When Commercial tenants leave, the Dilapidations process needs careful handling

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With Coronavirus hitting many businesses hard, there could be an exodus of commercial tenants leaving landlords to pick up the pieces. In many cases Dilapidations is a process that will need to be dealt with and dealt with in a professional way if it is to be effective. This article provides some tips on how to go about it the right way.

Summary:

• Dilapidations claims can be substantial so tenants should be made aware of this and should fully understand their obligations.
• Tenants should be advised in good time to take steps to limit their dilapidations liabilities both at the commencement and ending of a lease.
• Tenants need to have the building checked and surveyed for pre-existing defects at commencement and these should be incorporated into a schedule of condition.
• Landlords should ensure that a schedule of condition is drawn up at commencement, agreed between the parties and appended to the lease.
• Final schedules of dilapidations are usually prepared by a chartered surveyor at lease termination.

Dilapidations in Commercial Property – Commercial Leases

Dilapidations is a term used when referring to the condition of a commercial property during the term of the tenancy or when the lease ends. It means the same as disrepair and is tied in with the repairing and decoration obligations in the lease agreement.

Dilapidations and schedules of dilapidations have serious financial implications for commercial (business) tenants, so they should ensure that they fully understand these implications and take steps at the outset to minimise their liabilities before signing a commercial lease.

Tenants should be aware that they could find themselves liable for pre-existing conditions if these are not identified and recorded in the lease.

Full Repairing and Insuring Lease

It is of particular relevance to landlords and tenants where the property has been let under the terms of a standard commercial Full Repairing and Insuring (FRI) lease where the tenant is responsible for repairs, both internal and external, including the structure of the building. The FRI lease is the norm rather than the exception in commercial property rentals.

Some small business tenants, in their eagerness to get in the premises are far too blasé about their legal obligations and will sign the lease regardless.  They will often agree to leases, even short term leases, which have full repairing and redecoration obligations and fail to record the in-going condition of the property, which is often a very expensive mistake. This is especially painful if they are leaving because of a failed business and funds are non-existent.

Landlords and tenants should always make sure that leases for commercial property include a thorough schedule of condition ideally supported by photographic evidence.

Initial Building Survey

Before taking on lease obligations tenants should consider commissioning an in-going building survey carried out by a chartered building surveyor.

At the end of a lease a tenant is almost always obliged to leave the property in a good state of repair and decoration, and this would in most cases be a better state than it is actually in at the lease end.

Tenants often fail to appreciate this obligation and don’t allow for the cost. Even when they have recognised their obligations, their budgeting is often far from adequate.

Landlords and tenants with a dilapidations claim need to be aware that there are statutory limits to the amount that the landlord can claim from the tenant.

The provisions of the Landlord and Tenant Act can lead to certain tactics being employed in the dilapidations process and the time to analyse these tactics is several months (at least 6 months) before the lease comes to an end.

Thinking ahead in this way means that any necessary works can be planned or negotiations conducted which could considerably reduce the landlord’s claim.

Schedules & Tactics

The landlord may serve a Schedule of Dilapidations on the tenant at different stages of the tenancy:

A schedule served during the fixed term of a lease is known as an interim schedule.

A schedule served within the last three years of the term is a terminal schedule.

A schedule served at or after the end of a lease term is a final schedule of dilapidations.
An interim or terminal schedule will specify both the disrepair alleged by the landlord and the remedial works which the landlord requires the tenant to undertake.

The difference with a final schedule is that whilst it contains the same alleged breaches of covenant and details of remedial work required, here the tenant will not have an option to carry out the works himself since his right of occupation has ceased.

With final schedule therefore the remedy for the landlord is to claim for damages which will cover the cost of remedial works, AND loss of rent, service charges, rates, professional fees and VAT for any period during which the property is off the lettings market.

The Schedule of Dilapidations:

The Schedule of Dilapidations is simply a listing of all outstanding repair, maintenance and decoration items which a landlord (or more likely his surveyor) has determined have arisen under the terms of the lease being the tenant’s repair and maintenance obligations.

The tenant is obliged to carry out the remedial works listed in the schedule or pay to the landlord damages which equate to the cost to the landlord of carrying out the works.

Schedules of Dilapidations are often the cause of disputes between landlords and tenants, the result of which may mean court action. A court will ultimately decide upon what is relevant and what is not in the Schedule of Dilapidations. It is in both party’s interests to try to avoid court action.

