The dilapidations process can lead to wasteful or unnecessary refurbishment work by a tenant obliged to reinstate a building at the end of a lease. Simon Brown, Director in our Dilapidations team discusses alternative approaches that could achieve a more sustainable approach to the reinstatement and refurbishment cycle.
A few years ago, I managed a client’s exit from a 16,000 square foot trading floor held under a particularly onerous lease in an otherwise occupied building. My client had to spend in the order of £50 per square foot to reinstate new ceilings, LG7 style lights, and carpets all to the landlord’s specification.
Within two years, because the space had remained unoccupied and in the same condition, the landlord stripped out and discarded the ceilings, lights and carpets, as they didn’t match its refurbishment plans for the other floors. What a waste of money, resources, and energy, not to mention considerable disregard of the sustainability agenda.
Every building has a lifecycle and will probably need refurbishment at the end of a lease, but in this case, even though the reinstatement work met the required market standard it ended up in the skip without ever being used.
The financial settlement of dilapidations liability is often reached and this avoids waste, but there are plenty of occasions where the outcome is financially and environmentally inefficient. Surely reversing this trend would be welcomed by both landlords and tenants as it would reduce costs for both parties by decreasing the need to carry out unnecessary refurbishment.
Maybe it is time that an alternative approach is considered by those drafting heads of terms or leases? For example:
- A covenant giving the landlord an option to demand a reinstatement payment rather than allowing the tenant to carry out refurbishment works?
- A tenant’s option to make a reinstatement payment as part of the licensing of alterations?
- A tenant’s option to pay an all-inclusive rent including the cost of reinstatement of non-structural alterations at the end of the term?
- A landlord’s option to require a tenant to reinstate the space to shell and core?
None of these solutions is perfect. At present the principal of reinstatement to a developer’s finish is entrenched in UK leasing culture making it difficult to see this changing quickly. However, to tackle the current unsustainable approach of the reinstatement a new approach needs to be adopted by those drafting heads of terms and leases. This will not only help reduce unnecessary landlord and tenant reinstatement costs but also avoid waste and improve efficiency.
Director, CBRE Building Consultancy team
T: +44 20 7182 3606