Commercial Leases - Dilapidations Liability – Tenants beware!

Once a lease is signed a legal contractual relationship is formed.  It is no defence for a tenant to claim that they were not aware of what they were signing as ignorance is no defence in law! 

Source: http://brisbanecommercialproperty.com.au/

A tenant occupier of a commercial building has a legally binding contractual obligation through their lease to return a building to the landlord in a state of repair that is stipulated within the lease, when the tenancy ends.  Now it may seem obvious that a landlord would expect to have a building returned to them in such a condition so that they can re-let the building immediately, however in reality this very rarely is the case.  This can then lead to protracted dilapidations claims where the costs to the tenant can start to escalate due to a landlord’s a claim for loss of rent and service charge and additional professional fees in addition to the costs of repairs, reinstatement and decorations that are associated with the lease covenants.

In my professional career I spent many years negotiating dilapidation claims (acting on behalf of both landlords and tenants) in the whole spectrum of the different commercial sectors, such as office, industrial, retail, leisure etc.  During this time I have encountered many tenants who did not understand the significance of meeting their lease obligations and in fact entered into a lease arrangement without seeking professional advice or indeed reading the lease in any detail before signing!  The gravity of the situation did not dawn onto these types of tenants until they were served with a schedule of dilapidations accompanied by a summary of claim which often ran into tens of thousands of pounds and sometimes even more. 

Source: http://commercialpropertyforsalewall.blogspot.co.uk/

Once a lease is signed a legal contractual relationship is formed.  It is no defence for a tenant to claim that they were not aware of what they were signing as ignorance is no defence in law!  Therefore a tenant should be aware of what they are entering into and in particular their repairing and other obligations BEFORE they sign the lease.  Although there would be a fee involved it would always be advisable for a tenant to seek professional advice to enable them to understand the lease and in particular their likely dilapidations liability once the lease comes to an end.  Good professional advice may identify obligations and clauses in a lease that may be particularly onerous to a tenant and negotiations may be possible to have clauses removed or at least re-worded.  Also, a professional advisor may recommend that a schedule of condition is taken prior to occupation which can later be used to help limit liability when the lease comes to an end.  In my experience I have found that many tenants are reluctant to pay professional fees for some of the services/advice previously discussed because they do not have the foresight to appreciate the benefits and especially the amount of money it could save them in the future.   Avoiding professional fees, particularly in relation to a tenant entering into a commercial lease arrangement really is a false economy.

A few of years ago I was asked to carry out a dilapidations liability assessment on a number of branches of a mid-sized DIY retailer’s stores which had been put up for sale.  I was acting as Consultant for the prospective purchaser.  The stores were located in many parts of the UK for which each one was occupied under a commercial lease arrangement.  Basically, my Client was considering acquisition of the business, however before being in a position to negotiate a fair price for the business it was necessary for them to understand the likely financial impact (their dilapidations liability), to them when each of the leases came to an end.  Each of the leases were unique, with a variety of remaining terms, (some had a few years remaining and some were much longer). There were also a variety of different repairing, re-instatement and decorations covenants within the leases. 

Prior to undertaking any type of dilapidations inspection it is important to read and understand the lease, which is what I did, and on completion of each inspection I was able to prepare a schedule of dilapidations for each branch.  The difference with dilapidations liability inspections compared to interim or terminal dilapidations inspections is that you need to have an eye on the future.  So I therefore had to take account of the length of term remaining on each lease and to make an assessment of the likely dilapidations that would occur at that point (the end of the term) and not just in the here and know.  I was then able to cost/quantify the lease obligations which would also factor in likely future inflationary cost increases.  I cannot remember the exact overall dilapidations liability however I do remember this totalling in excess of £1 million.  Not exactly the type of money you want to ignore if you are proposing to purchase a business!  My Client then went onto to use this to help negotiate a purchase price.

