While the standard of obligations imposed by a repairing clause in a lease is a hot topic when the lease is being negotiated, the dilapidations claims at the end of the lease may be seen as an opportunity for some landlords to try to seek betterment in respect of the premises which they re-claim, and can come as a shock to the tenants. In this recessionary climate we are coming across some extravagant Schedules of Dilapidations with landlords seeking to maximise their potential and the tenants fighting tooth and nail to resist.
There are a number of common themes that we can consider in ensuring how we can best protect the commercial position which our clients – be they landlords or tenants – think they are signing up to when they enter into a lease:
Premises for which the tenants are responsible
There should be a clear understanding of the extent of the premises to which the tenants' obligations apply. Is it just the premises which they occupy, or are other common parts brought into their repairing obligation? For example, the tenants in a short term lease in an ornate Georgian building might find that an obligation to contribute to the repair and redecoration of the entrance hall is unduly onerous. Equally, landlords letting out individual suites have to ensure that the whole building is maintained and generally attractive to future tenants. Factors such as the length of a lease should guide the tenants in determining the extent of repairing risk they should be assuming. This might encourage tenants to seek an obligation which extends solely to the interior of the subjects being occupied. Similarly if the premises are not in good condition at the onset of a lease, rather than assuming a full repairing obligation, the tenants may seek to have their maintenance obligation benchmarked against a Schedule of Condition agreed by surveyors for the landlords and the tenants – ideally photographic with some text.
It is probably obvious but should not be forgotten that the lease obligations should be read as a whole in determining the extent of the undertaking i.e. repairing, redecoration, statutory obligations and reinstatement. In a multi-occupancy building whether it be a large new office building or a tenement the parties should consider the potential for common costs/service charge/repairs. A tenant should have some idea of past charges and what might be anticipated going forward. A survey not only of the premises being let but the common parts for which the tenants would be responsible is a wise move. In being obliged to comply with statute, for example, the tenants may also find themselves responsible for the cost of such additional requirements arising over the period of the lease e.g. an updating of the position on fire regulations.
Alterations/Landlords carrying out Works
Any application for consent by tenants to carry out alterations at the beginning or in the course of a lease should be clearly documented in the Licence for Works with the obligations regarding reinstatement at the end of the lease spelled out.
In some cases works are carried out to premises by the landlords for the tenants, possibly as part of a general refurbishment. The obligations in respect of these works at the end of a lease should be dealt with in the lease documentation so that the parties' intentions are reflected. The works might be left in place or the landlords may require the tenants to reinstate the premises if the works are tenant specific and the preference is they are removed so a new tenant can come in and fit out. The tenants should be clear regarding the position so there is no unpleasant surprise at the end of the lease when significant items need to be removed and the premises made good. This can be dealt with in a Licence for Works or by way of a schedule in the lease determining what happens to the works and the extent of the tenants' responsibility to remove these.
In each case both parties should be clear as to the obligations so there is less chance of a costly time consuming dispute delaying the return of the premises in a condition conducive to a smooth re-letting. It is in neither party's interest for the area to be grey.
How much control will each party have regarding reinstatement? Ideally the landlords would like the option to require the tenants to reinstate, or to pay the landlords a lump sum to equate to the cost of reinstatement, which tenants will seek to resist. The tenants will wish to be clear as to what has to be removed, with reasonable timescales for the landlords issuing a Schedule of Dilapidations giving the tenants plenty of time to consider it, agree it and be in a position to carry out the works timeously.
Particularly with long terms leases, both parties should be monitoring that the maintenance obligations continue to be fulfilled. If tenants "let things go" they risk the final costs being greater and the landlords should not rely on an expensive solution being presented to the tenants at the end of their lease – especially if the tenants can't afford it at this point.
Should a dispute on dilapidations arise then each party's surveyors and solicitors need to work together in advising their client of the best way forward. In the case of prevaricating tenants the landlords still need to act as swiftly as possible to reach a satisfactory conclusion as a damages claim will be complex and requires proof of loss in terms of lost opportunity to re-let and costs. Tenants faced with a steep dilapidations bill will require a combination of surveyor input on the terms of the Schedule and legal input on the terms of the lease.
While disputes can never be avoided completely both landlords and tenants are best served by clear documentation at the outset of the transaction reflecting their considered and commercial agreement and an appreciation and fulfilment of their ongoing rights and obligations.