Dilapidations are one of those property issues that many warehouse occupiers only think seriously about when it is already too late. Yet as UKWA members heard recently during a specialist panel discussion on the topic, the financial consequences at lease-end can be substantial.
Dilapidations are claims made by a landlord against a tenant for breaches of lease obligations, usually relating to repair, decoration and reinstatement of alterations. In warehousing, where buildings are highly operational and frequently adapted to suit individual occupiers, the risks can be particularly acute, sometimes leading to bills running into millions of pounds.
Our panel discussion brought together property professionals, legal specialists and contractors with practical experience of industrial sites. One message came through repeatedly: preparation matters enormously.
A comprehensive Schedule of Condition at the start of the lease is critical, providing an agreed record of the building’s condition when occupation began. Without it, disputes can quickly arise about whether deterioration occurred during the tenancy or already existed.
Many businesses still take on warehouse space without fully documenting the original condition of the building. And over the lifetime of a lease, often a decade or more, panellists conceded that these documents can sometimes get lost too, so keeping them safely accessible matters as well. But the schedule is only part of the answer.
Occupiers should also use qualified repair and maintenance contractors and keep careful records throughout the lease term. Warranties and maintenance records can become invaluable later. If a roof has been repaired, dock levellers maintained or fire systems upgraded, being able to demonstrate that properly may materially affect discussions with the landlord.
The panel also highlighted a common misunderstanding amongst tenants: assuming that expensive works automatically count as “improvements” welcomed by the landlord. In reality, many landlords simply want the building returned in a broadly “vanilla” condition that can easily be re-let to the next occupier.
That means tenants may be required to remove installations they invested heavily in themselves. Mezzanines, solar panels, Wi-Fi infrastructure, office refurbishments, bespoke automation systems and even warehouse racking may all fall within reinstatement obligations, depending on the lease wording and licences for alterations. What suits one occupier may simply be unwanted by the next.
This is why financial provisioning is so important. Dilapidations liabilities should never come as a last-minute shock. Businesses need to understand their lease obligations early, seek a professional “Dilapidations Liability Assessment” well before lease expiry, and build realistic provisions into their financial planning. Depending on the circumstances, these provisions may also attract corporation tax relief.
Experts from UKWA Associate Member Dilapsolutions can help with specialist advice. Managing Director Paul Raeburn explained the benefits of using two different types of surveyor at the end of the lease: a chartered building surveyor to assess compliance with the Schedule of Condition and a chartered valuation surveyor to value the property in the prevailing market. These, he stressed, are different disciplines. Most vacated warehouses require modernisation works anyway to optimise their open market value, and under “Section 18” this can reduce the amount payable.
Simon Hartley, Head of Property Litigation at Weightmans LLP, concurred. Legal requirements can vary across different parts of the UK and recent changes may affect occupiers differently depending on where their building is located, so obtaining professional advice is essential.
In warehousing, operational focus understandably centres on customers, labour, stock and transport. But property obligations continue quietly in the background throughout the life of the lease. Proactive management is usually far cheaper than a dispute at lease-end. Ignore dilapidations, and the exit bill can be painful.
Clare Bottle
UKWA, CEO
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