Statutory Relief for the Tenant

With an interim schedule, the tenant may obtain relief from forfeiture proceedings (eviction) under the Leasehold Property Repairs Act 1938. This is providing the original term of the lease exceeds 7 years, of which 3 or more years must remain un-expired.

In some situations the tenant may be entitled to relief. In the case of a final schedule and corresponding claim for damages, the tenant may be protected by Section 18(1) of the Landlord and Tenant Act 1927. This is with the proviso that:

The landlord cannot recover damages exceeding a sum by which the value of the landlord’s investment is reduced by the tenant’s breach of covenant.

Where a landlord intends to demolish the building or carry out structural alterations such that the tenant’s breaches of covenant to repair become irrelevant, then if the tenant can prove his case absolutely, no damages will be recoverable by the landlord.

How can the Tenant Limit his Dilapidations Liability?

There are some practical steps that tenants can take to limit dilapidations liability. For example, in initial negotiations for a new lease, particularly with short leases, the tenant may insist that the repairing liability be restricted to leaving the building in no worse condition than at the start of the lease, as an alternative to accepting full liability.

The word repair in a lease sometimes includes a liability to renew, for example, where a roof was so dilapidated that renewal was the only practical option. So, to limit any repairing liability a Chartered Building Surveyor should be instructed by the tenant to produce a Schedule of Condition, recording the state of decoration and any pre-existing items of disrepair.

These precautions as also very relevant on assignment where a new tenant takes on the obligations of an existing tenant. Here alterations and disrepair must also be considered carefully by the tenant considering the purchase (assignment) of another tenant’s lease.

If breaches and alterations are identified prior to the purchase of the lease, the tenant may be in a position to negotiate for a reverse premium from the outgoing tenant.

Professional Help in Dilapidations Matters

Landlord and Tenants will almost certainly need professional help ideally from a chartered surveyor when dealing with these matters particularly if there is likely to be a dispute.

In the case of the landlord schedules must be accurate and able to stand legal scrutiny.

In the case of the tenant, the adviser acting needs to determine:

1. Is the schedule of dilapidations accurate?

2. Is the standard of repair required by the schedule is justified?

3. Are there any appropriate statutory reliefs which may be applied?

4. Should the tenant organise the repairs and if so under what times scales, or would it be preferable to pay damages?

Pre-Action Protocol

The Civil Procedure Rules – Pre-Action Behaviour in other Cases (s4.1-4.10) covers all civil disputes including dilapidations claims and covers pre-action behaviour in cases not covered by a specific protocol.

The Property Litigation Association protocol on dilapidations gives guidance, and the Civil Justice Council is currently reviewing all adopted protocols and all draft protocols to determine whether one default protocol can deal with all civil claims, which include dilapidations.

This Article on Dilapidations was originally provided to LandlordZONE by James McAllister BSc(Hons) MRICS ACIArb FFPWS, Director, The Dilapidations Consultancy Ltd. It has be revised and updated by Tom Entwistle.

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Northern Ireland opens up housing market

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The Northern Ireland Executive announced in yesterday’s Covid-19 press conference it was opening up the remainder of the Housing Market from Monday 15th June.

This amendment enables house sales and moves and covers the end to end process such as viewing

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Tenants face little chance of finding Legal Aid when remote possession hearings begin in August

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The Law Society has called for vulnerable
tenants to be given access to Legal Aid when the possession hearings re-start
in August, but experts that LandlordZONE has talked to warn that this laudable intention
is unlikely to be delivered.

The Law
Society says the lengthened stay on evictions is an important step to protect
vulnerable tenants, and its president Simon Davis claims that: “When hearings
recommence, it is vital that legal aid is available to tenants and that the
safety of court users is ensured.”

After August 23^rd, Courts will hear most possession hearings
remotely until the autumn and could conduct possession hearings by phone or
Skype.

Letters sent our recently by at least three county courts suggest that the lack of a duty solicitor, plus the practicalities of remote hearings, will make it hard for tenants to access any sort of advice and support, including Legal Aid.

Duty solicitor

But housing solicitor Sue James, of Hammersmith & Fulham Law Centre, believes taking away the duty solicitor will almost certainly mean more evictions.

“Clients facing possession proceedings often
have welfare benefit problems which means they are on very low incomes,” she
says.

“They may also lack computers to access the
court remotely or to have data or credit on their phones. Remote hearings for
duty possession cases are not workable.”

