Article by Dan Smith, Building Consultancy Associate, and Colin Busby, Building Consultancy Partner at Ryden.
Often, the liabilities for building maintenance and repairs throughout and at the end of a lease term will be the responsibility of the tenant. Interim and terminal schedules of dilapidations can be prepared by landlords to document the tenant's breaches of lease and the remedial works required. These schedules also often include cost estimates to execute those works.
Amidst the COVID-19 pandemic, it is not clear what the long term impact on occupational businesses will be and in turn, how this might impact the often costly expense of dilapidations. We envisage that (inevitably) proactive maintenance and repairs, throughout lease terms, will fall further down the pecking order of tenant's priorities. This could lead to deterioration, however small, of leasehold properties, bringing the subject matter below the standards of repair contemplated by lease covenants. In turn, landlords' attentions are likely to turn to any incremental disrepair that occurs to their properties and the effect this might have on freehold values.
We foresee that landlords will make better use of Jervis v Harris lease clauses, whereby a landlord can serve a tenant notice to carry out repairs. If the tenant fails to complete the repairs within a specified time frame (usually 2-3 months), the landlord can enter, carry out the works and recover costs from the tenant as a debt.
It is important to remember that costs incurred through this mechanism are not limited by section 18 of the Landlord and Tenant act 1927. Simply put, the landlord's future intentions of the property are not taken into account, which might include substantive refurbishment schemes, pulling down buildings and redevelopment options. In theory, the landlord will only need to prove that the cost of the works have been incurred, however redundant they may become in the future.
In Scotland, the situation is arguably even more straightforward, with no Landlord and Tenant Act in place north of the border. Consequently, landlords will look to ensure tenants are meeting their obligations under the lease, and the use again of interim Schedules of Dilapidations particularly is likely to become more prevalent as lockdown begins to ease.
Furthermore, we expect (and have started to see) businesses looking to review their working practices, whilst observing and learning from the 'new' way of working that the majority of us have become accustomed to. Home office setups, flexible working hours and video conference calls are now the daily norms. As a result, tenants are likely to take the opportunity to consolidate, downsize or terminate and exit existing leases were economic to do so.
Where tenants look to make use of lease break clauses to fulfil their new requirements, it will be important to consider the effectiveness of break clauses. This can often be conditional on complying with certain requirements, such as giving vacant possession, paying rents and rates and/or complying with other specific lease obligations.
Where lockdown and Government restrictions prevent break options being fulfilled, it is yet to be seen how landlords will react. One obvious risk is that landlords try to frustrate break clauses in an attempt to reduce their voids and maintain rental income - which will no doubt be impacted and reduced, with many tenants looking to delay payments. Consequently, in England and Wales, some lease terms could continue, together with all occupational costs, meaning significant unplanned expenditure for some.
Strategic professional and legal advice are always recommended at the earliest opportunity for both landlords and tenants to navigate what can sometimes be tricky lease obligations and in particular dilapidations scenarios.
Whilst we all manoeuvre towards the ‘new normal’ post COVID-19, it remains to be seen if dilapidations liabilities will take an even more prominent role in business planning.
For further information or advice on your dilapidations liabilities, please get in touch with our Building Consultancy experts.