Dilapidations - Changes for the better

Dilapidations - Changes for the better

POSTED 25 February 2020

One of Paragon’s first ever instructions over 10-years ago, involved a 5-storey 90,000 sqft office in Telford.  It was originally leased to a well-known manufacturer of high-end televisions and subsequently sub-let to Her Majesty’s Forces.  Now I am not professing to be an expert in office agency / investment, but given the financial climate around 2009, market demand in a Midland’s new town was not exactly great... and we were advising on a potential 7-figure dilapidations claim at common law.

Without going into too much technical detail, the claim highlighted a requirement to remove an ageing 2-pipe fan coil air- conditioning system which frankly was nearing the end of its serviceable life. I think from memory someone had also carried out a gas replacement as a result of R22.  This single reinstatement request meant associated repairs to a relatively good suspended ceiling and allowances for redecoration.  We also advised the preparation of a S.18 report which was accepted by the tenant’s advisors as a fair representation of the claim. 

 

A senior director at a large multi-disciplinary practice (where I started my career) was appointed for the tenant and we had 2 or 3 sensible and sometimes spirited meetings at the property, principally discussing the finer points of air-conditioning reinstatement and the extent of cladding repairs.  The exchanges over differing views were dealt with without undue delay and after a period of some 4 months we reached agreement at a significant 6- figure settlement.  A week or so later, a hand-written letter arrived on my desk.  The letter was from the tenant’s advisor, having taken the time to write to me, in good old-fashioned pen and ink, to thank me for an enjoyable instruction and noting that we achieved a good result for our respective clients.  I remember this letter as if it was last week; together with our on-site discussions and common interests of golf, shooting and sports cars. 

Why do I remember this so fondly?  Because it is how I believe dilapidations should be discussed between 2 experienced surveyors.  Whether or not in this case the tenant had taken advice prior to our discussions I will never know, but there was certainly no un-due delay, hiding behind emails, waiting weeks or months only to get a holding response from the opposing surveyor who is still “awaiting clients’ instructions to meet” when they have effectively gone to ground.  Does this sound familiar to any colleagues in the dilapidations industry?

I have unfortunately experienced such painfully slow responses on two recent and not insignificant dilapidations claims.  Clearly further details cannot be divulged as legal positions cannot be prejudiced, but they are certainly creating a lot of frustration for the relevant Fund and Asset Managers.

We really must improve our response times in dilapidations negotiations.  Whilst the latest RICS Guidance Note and the well-known Civil Procedure Rules provide us humble building surveyors with guidelines; in the absence of a tenant’s FD or accounting strategy making the decision, where is the incentive or formal request for a timely response from either party? We are certainly missing this from our practice and I do hope that our legal friends begin to incorporate some timescale parameters in their drafting similar to Rent Reviews.  The obligation for an independent expert’s review would also help matters and provide more emphasis for the RICS’ ADR offering on Dilapidations matters – they clearly recognise there is a problem here.

My Party Wall colleagues in the office have a very effective mechanism under the 1996 Act should an Owner or indeed an Appointed Surveyor not respond or act effectively – maybe as dilapidations surveyors we would benefit from the same?   

 

‘Forewarned is Forearmed Richard’… a well respective London property agent once told me in their office – I have not forgotten that and it applies so well to the dilapidations market.

 

Without labouring previous experience, I did have the misfortune many years ago of sitting in an office with an advisor to a mutual client watching him bang the table demanding £40/sq ft at the end of an IRI lease in a very large 1970’s City of London building. The tenant had frankly done a wonderful job of creating a nice clean space with new comfort cooling…..and with the exception of the usual removal of partitions, minor repairs and a ‘qualified paint brush’ being applied twice to the perimeter walls, “that was about it sir”!! I am not sure if they had taken some dilapidations advice at pre-purchase or whether a ‘figure had been slotted into the cash flow to make the 2013 comprehensive redevelopment figures appear more attractive, but I am guessing both of the above presumptions were probably correct.

Early advice on dilapidations and the likely recovery is essential as part of the due-diligence process and must always consider intentions to improve marketability.  This includes a comprehensive review of lease covenants, licences, side-letters and schedules of condition as well as the building survey and if appropriate any M & E perspective.  I have on some large transactions identified a lack of reinstatement covenants which certainly changes the dilapidations advice from the off. This is why Paragon always include this advice as part of our technical due-diligence reports.

Alternatively, our dilapidations assessments which include a draft schedule provide an accurate insight to any liability prior to lease expiry for Landlords and tenants alike.  Our assessments have also negated the preparation of schedules from the opposite side which has in turn saved on fees.

 

Last month I attended the RICS Dilapidations conference (north) in Manchester where we listened to thought provoking speeches from the legal and building surveying world. It was a great opportunity to catch up with peers and friends and to yet again realise the enormous talent which is prevalent in our industry.  As a group, not only do we have a duty to prepare fair and well considered schedules, but also to extend this to health and fire safety. The forthcoming RICS Technical Due-Diligence paper will place the same emphasis across the board.

It is difficult to pinpoint and will be very interesting to see where dilapidations as we know will be heading in the future with the incorporation of inclusive rents, attractive serviced offices, shorter tenancies, early settlement, capped dilapidations liability and ADR provisions.  But I do know clients are becoming weary of protracted, posturing and extended or at worst, unnecessarily delayed discussions and as an industry we need to understand how this reflects on the delivery of our service as respected professional commercial advisors.  Moving forward, we must always seek to achieve a fair and expedient settlement; not only for our clients but for the reputation of our wider industry.  

 

Richard Estrop (and in memory of Mr Malcolm Smith)

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