The housing team at Citizen’s Advice tells LandlordZONE that many of its offices are already working with their local courts to discuss what support can be put in place so defendants have access to advice beforehand, and representation if needed.

It adds: “If they have been unable to access
advice, then they should ask the court about what local arrangements have been
made. They could also ask the court to adjourn the case to allow more time to
get advice.”

Paul Shamplina of Landlord Action adds: “Getting Legal Aid at the best of times is very difficult for tenants because they have to prove they quality and often they don’t, but until we get a clear understanding of court representation, everyone’s a bit in the dark.”

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Latest research reveals London’s rental market Covid battering

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New lets agreed in the prime London lettings market over the course of lockdown fell by more than 70% compared to the same period last year, while achieved rents dropped by 3.4%, it has been revealed.

House prices did worse, though, falling by 8.4% between mid-March and the end of May compared with the period pre-lockdown, according to data firm LonRes.

It says while there was a 23% reduction in new lettings listings during lockdown compared with 2019, sales saw a 67% fall in new listings over the same period. It explains that this reflects the fact that landlords wanting to avoid void periods list their properties as soon as they become vacant, whereas owner-occupiers can often hold off selling until market conditions become more certain.

It reports that with
agents unable to show properties and home-movers unable to transact, it was no
surprise that the number of lets over lockdown was significantly down. Many tenants have been choosing to say put while
agents are reporting high levels of renewals. This meant that activity,
even pre-lockdown, was lower than during the same period in 2019. 

But as estate agents
opened and viewings began, new instructions have increased; in the second half
of May, there were 16% more new lettings instructions than during the same
period in 2019

Marcus Dixon, head of research at LonRes, says: “Looking ahead, landlords will be hoping that pent-up demand from tenants will be enough to absorb increased levels of stock currently on the market, if not we could see some further downward pressure on rents in the coming weeks.”

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CGT – I “want” to pay, but how?

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I seem to be caught between two systems. I sold a property in February 2020 and made a small loss. I sold another in May 2020 and made a gain which is not completely cancelled out by the previous loss plus my allowance.

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BREAKING: New cleaning rules revealed for Airbnb landlords

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Airbnb owners may have to follow a new set of property cleaning protocols when the tourism industry re-opens on 4^th July, it has been revealed.

The UK Short Term Accommodation Association (STAA) has developed the protocols with many of the UK’s leading tourism bodies for self-catering and short-term lets rentals.

The document has been shared with the Department of Culture, Media and Sport (DCMS) and are designed to support DCMS Secretary Oliver Dowden’s efforts to open up this part of the tourism industry if ‘consistent with public health’.

Merilee Karr, Chair of the STAA says: “Self-contained accommodation has a lower risk than other areas, so I would hope that that will be at the front of the queue and the industry wants to ensure everyone is ready and able to meet the right standards,” he said recently.

“These protocols should provide consumers with the confidence to travel safely to any property that meets them,”

“I agree with Minister Dowden that short-term rentals which adhere to these cleaning protocols, offer a comparatively low-risk option for customers looking to book a holiday in the current environment.”

For landlords with Airbnb or other short lets platform properties, one of the best steps they can take is to get independently accredited by the STAA industry partner Quality in Tourism, through its Safe, Clean and Lega assessment scheme.

The protocols include:

Risk assessment

• The core principle of the guidance is risk management which is why a risk assessment of the property is the first thing that needs to be done. Broadly speaking, it involves identifying potential risks within a property and taking active steps to mitigate those risks.

Cleaning

• Cleaners must wear appropriate protective clothing, avoid using microfiber cleaning cloths and instead use disposable sanitising wipes because they are less likely to spread the infection accidentally. They must use products which both sanitise and disinfect and keep any contact with guests to an absolute minimum.

• It’s recommended that a cleaning checklist is given to cleaners with a clear set of instructions to follow, guidance on the basic materials and equipment to be used and specific areas that cleaners should be mindful of. Also, provide a cleaning standards tick list for incoming guests to show what has been cleaned.

Guest contact

• Contact may sometimes be inevitable e.g. when checking passports/IDs. In these circumstances, operators should wear protective clothing and maintain a safe two metre social distance whenever possible.

• Operators should consider using contact-free check-in methods, such as key safes, although they must be mindful that such methods still pose a contamination risk.

• Operators should ensure that guests have all of the relevant information that they need ahead of their arrival. Tips include providing information for guests via email before they arrive such as helpful numbers and contacts, guidance in case a guest shows COVID-19 symptoms, a list of local walks/attractions that are open under social distancing rules and appliance and heating instructions.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – BREAKING: New cleaning rules revealed for Airbnb landlords | LandlordZONE.

