The Court of Appeal has held that a tenant’s covenant to pay “all costs and expenses which might be incurred” entitled the landlord in a dilapidations claim to have his costs assessed on an indemnity basis.
So in the euphoria of taking brand new premises a standard FRI lease is signed. The building is pristine and seemingly has little maintenance and decorative liabilities. Wrong! Do not forget with the passage of time and weathering and possibly aggressive inland coastal environment, protected metal coatings and factory applied finishes to cladding and steelwork will deteriorate. The decorations covenant will also likely require periodic redecoration and redecoration in the last 3,6,12 months of the lease.
Always seek advice from an experienced Chartered Building Surveyor FRICS or Chartered Building Engineer FCABE who can advise as to not only present condition, but also future liabilities as building and component materials weather and degrade.
WOW Words of Wisdom
DO NOT sign a standard FRI lease without understanding the implications for costly repair and decorations liabilities and costs as the lease term diminishes and the building asset deteriorates. Expert advice is priceless and will save you ££££
Not a cheap building to repaint, so a 10 year minimum life high performance paint system is essential to save the horrendous repeat costs of access and protection!
Useful reminder of how the value of actual loss in a dilapidations claim is established by the courts.
I have come across an interesting article by an accountancy firm about the tax aspects of making suitable provisions for dilapidations liabilities and offsetting against taxable profits. Read it and see your accountant about how this may be of advantage.
Dilapidations and Taxation
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.
A client approached me towards the end of 2009 with a dilapidations claim from a Landlord for £180000 or thereabouts in respect of an industrial warehouse. There was only a month or so left of the lease. I asked why the Tenant had left it so late to deal with the matter. The Tenant thought because it had heard nothing from the Landlord with couple of months to go, it was going to get away without claim. There had been an Ingoing Tenant’s Schedule of Condition and the lease liabilities were limited to yielding up in no better or worse condition than the state of repair at time of lease.
Other than move out and remove fixtures and fittings the Tenant had done virtually nothing to put its house in order in respect of repairs and decorations.
I was engaged to see what I could do. An analysis of the Lease and Claim revealed there were the usual invalid items and overstated costs; liability for some repair items was relieved by the Schedule ; a lot of the repair and decorations items were however valid. I prepared a schedule of works so the client could attempt to complete the same before lease end including repainting a substantial concrete floor and various other simple works of repair and cleaning.The Tenant was engaged in relative modest expenditure in comparison with the original costed claim items.
After vacation and lease end ,the Landlord’s surveyor revised the Landlord’s claim downwards to £95000. After six months of negotiation and haggling with the Landlord’s Surveyor, the Landlord eventually settled for £40000.
A satisfactory result for the Tenant.
WOW (Words of Wisdom)
Do not assume because your Landlord has not served a Schedule of Dilapidations you will escape liability from Lease covenants for Repairing, Decorating and Reinstatement.
Plan backwards and put your house in order, unless of course you know for certain the premises are to be substantially altered or demolished rendering any such works valueless. ( Law of Supersession).
Oh and if a warehouse concrete floor slab is not painted at the beginning of lease be aware painting it could substantially extend your decorating liabilities at lease end.
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.