Watts Service Focus


Dilapidations Special Bulletin

Property is often high on a company’s list of fixed costs, and a target for savings. In recent years, reductions in property maintenance budgets coupled with many tenants opting to relocate rather than renew has resulted in a growth of dilapidations claims. These may either be terminal claims, or receiving more attention recently, possibly as a result of high profile business failures – interim schedules. This growth in the market has encouraged a variety of surveying firms to move into the dilapidations sector.

One factor in a tenant failing to maintain a property may be poor cash flow and, whereas a properly prepared and handled interim schedule can protect the landlord’s interest, an overblown or wrongly handled interim schedule may, in extreme circumstances, be the final act that causes the tenant to cease trading. It is far more common for an overblown interim schedule simply to sour the relationship with the tenant to such a point that break clauses are actioned, or leases are not renewed at a later date.

Relief against interim schedules is of course often available for the tenant, and should be considered by the landlord’s surveyors from the outset. The key for both landlord, and tenant, is to ensure the matter is handled by an experienced firm; one conversant with dilapidations statute and case law.

Dilapidations Special Bulletin

The opportunities and pitfalls of vacant possession

In the current market, tenants often want to use the break clause in their lease to cut costs, take advantage of new tenancy rent-free periods, and generally obtain more competitive terms. However, tenants should beware vacant possession clauses – they may not be as straight forward as they first appear to be.

Dilaps Main

Landlords are frequently keen to keep existing tenants to avoid paying empty rates, the cost of re-letting and losing rental income. Failure to comply may result in the forced continuation of a tenancy.

Break clauses in commercial leases are often very onerous on tenants, being conditional on full compliance with lease covenants. However, in some instances break clauses may only be conditional upon providing vacant possession, which is generally considered relatively simple to achieve.

In fact this is not the case. Vacant possession is an imprecise expression as there is no established legal definition. Case law does not provide a clear or settled approach and tenants may be caught out if they do not fully understand what may be involved. Vacant possession is generally considered to be a ‘physical or legal impediment to enjoying the property’, which can entail different categories of obstacles, comprising: tangible impediments, persons in occupation and legal impediments. Where commercial office, retail and industrial properties are occupied under a lease, the tangible impediments are often the key relevant category in complying with vacant possession at the break date.

Traditionally, the status of the items at the property, i.e. determining whether they are chattels (personal property) or fixtures (fixed to land) are key to judging whether there is a tangible impediment to the enjoyment of the property at the break date. While chattels have long been considered a barrier to vacant possession, it is also considered that fixtures installed by tenants may also constitute a tangible impediment that could cause the break option to fail.

In a recent case dealt with by Watts, vacant possession of a property was called into question due to the fact that the tenant had left demountable partitions in place. These had extensively sub-divided the property and were argued to constitute a tangible impediment, preventing vacant possession from being achieved.

Tenants wishing to vacate their current premises, should be aware of the issues thrown up by lease terms and understand the implications of vacant possession if compliance is specified. Landlords should also be aware of the potential opportunities and the strategies they can adopt to exploit the requirements of break clauses. These opposing goals ordinarily converge during dilapidations negotiations close to the end of a lease or break date and often include discussions on vacant possession.

The terms of each specific lease are of paramount importance, particularly in respect of the break clause and yielding up clauses and monetary settlements paid to landlords often have a ‘surrender premium’ to effect the break.

Watts can advise both landlords and tenants on their respective options in association with their legal team to ensure that their overall operational strategy is achieved. For more information, contact Ian Laurie, Director at Watts Group on 0161 831 6180.

Watts Pocket Handbook

The Watts Bulletin is the technical companion to the Watts Pocket Handbook, the essential guide to property and construction, as used by professionals since 1983.

Watts Bulletin editor: Trevor Rushton.

To subscribe to Watts Pocket Handbook Online, visit wattshandbook.co.uk.