Words of Wisdom)
Always, always commission an Ingoing Tenant’s Schedule of Condition before Lease to enable you to limit your liabilities, or negotiate repairs and decorations before lease, or a rent free period to reflect cost of same or simply exclude where functionality and weather exclusion are not issues.
Sadly many commercial Tenants are ignorant of what their lease terms mean. If for one moment someone explains clearly the innocuous phrase ‘to keep’ in repair means implicitly to ‘put into repair‘ that deal on cheap lease in a leaky Victorian north-light factory does not seem so good. ‘To keep‘ means to put your hands into your own pockets and spend hard earned cash on putting the premises in repair.Great for the Landlord. Not so great for the Tenant.
Oh and do not think you can fold the Company to escape liability- most leases require the old PG– the personal guarantee from Directors or others.
WOW (Words of Wisdom)
Always take professional advice from a Chartered Building Surveyor before Lease who can work with your Solicitor to ensure you do not unwittingly sign up to an onerous and costly burden. You now know it makes sense.
Matthew Williamson says in Weightmans newsletter :
“Over the past couple of years, the number of dilapidation claims served by landlords against tenants has risen dramatically. Dilapidations are the tenant’s cost of reinstating a property back to the condition required by the lease. Claims have increased because the recession has limited the redevelopment of commercial premises; in a stronger market landlords may just demolish premises that were in a state of disrepair, now they are forced to spend money repairing and redecorating and want to claim that money back from their tenant…………..”
Matthew Williamson is an associate in the commercial property team at law firm WeightmansLLP
Full article can be found by clicking below. All rights reserved.
A client rang me recently and his 10 year lease ends July 2010.He admitted he had no idea what his lease required of him in terms of repairs decoration and reinstatement!
Seemples- RTF******L – read the lease and plan backwards. Do not expect the Landlord to trigger you into action with a Schedule of works. Take control , extract head from sand and address your liabilities while you can. It is so easy to get wrapped up in your business that repairs and decorations to the building can seem a gross inconvenience. There is a natural reluctance to budgeting for repairs and decorations to a building you do not own. However neglect to attend to those responsibilities and it could be very costly.
If you cannot work out a strategy to minimise your exposure to claim you know where to come.
WOW (Words of Wisdom)
Ignorance is not bliss when it comes to commercial lease liabilities.
Any Tenant of a commercial premises under the covenants of a typical ordinary lease will be expected to keep the premises in good repair and regularly decorated. You must repair and decorate as the lease specifies.There is usually a restriction on alterations without permission. So if you add or takeaway something you will be liable to reinstate and make good.
Do not file the lease away in the cabinet. Get it out and check what it says, preferably in good time before lease end .
You generally have no rights to hang over at lease end to sort matters out unless of course you want to carry on paying rent! The Landlord may not agree to your hanging over anyway.
I come across from time to time poor and impoverished Schedules of Condition prepared on behalf of ingoing Tenants comprising pretty basic and limited written schedules and photographs.-an attempt to limit the Tenant’s liabilities to a condition no better or worse than recorded at the time of Lease was the probable brief. Gosh these must have been prepared years ago before digital camera technology I hear you say. Often yes , but I have had to try to defend terminal dilapidations claims on basis of schedules prepared as little as 5 years ago meeting this description. It is hard work as it seems the object of dispute is always just outside the field of view of the photograph. Sod’s law. I can interpolate a lot from overall state of repair and decoration shown on a series of photographs but there is nothing better than a comprehensive visual record which leaves no room for arguements between Surveyors often many years down the line. Digital photography technology allows us now to take hundreds of photographs and store them on SD cards or similar cards the size of a postage stamp or DVD disc . ( CDs very rarely these days have enough space to store sufficient high-resolution photos).
Even hundreds of photographs might not be enough. To address this issue we have adopted and use the best of technology to now prepare definitive Schedules of Condition comprising comprehensive written descriptions of defects, cross referenced high resolution photos ( minimum 9MP) and High Definition Video (AVCHD) . A HD video is priceless for recording complex defects and conveying the condition. Run on your common place HD TV on say a 42″ screen the HD video reveals all. I started last year when faced with prospect of recording condition of 4.5 acre industrial site of complex buildings of many varied types. It worked and I provided multiple DVDs ( about 2.5 hours of video )to compliment digital photos and written schedules. No arguements in 10 years time at lease end.Period. Sony or other commonly available Blue-Ray players or even Sony ps3 play the discs beautifully.
