Green Dilapidations: more sustainable commercial property leases
Commercial building owners and occupiers are increasingly looking to fulfil their net zero carbon ambitions with measures beyond more sustainable development and energy performance practices. In particular, the current property leasing cycle and non-sustainable dilapidations processes are generating quantities of waste and carbon, which can be mitigated with a more sustainable approach: Green Dilapidations.
TFT’sGreen Dilapidations services are designed to help clients reduce the additional material, resources and cost associated with repeatedly fitting out and stripping out commercial property spaces over their lifetime. Taking a long-term view of tenancy, occupier and market requirements, we help our clients benefit from a more efficient, sustainable dilapidations process for both landlord and tenant.
Our support is rooted in facilitating better collaboration between stakeholders. That means the landlord and tenant of course, but also agents and the wider supply chain. Our sustainable building knowledge, commercial understanding and dilapidations expertise helps to formalise a better system as a whole.
We see a greater appetite from our landlord and tenant clients to adopt Green Dilapidations services. A notable occupier client is one of the leading property litigation practices, who we are helping to exit their existing offices in this way. Our recent seminar on green dilapidations in June was well attended by a cross-section of the industry, showing the breadth of interest for specialist advice on the subject.
It’s not just for offices either, and can be used for retail, industrial and other commercial property sectors.
Vacant possession: a new definition and advice for tenants
There has been a new Court of Appeal decision about vacant possession (“VP”) which changes what dilapidations professionals thought that VP meant after an earlier decision last year. That decision might have refined what we thought it might have meant since 2016, which probably changed what we had thought it meant prior to that.
What’s changed, and what should you do about it?
Summarising the new decision on vacant possession:
The Court of Appeal (applying the facts of the case in front of it) has this week said that VP relates to the lack of the “trilogy of people, chattels, and interests”.
That wipes out what we thought VP meant after the case that was appealed was handed down last year. That case had led us to believe that VP could fail to be achieved if too many of the landlord’s fixtures had been removed. Now, it seems, a tenant can remove as many bits of the premises as it likes, VP can still be achieved, and the landlord’s remedy is in damages (only).
In 2016, obiter comments in a high court judgement (which mean those words in the judgement do not form part of a precedent) suggested that, if a tenant had left too many tenant’s fixtures in place (in circumstances where tenant’s fixtures did not form part of the premises – as defined) then VP would not have been achieved in that case.
What should a tenant do to achieve vacant possession?
When exercising a VP conditional break, be cautious. Get legal and surveying advice.
Prepare early. Remove all people, chattels and interests and think about also removing your tenant’s fixtures if they do not form part of the demised premises. If you are not sure if an item is a chattel or a tenant’s fixture; remove it. It you are not sure if an item is a tenant’s fixture or a landlord’s fixture; remove it.
Make it clear to your landlord that you are leaving, hand over keys, alarm codes etc.
Don’t venture back into the premises after the break date.
Make sure you also have complied with all other break conditions (such as getting notices right, making sure all payments have been made – even if not demanded by the landlord).
If there is no VP condition, but there is different wording, then you might be required to do other things. If you are required ‘not to be in occupation’ then the process is less clear. It is probably less onerous than VP but nobody has been to court yet to find out. Don’t be the one to go to court to find out! To be cautious, assume it means VP.
If the condition is to comply materially then that is very very difficult to do. Assume you have to do everything perfectly and you have a chance. But beware late reinstatement notices from your landlord changing the goal posts after a date when you can’t do anything about it.
If the condition is to comply absolutely then you probably have no chance, but if it is worth trying then try.
Balance of power
The Court of Appeal decision has changed the balance of power more towards tenants if there is a VP condition to comply with. But, the power still really lies with the landlords because courts have been very strict in making sure tenants comply with their obligations correctly.
As this week’s judgement points out, that does not mean to say that the break clause should be interpreted unfairly in favour of landlords; rather, once the clause has been interpreted judges will expect strict compliance by tenants.
The cases referred to:
Capitol Park Leeds plc (1), Capitol Park Barnsley Limited (2) v Global Radio Services Limited  EWCA Civ 995
Capitol Park Leeds plc (1) v Global Radio Services Limited  EWHC 2750 (Ch)
Riverside Park Limited v NHS Property Services Limited  EWHC 1313 (Ch)
TFT Edinburgh at 5: scaling the Cairngorms and court
TFT’s Edinburgh office is celebrating its fifth birthday with a difference. The office bash might have to wait for another year, but we’re looking back on some of our favourite projects to date, and the big things which lay ahead.
