Questioning assumptions of value and supersession amid market disruption
In the latest of our articles tackling pressing commercial property issues amid COVID-19 disruption, we suggest that now is a good time to re-assess your property valuation assumptions.
What will the commercial property market look like in a few weeks’ or months’ time? We don’t know for sure but we can refer back to 2008 for similar shock when the financial crash hit. At that time, tenants whose leases were coming to an end were mostly comfortable in the knowledge that their landlords were due to redevelop or refurbish the premises. This would largely eliminate their dilapidations liability. When the crash happened, those sensible assumptions became wrong assumptions.
We might well be in a similar situation now. We don’t want to paint a negative picture of the immediate future, and we hope that commercial property remains a strong investment. But, plan for the worst and hope for the best. Planning for the worst might well mean that tenants should now be reconsidering those assumptions about their landlords’ redevelopment plans and perhaps should be updating their strategy.
Perhaps tenants should budget for a greater liability, now assuming that their landlord might well want the premises returned reinstated, repaired and decorated, so that the property is available immediately for new tenants to occupy.
If tenants’ premises are vacant due to home working, or if home working policies now mean that premises can be made available for contractors to complete dilapidations works then perhaps that should be considered again by tenants nearing the end of their tenancies (if construction work is permissible during COVID-19 restrictions of course).
We aren’t valuers but we wonder whether future valuations back-dated to a period shortly before COVID-19 restrictions were in place would take account of the then-future restrictions. From what we know of valuation assumptions, we doubt that COVID-19 would be taken into account, which might well be a blessing for tenants who are wanting to demonstrate that, on the valuation date (the lease end date) the landlord or the market would or should have intended to refurbish or redevelop.
Current circumstances may, unfortunately, lead to disputes about these sorts of issues. Supersession and valuation matters are complicated and expensive to argue at the best of times, so we hope all parties in this situation are able to come to an amicable solution.