Dilapidations cases are on the increase. Some would say that in such times of austerity landlords are more aggressive, more eager to identify and pursue liabilities that may generate a cash windfall. Yet there are more subtle and powerful drivers that influence these matters. Landlords rarely ignore such liabilities in any market conditions, whereas how they approach and deal with them is indeed subject to human emotion and is of course dealt with to an extent by the improving attitudes and behaviours of participants when applying the Dilapidations Pre-Action Protocol.
The subject of this article is not such technical matters, but those other drivers that are influencing the increase in the number of dilapidations cases; something that we are very much experiencing at GVA.
We have noted a 178% increase nationally in the number of dilapidations cases between Q1 2008 and Q4 2011. The trend appears to be continuing through 2012 so far and yet we are not experiencing any Landlords who are overly aggressive or determined to hunt down every dilapidations opportunity.
Through our 12 regional offices we can see the same trend and note below four such examples (Q1 2009 to Q4 2011):
Leeds - 177% increase
Manchester - 111% increase
Birmingham - 118% increase
London - 34% increase
Of course there are negative drivers as would be expected in a poor market following the credit crunch that crashed on to our shores during late 2008. Many organisations have struggled, with premises being closed and portfolios being reduced and rationalised where possible.
We are still seeing the results of such property rationalisation as private and public body strategies that were conceived in 2008/09 are now visibly active, with increased property exits, whether it be by lease expiry or break options at the appropriate time.
That trend begs the question of whether there was a dip around 2008. It appears that the number of cases was steady, as of course the number of leases remained and was not subject to an instant reduction.
It is interesting to note the relative low increase of cases in London. That may be explained by the fact that many organisational outposts in the regions contracted back to London rapidly at the time of the crunch, with many more exits in those areas relative to the London area.
It is logical that as an increase of lease exits has occurred there has been a resultant increase in dilapidations cases. However there are most definitely other drivers at play.
Perhaps the most subtle yet powerful driver is the market itself and the collective behaviour of its participants in creating lease terms and events.We have conducted detailed research into the use of Upward Only Rent Reviews and reviews based on RPI inflation indexation.We found that as both of these bases suit Landlords there has been a clear move by tenants to achieve rent reviews that may involve downward reviews as well.Whilst the latter is not a lease term, it is actually the reduction in lease terms to much shorter durations e.g. 10-15 years down to circa 5 years, which achieves that objective. This singular and collective movement of behaviour has increased the number and frequency of lease expiry and break events, and is the most influential driver to the increase in dilapidations cases.
This trend looks set to continue and it is difficult to see a driver that will reverse the trend. Only perhaps when landlords have a number of begging prospective tenants to choose from will a tenant think to take a longer lease for security of tenure, but such instances seem a long way down the road to recovery. There may be a reduction once portfolios are rationalised, but that is always a work in progress as many Asset Managers will testify to.
There is also the impending proposal by the International Accounting Board to revise the current standard so that operating and finance leases are treated the same. This means that property leases will have to be included in the balance sheet as both an asset and a liability, with the likely rent and dilapidations costs being assessed and identified. There is conjecture that such standards may also impact on whether an organisation can justify a certain occupation when the balance sheet may be inflated by such allowances i.e. adjusting the business case and property use.
It is clear that there are significant changes in the market and of course significant regulatory changes in tandem. The result is more flexibility and ease of movement for tenants, with increased lease events and management of those events.
Written by Stuart Traynor