This was most definitely the highest I have been when carrying out inspections, which weren’t helped by the deep snow and sub-zero temperatures. I nearly lost the tips of my fingers because, as an aspiring urbane surveyor, I slightly forgot that gloves would be important. Certainly the best views though above the clouds, and feeling of being on top of the world. As ever inspecting different types of buildings, one is always drawn also to understand what goes on there and how it all operates. In this case there was a railway, a mountain rescue post, conservation, skiing, catering and retail all to be considered. This is one inspection that I won’t forget.
Acting as a ‘court reporter’ for the Outer House, considering a dilapidations dispute in Glasgow:
A court reporter is appointed by the court to provide technical expertise when the case before the court is fundamentally a question of expert opinion. As always with these disputes, significant time has passed since the evidence on site was available to review so it becomes a question of reviewing the (not insignificant) bundles of documents, and then expressing a reasoned opinion as to the various liabilities. As often occurs though, much of the difference between the parties is a matter of legal interpretation and so the reporter is allowed to question to court on the correct legal approach. In this case, the main issue was one of ‘supersession’. I’m sure all dilapidations surveyors would like clarity from a court as to the correct way to deal with supersession. Fingers crossed we find out.
I’ve also acted as arbitrator in dilapidations disputes. The arbitrator receives evidence from the parties, considers it and publishes a binding ‘Award’ that sets out the resolution of the dispute. Arbitration of dilapidations disputes is a growing area in Scotland and is something TFT is proud to contribute to. Indeed, we have published a set of Dilapidations Arbitration Rules for Scotland, which we hope will aid parties who are considering this form of ADR.
Vacant Possession just got more complicated for tenants
TFT dilapidations specialist Jon Rowling explains a new concern for commercial property tenants trying to achieve ‘vacant possession’ for a lease break. They may have been careful not to leave too much behind, but now they also need to be careful not to take too much away.
Tenants wanting to exercise a lease break option always have to be cautious, because the conditions are interpreted strictly and precisely by the courts. With one false move, the lease term continues.
Having to provide vacant possession (VP) is still a common hurdle. Whilst there is case law supporting its definition, uncertainty remains as to what tenants need to do to achieve it.
Since Riverside Park Ltd v NHS Property Services Limited  EWHC 1313 (Ch), there has been some uncertainty as to whether tenants only need to remove chattels, or whether fixtures also need to be removed. An additional complication arises if the break clause condition calls for the tenant to be “not in occupation”, because it’s not always clear what that means.
In this case the tenant had to provide vacant possession of the “Premises” (as defined). The court held that the tenant failed to do so, and therefore the break failed. It failed because the tenant failed to yield up the Premises. In fact the question of VP doesn’t seem to have been necessary to consider because the decision seems to have made based on the definition of the Premises.
The tenant knew they needed to remove their own fit out and did so. However, they also removed (or had previously removed) significant elements of the landlord’s building including air conditioning, ceilings, fire barriers, radiators, lighting, floor boxes, small power etc.
The definition of the “Premises” included:
“… all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings…”
Essentially, because the tenant had removed landlord’s fixtures, it had not yielded-up the Premises. Too much of the Premises was missing.
Tenants who have to achieve VP have always been cautious about leaving too much behind, but now they also need to be cautious about taking too much away. Potentially, the fact that the items removed by the tenant in this case were so substantial might mean that other tenants who remove just a little bit too much could draw a distinction between their case and Capitol Park v Global Radio?
The case is also interesting, particularly for surveyors, because it raises further commonly encountered issues:
That ‘agreements’ with your opposite number should be recorded in writing, to avoid the uncertainty and expenses of an estoppel argument
That some surveyor-to-surveyor correspondence, and surveyor-to-client correspondence can be seen by the court
That tenants preparing for a conditional break, where building works are required to be completed, should press ahead with that work until such time as a financial agreement and surrender is agreed between the parties. Don’t stop work in anticipation of a settlement being reached
Riverside v NHS was mentioned in the judgement, but we still don’t know whether tenant’s fixtures also need to be removed to achieve VP
The case didn’t consider what the phrase “not in occupation” means.
Capitol Park Leeds plc v Global Radio Service Ltd considered whether the removal of landlord’s fixtures was enough to frustrate a VP condition to a break, or whether the removal of the landlord’s fixtures should be considered as part of a dilapidations claim, after the successful exercise of the break. The judge preferred the former option, but leave to appeal has been granted.