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Mortgage company put me on variable rate doubling my interest payments?

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I have lost my job, because of the coronavirus lockdown recently. I had a two year fixed term on a BTL property with Precise Mortgages which ran out on 1st of April and instead of giving me a new fixed term (which they refused) they put me on variable rate doubling my interest payment.

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OPINION: Despite government support, many landlords feel they have drawn the short straw…

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Whilst the government has shown landlords support, both commercial and residential landlords, laws currently being passed are putting both on the back foot, by preventing them from pursuing rent arrears claims and evictions.

Covid-19 is causing
widespread devastation across the whole country as tens of thousands
of people die earlier than they should, and a nationwide lockdown has
an impact on the economy that will take years to overcome. The
coronavirus pandemic is going to be the biggest post-war crisis our
country has seen, not withstanding its effect on the world-wide
economy – there is no doubt we will all be the poorer as a result
of this.

Firms are in danger of going out of business, and doubtless many will; families are in mourning, thousands will lose their jobs and landlords are facing unprecedented challenges – residential landlords are trying desperately to balance their desire to show human compassion while covering their costs, and commercial landlords want to help their business tenants survive, while balancing this with their own cash flow problems.

Some landlords have
really drawn the short straw: in particular those who were in the
process of evicting for legacy rent arrears prior to the lock-down,
and they now find themselves housing tenants for free, long-term –
the eviction bans, it seems, are constantly extended. Other landlords
fear that their tenants are avoiding paying rent, even when they
could afford to do so.

There’s a
compromise to be had somewhere: between the two opposing camps of
those landlords who want to stop the worst cases of deliberate rent
non-payment of rent, those tenants taking advantage of the situation,
and the government’s actions to support tenants, informed by
tenants and tenant lobbying groups.

Commercial landlords
in particular are worried about the new laws on rent collections,
with a bill set to pass through the House of Lords which will further
weaken their position: these landlords could soon be blocked from
perusing business rent arrears for at least 90-days

The Corporate
Insolvency & Governance Bill includes in its rubric a temporary
ban on landlords using winding up petitions where a tenant company
cannot pay its rent bills due to the coronavirus. It prevents
landlords from recovering rents, unless they are overdue by at least
90 days. Ordinarily, commercial landlords can pursue rents arrears
after seven days.

Commercial
landlords, and this includes many small private investors, argue that
this new legislation tips the balance of power too far in favour of
the tenant. And this, coupled with the temporary ban on their ability
to evict corporate tenants, who refuse to pay their rent, will overly
weaken the landlord’s negotiating position when it comes to
valuations and lease renewals.

With a new quarter’s
rent due on the June 24^th quarter day, many commercial
landlords are getting very concerned that they will receive even less
in rent payments than they did in March. It has been estimated that
only around 50% of the rent due from businesses in the UK had been
collected 10 days after the March quarter deadline. This compares to
around 70% in a normal year.

Landlords fear that
this latest bill will incentivise corporate tenants to not pay rent
even if they can afford to, so for many smaller landlord investors,
and some of the struggling mega corporates, the suspension of rent
payments, it is argued, could push them over the edge into
insolvency.

Residential
landlords appreciated that the Ministry of Housing, Communities and
Local Government recognised early on the vital role they play in
supporting their own tenants through the crisis by announcing a
series of measures to help both landlord and tenants, including:

• Changes to
  Local Housing Allowance rates to cover 30 per cent of market rents,
  helping tenants on low incomes
• A commitment to
  cover up to 80 per cent of wages of furloughed workers, a critically
  important decision, enabling more tenants to continue to pay their
  rent and their bills during the outbreak. The self-employed also
  qualify for payments of up to £2,500
• An extension of
  the mortgage ‘holiday’, initially offered to homeowners to buy
  to let, allowing landlords (although obviously only those with
  mortgages) to let tenants defer
  rent payments
• The deferral of
  VAT payments, meaning no business had to pay any VAT in March, April
  or May An extension to the notification period for repossessions to
  three months, with courts suspending all possession hearings for 90
  days

• Loosening of
  the rules around Right to Rent checks, allowing documents to be
  submitted electronically.

These concessions
are all in addition to the loans, grants and rates reliefs announced
in the budget. However, many private residential landlords fail to
benefit from much of this. Those without mortgages still need to
cover their costs and many rely on their rental income to fund their
living.