I have now adopted the procedure for more modest commissions. Why accept anything less? OK it costs extra in time and effort and cost but the definitive record is priceless to resist overstated dilapidations claims at lease end. My aim is to make it as far as impossible to pursue a legitimate claim for disrepair where limitation as to condition at time of lease is of essence.No system or approach is perfect but my clients will always be assured I shall continue to strive to perfect my method using the best of technology available.
They may not know it for 5 or 10 years but they will reap the benefit .
WOW (Words of wisdom)
Limit your liabilities by definitive ingoing Tenant’s schedule of condition.
A Tenant client of mine rang Jones & Co from his newly acquired position standing on a window ledge facing the prospect of a self- propelled precipice drop.
‘I have received a Terminal Schedule of Dilapidations claim for £100500! We have only occupied the premises for 5 years and now this bombshell…what can we do?’
I duly took instruction calmed him down and helped the distraught Tenant step back from the window ledge .
I conducted a review of the Claim which included an inspection of the premises and detailed examination of the Lease. The Tenant was indeed bound by fairly standard lease with liabilities to keep the premises in repair, redecorate in the last three months of the lease and not to have made any alterations without consent.
The Tenant had unfortunately not been advised before Lease to have a Surveyor prepare an Ingoing Tenant’s Schedule of Condition . This would have served two purposes : to ascertain condition and for attachment to Lease to limit liabilities to keeping the premises in no better or worse condition. The operative words in the repairing clause ‘to keep’ meant that where the premises were already in disrepair the tenant would assume liability to put into repair. A common and often very expensive mistake.
‘Not fair’ I hear the cry so many times. Well you are a big boy or girl and you are entering into a legal commercial contract so why did you not take the best legal and surveying advice at the outset?
This Tenant fortunately contacted Jones and Co with a couple of months left in the lease and there was just enough time for action. The review of the claim revealed a fair number of item requirements for repair were indeed potential legitimate claims. I was however in disagreement with a significant number of items which I considered either outside the scope of the lease requirements and were not the Tenant’s liability or were simply overstated. eg Replace rooflights £10000when a clean and reseal would suffice. Replace colour coated metal barge boards £5000 when a repaint only was necessary. You get the picture.
I prepared a formal Review of the Claim and identified legitimate liabilities and matters to address. Doubtful items were identified and I suggested these items were worth arguing. I recommended a strategy and response. Acting on the advice the Tenant determined to effect works of repair and decoration and reinstatement to mitigate his own exposure to the potential dilapidations claim.I prepared a Schedule of works I considered he should address . He took control of costs and with professional advice carried out works of repair and redecoration which were considered reasonably required by the Lease and not all those required by the Landlord’s Surveyor. Upon vacation of the premises I prepared a full Photographic Schedule of Condition recording the condition. Always do this as it can save arguements later as it indeed did.
The premises looked pretty smart at lease end and all credit to the outgoing Tenant a good job had been done and fair amount of money spent but nothing like the amount of the potential claim! There was nothing prejudicial about the vacated condition which might be offputting to a potential new Tenant- which is of course dear to any Landlord’s heart and wallet.
Congratulations all round you would think? Effusive thanks from Landlord? No. A revised Claim for £25400 only.
‘Hell fire or f*** me ‘ as actually uttered by the ex- Tenant! Understanadble.
My client duly contacted me and requested I negotiate settlement which I duly did. The majority of the items still claimed were challenged and argued against.The claim was reduced to £20500 but they would ‘settle for £10000 ‘( getting desperate). I considered £1750 plus VAT equivalent was fair and reasonable ( being majority Landlord’s Surveyors fees for the merry dance we all had enjoyed)
Well suffice it to say the matter was finally settled at around £2400. Result!
WOW(Words of Wisdom)
1. Always take best experienced and informed professional legal and surveyor’s advice before lease
2. Always commission an ingoing tenant’s Schedule of Condition (and do not forget all engineering services.)
3. Always negotiate repair and decorations liabilities. Spell out just exactly what you are prepared to take on and expressly exclude all matters you are not.
4.Keep your house in order and do what you have contracted to do in respect of repair and redecoration.
5.Take control of costs and plan backwards from lease end date and allow sufficient time to put the house in order. Take advice from your Surveyor as to strategy .