Are you a landlord or a tenant of commercial property with queries about a lease, dilapidations or dispute resolution?
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.
For those who need guidance and support in working through these matters, please contact either Jon Rowling or Neil Gilbert to discuss how we can help.
Alternative arrangements for conditional break options
COVID-19 has implications for a few areas of the landlord-tenant relationship, which we’ll explore over the next articles. For the first, we ask: where do site closures leave tenants who have to carry out construction works in order to satisfy a conditional break option?
It is not uncommon for tenants to have to provide ‘vacant possession’, to comply materially with all obligations or to complete other specified works; either by the purported break date or (sometimes) when the break notice is served on the landlord.
In circumstances where construction activities are restricted by covid-19, where does this leave a tenant who is now unable to carry out that construction work?
It is worth checking whether the construction activity really is restricted. For example, the tenant might be an NHS entity and complying with the break might save the NHS significant funds; does that make it ‘essential’ work? At the time of writing, UK government guidance appears to be that construction activities can continue so long as social distancing is maintained, whereas the Scottish government has indicated that all construction activities should cease. Some contractors have unilaterally taken the decision to pause work (the contractual implications of which is another matter).
Where these break option cases have made it as far as court, judges have been very rigid in their requirement that a tenant has to comply with its obligations precisely. That doesn’t bode well for tenants who find they are unable to comply with their obligations.
The usual approach for tenants has been, prior to starting their construction works, to engage with their landlords to try to negotiate an exit from the premises without having to comply with the break option conditions. It is generally accepted that the landlord has the upper hand in these negotiations; presumably if a landlord knows that a tenant has no opportunity now to comply with its break option conditions, the landlord’s negotiating position improves substantially.
All things being equal one has to expect that landlords will not be keen on their tenants moving out just when rents are not being paid, when the future market might be weaker and when tenants are perhaps less likely to want to renew.
Maybe there is an opportunity for landlord and tenants to be collaborative; if complying with the break option conditions isn’t possible it might be possible to agree a different way round things – maybe joint marketing of the space until such time as a suitable new tenant appears, at which point the departing tenant is allowed to surrender the lease.
Whatever happens, the implications of COVID-19 will have changed the landscape for many considering exercising break options.
We offer advice to help parties involved in this or similar situations come to an amicable solution, even in the midst of disruption.
The TFT Purple Book: A guide to Dilapidations in the UK
The TFT Purple Book: A Guide to Dilapidations in the UK is a comprehensive guide which identifies the legal context, best practice, background to how and why dilapidations is dealt with as it is, and addresses areas of legal uncertainty. It aims to serve as a single point of reference from which the reader can develop a solid foundation of knowledge. It even considers cattle, children and ‘chattels-vegetable’ – and not many text books can make that boast.
Dilapidations in England and Scotland. Our new white paper highlights the differences.
To celebrate the continued success of our Edinburgh office, and the increase in dilapidations instructions we are managing north of the border for our clients, we present a paper on recent changes to Scottish dilapidations law and procedure, and we identify the main differences between dilapidations in Scotland and south of the border in England and Wales.
The TFT Dilapidations Flowcharts are an industry first. They explain and demystify the various steps involved in a typical end-of-lease dilapidations dispute, identifying how a dilapidations liability is calculated. For the first time, complex issues such as the classification of fixtures and chattels, the reinstatement of alterations and disrepair are explained visually. The dilapidations dispute resolution process and options are also identified.
We hope the TFT Dilapidations Flowcharts will become a useful industry-standard resource for both clients and other surveyors to help improve the dilapidations process. At present, partly because dilapidations disputes can be highly complicated but partly also because many who dabble in dilapidations do not know the background to the issues, dilapidations disputes can become contentious, costly and time consuming. The TFT Dilapidations Flowcharts are part of our effort to improve this area of practice.
RICS Building Surveying Conference 2018 – TFT speakers confirmed
This year’s RICS Building Surveying Conference will highlight the latest developments within the built environment sector and focus on the impact of emerging technologies.
TFT will be speaking on a number of topics: Dan Cooper will be chairing the Dilapidations update and the Building Conservation in Practice case study, Jon Rowling will be contributing to the dilapidations update and David Mann will provide insights for the Reinstatement Cost Assessments and Technical Due Diligence sessions.
The Conference takes place in London on 2 May. More details can be found here.