Most warehouse and logistics occupiers are tenants, under leases making them responsible for all repairs, redecorating and reinstating any alterations prior to exit. It is all but impossible in practice to fully comply; hence, the standard “Terminal Schedule of Dilapidations” served on tenants by the landlord’s solicitors close to expiry/break, scheduling all alleged breaches and costs to remedy, writes Paul Raeburn a chartered surveyor, arbitrator and accredited mediator at Dilap Solutions.
This will rarely be less than £200,000 for a smaller warehouse and can be many millions of pounds for a big box. Dilapidations can significantly damage a business’s cash flow. Below is a checklist of key points to assist understanding and optimise outcomes:
KEY POINTS
•Dilapidations: are the damages, often amounting to £100’s of £1000’s that Landlords claim at lease end/break for breaches of lease covenants to repair, redecorate and reinstate alterations. In English law, the standard clause “to keep in good repair” means the tenant can be obliged to hand back in better condition than lease start.
•Use FRS 102: to obtain full corporation tax relief on capital set aside annually to accrue to a professionally estimated dilapidations liability sum at lease end/break.
•Use a Valuation Surveyor: in addition to a Building Surveyor, whose expertise is applying the underused statutory “Section 18” defence to cap settlement at the lower of the remedial costs negotiated between building surveyors or the impact on the property’s open market value. This is usually significantly less.
•Schedules of Condition: can help mitigate but are limited by inexorable decay. Section 18 is a more potent defence.
In more detail, a fundamental is that at law, the standard obligation “to keep in good repair” ordinarily means that the tenant is to hand back in better condition than at lease commencement.
FRS 102 is an accounting provision applicable in both the UK & ROI whereby a company can obtain full corporation tax relief on the sums it accrues annually to meet the “Dilapidations Liability Assessment” provided by a chartered surveyor.
Tenants faced with dilapidations claims instruct their own building surveyor to negotiate to a lower sum. But this risks failing to properly apply the underused statutory Section 18 (“Diminution in Value”) defence which, only if known about and used, caps settlement at the lower of the remedial costs total negotiated between building surveyors or the impact on the property’s open market value. This is usually significantly less. Applying this is outside the expertise of the building surveyor. It is for the specialist chartered valuation surveyor (valuer).
By analogy, if you have an injury or operation, it is down to both the input of the surgeon and then the physiotherapist to optimise your outcome. The same applies in dilapidations, with the first expert being the building surveyor and the second, the valuer.
The cap works because almost all vacated sheds require modernisation works to best present them to the open market, as well as to meet modern regulations (e.g., EPC). Those works inevitably supersede many of the dilapidations items costed and agreed upon between opposing building surveyors, often “big ticket”, ranging from new roofs to brand new offices. Knowing and understanding the open market so as to fully apply this defence is the expertise of the valuer only.
When taking new leases, Schedules of Condition can be helpful in reducing future dilapidations liabilities, so long as they are exceptionally well prepared, but are still limited by the inescapable facts of inexorable decay and wear and tear. Section 18 is a far more potent defence.
For further information visit: www.dilapsolutions.com
Paul Raeburn is a chartered surveyor, arbitrator and accredited mediator, who, with his colleagues in this specialist dilapidations consultancy, provides unrivalled advice and results for warehouse and logistics occupiers across the UK & ROI.
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