Student landlords in
particular are struggling when they find their tenants have gone home
to live with their families, as the universities and colleges closed
down. This could leave landlords with council tax bills to pay, while
many of their tenants think they don’t have top pay rent, even when
they are contracted to do so, and are refusing payments. Not only
does this seriously compromise the student landlords’ position,
they have perhaps even greater worries for next term, for the
possible dramatic reduction in foreign student numbers. It could mean
that many student landlords will leave the sector for good.

The National
Residential Landlords Association (NRLA) is making representations to
government for extra help for struggling residential landlords left
with empty homes, and it is calling for landlords of houses in
multiple occupation to be given council tax relief.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – OPINION: Despite government support, many landlords feel they have drawn the short straw… | LandlordZONE.

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LATEST: Bedford consults on new HMO licensing restrictions

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Landlords in Bedford hoping to convert houses into HMOs are to face a raft of new regulations if the local council gets its way following a consultation that it due to run until 7^th July.

HMOs within the town’s boundaries are to be restricted to no more than 30% of the total number of properties within a 100 metre radius and no more than two HMOs can be next to each other on a street, or sandwich existing family houses.

“The threshold is intended to manage the cumulative impact of large and small HMOs within the immediate and wider area and to ensure that the planning process is able to manage the impacts of piecemeal expansion of HMOs effectively through the addition of extra rooms for additional households,” the consultation document says.

Bedford Borough Council has published the Supplementary Planning Document (SPD), which is now under consultation.

It sets out the new HMO restrictions which include four key ‘pillars’ that landlords will have to follow if they hope to have their plans to establish or extend an HMO approved by the council.

Density rules

As well as the density rules, it sets out minimum quality standards, requirements for car and bicycle parking facilities and requires that planners ensure the development of an HMO isn’t ugly or, as the document more politely puts it, has ‘no harmful visual impacts’.

“HMOs are a key part of the mix of accommodation on offer in Bedford Borough, particularly in the urban areas and immediate surroundings,” says Councillor Henry Vann, Portfolio Holder for Planning.

“It is important that we do everything we can to ensure that they are providing good quality housing for residents and are playing their part in creating balanced communities in our towns. Please do get in touch and have your say.”

In addition to planning permission, before an HMO may operate applicants may be required to gain additional approvals including Building Regulations approval and an appropriate HMO licence before it can legally operate.

Read the full consultation document.

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‘It’s like the wild west out there’ – huge commercial landlord switches to monthly rent payment

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High profile
commercial landlord Shaftesbury has switched permanently to monthly rent
collections in a series of measures aimed at supporting
tenants and improving its bottom line.

The landlord, which boasts a 15-acre portfolio of restaurants, leisure
and retail in London’s West End, has also suspended paying
dividends to shareholders after revenue from rent dropped 4.9%.

Shaftesbury says it’s had discussions with its 800 commercial tenants to agree tailored solutions on rents and service charges, with the aim of collecting 50% of rents due from April to September 2020 “over time”.

But it’s the permanent switch to collecting monthly rents in advance for all commercial tenants from October that’s the biggest change.

Wild West End

“It’s like the Wild West out there at the moment – there are no rules – every landlord is different,” Adam Diamant, MD at Land Commercial, tells LandlordZONE.

“This is a nice gesture
which will help out tenants rather than the landlord. Most tenants would take
monthly payments over quarterly as it helps cashflow but makes life harder for
a landlord as they have to work out who’s paid every month, while being paid
quarterly makes debt collection and bailiffing easier.”

Shaftesbury
adds that it expects changes in the structure of leases to manage the fall-out
from the crisis, including different lease lengths, incentive packages and
turnover-related rents.

Publishing its half-year report, it explains:
“The collapse in West End footfall, evident from early February in Chinatown,
and then widely across the West End from mid-March, had an immediate impact on
the trading and cash flow of our 607 shops, restaurants, cafés, pubs and bars,
materially reducing the collection of rents in advance due on the March quarter
day.

“Many of our smaller office occupiers were
similarly affected, and we saw an increase in vacancy in our rental apartments,
as overseas tenants returned to their countries of origin.”

Commercial rent collection in the UK fell by 28.7% in March compared to the previous two years, according to Re-Leased, which reports that only 49.7% of rent due had been collected 10 days after the March quarter date, compared to 69.7% during the last two years on a like-for-like basis.

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