6.Always seek advice when you receive a Repairs Notice or Schedule of Dilapidations. The Landlord’s Surveyor’s requirements may not properly reflect the actual liabilities.
‘Not just a good surveyor, but meticulous in detail, and energetic in prompting dilatory advisors on the ‘other side’ into activity. Also, excellent in the finishing details. Well worthy of praise and recommendation.
A constant source of arguement between Landlord and Tenant (and their Surveyors )at lease end is about carpets and other floor coverings. Do they fall under the Repairing covenant? Are they loose or fixed . Are they glue fixed or on gripper rods? Who put them in?
When is a carpet in repair any way? If you walk across a carpet lots of times it will inevitably wear. Put desks and furnitute on top of carpet and it will indent. Sunlight streaming in through windows will cause fading. Spill coffee tea ink toner etc and it will become soiled. Walk in with dirty shoes and you will get grimy footpath trails associated with personnel traffic through the premises.
Ok so the tenant tries cleaning the carpets. They may be cleaner but what about the fade patches and uneven wear associated with wheely chairs and foot tapping staff at desk positions?
At the outset of the lease consider the issue of floor coverings and set down precisely how carpets and floor coverings are to be dealt with at lease end.
Landlords if you want all floor coverings renewed at lease end expressely say so at the outset and record in the lease. Specify the type and quality.Do not hope the repairing covenant will cover. Why should you provide new coverings and let someone abuse them- the floor coverings are a diminishing assest anyway. Fact- they will soil and wear and fade. Period.
Tenants if you do not want to renew floor coverings at the lease end or pay for them expressely say so at the outset and record in the lease. Do not take premises with pre-existing shag (ged) carpets and floor finishes and sign up to repair covenant to keep in repair because you can not keep in repair a worn or faded carpet or sheet vinyl floor.. You will inevitably face claim for new floor coverings.
Both parties to the lease should carefully determine at the outset their respective positions and expectations about future liabilities for floor coverings and expressely agree and record how they will be dealt with at lease end – include a specific paragraph in the lease. -something like ‘the Tenant will at before lease end renew all carpets and vinyl floor coverings or pay to the landlord the costs of the same at lease end.’ or ‘the tenant will have all carpets and other floor coverings cleaned in last 3 months before lease end or pay to the landlord the costs of the same at lease end but will be under no obligation to replace any floor coverings.’
WOW ( words of wisdom)
Landlords and Tenants should determine how floor finishes will be dealt with at lease end and agree liabilities and expressely set out in lease.
Leave nothing to interpretation in years down the line. Save ££££££ in claims or losses.
Tenants are well advised ‘to put their house in order’ before lease end or face potential dilapidations claim for breaches of lease covenants to repair redecorate and reinstate. But what happens if they do not plan backwards and arrive at the end of the lease with little or no time to carry out works? What’s the Landlord to do? What’s the Tenant to do?
Well the Landlord can take back the premises and initiate a dilapidatons claim with all the risks, expenses and delay and uncertainty especially if the Landlord is not intending carrying out the works. The Tenant’s diminution valuation defence looms large : you know the one; OK so the costs of repairs are £25000 but the value of the premises is only reduced by £5000 or nothing!!!
Alternatively with a little flexibility on the part of the Landlord the Tenant might be able to negotiate to hang over on bare licence after lease end to carry out the works and surrender the premises in repair and decorated.
The Landlord gets what he should want ,which after all should be his premises given back in tenantable repair and freshly decorated; the Tenant gets what he wants which should be to take control of costs and minimise his exposure to claim and discharge his lease liabilities.
I would not advocate this as a strategy for Tenants to adopt as it is certainly very risky, but I would certainly as I have recently done, commended Landlords to consider allowing the same.
After all in these trying times why as a Landlord should you run the risks of not recovering the full costs of repairs and decorations if you can accept some modest delay and get the active co-operation of the Tenant in sorting matters out with all the risks as to costs his?
In my locality prospective new Tenants are hardly beating the doors down of commercial agents to sign up for new leases of commercial premises and certainly not those which are visually run down and poorly decorated.
Just a thought…..
WOW ( words of wisdom)
Landlords should not automatically plunge headlong into confrontational dilapidations claim. Think about your objective. Your interests may be best served by flexibilty in encouraging the Tenant to sort matters out even at the cost of free hangover after lease end.