Jonathan Cohen, Director of Aspire Property Group, Explores Some Popular But Costly Mistakes Often Made By Tenants Of Retail Property.
In today’s economic climate, businesses have a lot on their minds such as cash flow issues, poor footfall or staffing issues. There are some retailers seeking additional premises, such as convenience stores, charity and pound shops, but more topically are multi retailers that are downsizing or worst still, independent retailers that are closing shop.
In effect, the purpose of this article is to raise awareness of unanticipated expenses when vacating from a premises, namely dilapidation costs. Every lease agreement stipulates repairing obligations, although how many people actually make it their responsibility to paint the walls every 3 years, or to ‘make good’ the damage accidently caused a little while ago? Equally as important, what are the (financial) implications to the tenant when they leave the premises?
Where It Often Goes Wrong
In the first instance, tenants are so focused on their business that seemingly minor repairs are often perceived as an inconvenience. There is a reluctance to budget for and to spend money on minor repairs for a building that they do not own, especially if their trading future is uncertain. Similarly, if business is thriving and is a possible need to expand into larger premises, why spend unnecessary money on the property?
However, many retailers will be able to share their regrets of ignoring a few missing roof tiles, or the spreading damp on the wall of the stock room. The performance of such repairs can prevent far more significant consequences further down the line.
Another scenario may occur when a business moves into new premises. If the property is somewhat ‘run-down’, it’s worth asking a professional for guidance or to prepare a Schedule of Condition. This will ultimately help to avoid inheriting an onerous burden with the existing defects being an immediate liability. Therefore, a detailed survey before acquiring the leasehold is often advisable, as it records the specific condition of the occupant’s space that can help in the tenant’s favour even 5 or 10 years later when they eventually vacate the shop.
Eventually, the landlord will usually charge a dilapidation bill. However, it is essential to be aware that property owners are not entitled to ‘betterment’ when serving a dilapidation schedule. Each claim for ‘repair’ must be justified and cannot be for the purposes of ‘improving’ the building or for the landlord’s benefit. Hence, when a tenant offers to carry out specific works (to repair) the landlord will insist that you pay a cash settlement. Be alert to the fact that if the landlord can re-let the premises without actually doing the works, he will much prefer cash in hand.
Are There Opportunities For Tenants?
Absolutely. If your business has identified a new retail outlet, but it’s certainly not in perfect condition, there are market opportunities to negotiate a long rent free period, or a reverse premium to help with the necessary repairs. It’s a cliché but pictures speak louder than words, so it is also advisable for the tenant to take photographs of the shop, before moving in and fitting it out.
Further to the above mentioned concerning the concept of betterment, a Schedule of Condition will record the existing defects that will tackle any future dilapidations claim. For example, an initial £60,000 dilapidation bill can appear worrying, although with the suitable guidance, a Schedule of Condition and strong negotiation skills (including knowledge of case law), it can be reduced to say £15,000.
Another idea is to include the potential issues of dilapidation at any lease negotiation. For instance, if you have a break clause or lease expiry on the horizon, it is highly recommended to negotiate a rent reduction or rent free period. At the same time, make it your objective to achieve a written agreement of a mitigated dilapidation charge or next best, a cap to the final figure. If in doubt about how to best negotiate, seek guidance from a professional (without upfront fees).
The Underlying Lesson
Typically, retailers may sit up and take notice when it’s absolutely necessary; i.e. once they have informed the landlord that they are leaving the property, and subsequently receive a massive dilapidation bill. The lesson is clear for retailers to increase their awareness of the stipulations in their lease, since falling short of such obligations is a breach of contract. In having a better understanding of the basics about this highly complex subject that is almost dictated by case law, a greater sense of control should ultimately help to minimise, or where possible, mitigate such significant costs for retailers.
About Aspire Property Group
Aspire PG works exclusively with tenants to achieve maximum savings, on a highly cost effective ‘no saving-no fee’ basis. In 2011, Aspire was successful in securing savings just shy of £1 million. It specialises in reducing commercial rents, business rates appeals and dilapidation costs. It has also proven highly succesful in negotiating energy, insurance and telecom contracts.
Jonathan has a proven track record with extensive knowledge and expertise having developed commercial strategies for numerous SME’s and national charities. He has an excellent reputation in representing commercial tenants and owner occupiers, with strong results achieved in Landlord & Tenant negotiations.
For more information or to discuss your requirements please contact: Jonathan Cohen, Director – 020 3627 2555 or email: email@example.com