Retail Dilapidations: How to maximise dilapidations savings…

The following article will focus on how retailers can ensure they maximise the dilapidations savings available to them at the end of lease…

The current retail economic environment has brought about changes in the way that retailers view, manage and plan their property strategies. Leases have become significantly shorter and many retailers are exercising break clauses to terminate leases in order to downsize, cut overheads and move to more dynamic and successful retailing locations.

How retailers plan and exercise their termination of leases is crucial in maximising the dilapidations savings that are available to them. The following four points analyse the vital steps retailers must undertake to ensure maximum dilapidations savings are achieved.

1. Plan your exit strategies early i.e 6 – 12 months prior to your lease expiry date

When planning to exit a lease agreement it is important to understand your repairing liability on the property in question, understand the conditionality of break clauses, evaluate the landlord’s interim remedies and evaluate the potential liability in monetary terms. A case that highlights the importance of evaluating the landlord’s interim remedies can be seen in the case of Jervis v Harris.

What is a Jervis v Harris notice?

The relevance of Jervis v Harris is that it enables the landlord to serve what is commonly referred to as a Jervis v Harris notice. This means that the landlord can send a tenant a list of items of disrepair and a stipulation that they are made good within a predefined timeframe. If the works are not completed by the tenant then the landlord can re-enter and carry out the works charging the cost back to the tenant as a debt and not damages. The risk to the tenant is that there is no Section 18 defence, as the landlord is not making a claim for damages; also the landlord has a defined ability to re-enter the premises and carry out the works. Risk for the landlord is that they could breach the tenant’s right to quiet enjoyment; and potential wrangles with regard to extent of liability and payment. Invariably Jervis v Harris is often threatened but rarely carried out.

2. Ensure landlord compliance with the dilapidations protocol

The Dilapidations Protocol was formerly adopted as pre-action protocol by the Courtson 1 January 2012 (though it had been informally used in dilapidations cases since 2002). The Protocol enables the court to levy sanctions against defaulting parties for failure to follow the terms of the dilapidations protocol before the start of a claim for damages for breach of covenant. As part of the protocol, a landlord’s endorsement must confirm that:

• All works set out in the schedule are reasonably required to remedy breaches of the tenant’s repair obligations.
• If endorsed by the landlord, full account has to have been taken of the landlord’s intentions for the property.
• If endorsed by the landlord’s surveyor, full account has to have been taken of the landlord’s intentions for the property, as advised by the landlord
• Any costing’s provided in the schedule must be reasonable.

The Dilapidations protocol also demands certain compliance from the landlord in regards to their dilapidations demand. The protocol states that the landlord’s demands should be quantified in the following ways:

The quantified demand should:

• Set out clearly all aspects of the dispute and substantiate the monetary sum sought as damages in respect of the breaches detailed in the schedule as well as any other items of loss for which damages are sought. It should also set out whether VAT applies;
• Confirm that the landlord and/or its surveyor will attend a proposed meeting/s;
• Be sent within the same timescale for sending the tenant a schedule;
• Specify a date (being a reasonable time) by which the tenant should respond. This will usually be within 56 days after sending the Quantified Demand.
• Most importantly the Quantified Demand must confirm actual loss correctly.

3. Make sure all avenues are considered in defending the claim:

It is imperative that retailers work with their surveyor to make sure all avenues are considered in defending the claim against them. These include:

• The effect of new lettings.
• Limb 1 & 2 of Section 18(1).
• Diminution in value.
• Demolition and supersession.
• Interpretation of the lease and the severity of dilapidations liability.
• Part 36 offers.

4. Ensure your consultants can negotiate!

Appointing the right consultant is crucial. It is important to appoint a surveyor that has your best commercial interests at heart, keeping claims away from court where ever possible, as once at court costs can easily escalate out of all proportion. Furthermore, retailers must be confident in the technical knowledge of the surveyor and their ability to achieve the best settlement on their behalf whilst keeping fees as proportionate as possible. Lastly, question the surveyor’s track record, CS2 achieved an average dilapidations saving of 73% when negotiating on behalf of their retail clients throughout the last financial year. This statistical demonstration of ability will ensure that retailers appoint the right surveyor to maximise the dilapidations savings available to them.

To further discuss maximising dilapidations savings contact David Jay.