Not all dilapidations liability will be as costly as the example I give above, however it is worth educating tenants about the benefits of seeking and paying for professional advice before they enter into a commercial lease arrangement.  In most cases larger companies will have there own professional advisers so the pitfalls discussed above are much more likely to be avoided.  In my experience it is the medium and particularly the smaller size companies or even individuals who are less familiar with commercial lease arrangements and worse are much more willing to avoid paying professional fees.  Perhaps it is to these companies/individuals that we need to focus our education?

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Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.

Professional Fees - Cheapest price very rarely represent best value!

Suicidal fee bidding does not do Clients or Consultants any favours and in fact serves just to undermine the credibility of the built environment professions

Source: http://luxuryactivist.com

We live in a very competitive world and in recent years due to the global economic downturn it is fair to say that businesses have had to adapt, diversify, and often downsize just to survive.  A successful business will also adopt a similar approach on an on-going basis, as a growing business will face similar challenges, all be it from a more positive perspective.  Gaining new and regular business is the key to the success of any business no matter where we are in the economic cycle and a key part of this is trying balance our professional fees so that they are competitive enough to attract new business and at the same time make a profit.

Businesses may be in a position to offer very competitive fees if they can tailor their services to be ‘lean and mean’, however, like myself, I am sure many reading this will have come across examples where they have submitted what they feel is a very competitive fee proposal only to find out that the Client has selected an alternative bid, for a fee that seems ridiculously unsustainable.  There comes a point where a Consultant has to question why they are doing certain things and working for ridiculously tight margins is not good for the long term viability of a business as well as undermining the value of good professional work and advice generally.  Clients should however be vary wary of selecting Consultants on the basis of lowest fee as they will often find that cheapest price very rarely represents best value.

Clients are perfectly entitled to expect as much as they can for their money, but Consultants do not do themselves, their Clients or indeed their professions generally, any favours by trying to undercut their competitors by submitting unsustainable fees.  One may argue that the sustainability of a fee will vary from business to business as overheads will also vary depending upon the size of a particular business.  A Client will therefore be well advised to carefully scrutinise all fees, particularly the lower fees, to establish precisely that their brief will be met, within the timescales provided with the resources needed including the level of personnel necessary. The adage, ‘you get what you pay for’ comes to mind.  A Client who selects a Consultant’s fee without suitable analysis, particularly a fee which is considerable lower than other bids, may be faced with a Consultant who is continually struggling to make the fee work for them, possibly resulting in a poor quality service, missed deadlines and disputes. 

There are a number of ways in which a fee can be calculated, from a percentage fee based upon the projected cost of the project to a lump sum fee which will be calculated based upon the amount of time likely to be spent on the project and the level of personnel and resources needed.  Either way carries an element of risk to the Client and to the Consultant. This emphasises why fee calculation and fee bidding is such an important part of a business. 

Source: http://www.123rf.com

Arguably the success of any project can be measured by time, cost and quality, none of which are mutually exclusive.  By selecting a Consultant based upon cost alone (lowest fee), no account may be taken of the impact of time or quality.  So for example lowest fee (cost) may impact on the level of personnel that will be allocated by a Consultant to the project, which could be inexperienced/junior member of staff, which can effect (quality) and deadlines (time). Nowadays, savvy and may I suggest sensible Clients do not rely on fee value alone for selection of their Consultants but adopt a much more robust method of cost AND quality. 

A cost and quality approach to procurement of Consultant services provides a Client with a much more thorough way of ensuring that the selected Consultant helps them to achieve value for money.  Granted, this approach is more time consuming than inviting fee bids alone, as it often requires a quality submission and interviews as well as assessment of fees. The advantage however is that through the quality assessment and interview, the Client can review the Consultant’s track record of similar projects, discuss and meet key personnel, discuss deadlines, establish how best value will be provided and so on.  This will enable to Client to understand exactly what each Consultant will provide and give them the opportunity assess which Consultant they feel will give them best value.  Therefore a Consultant who submits a fee which may be higher than other fee bids, still has the opportunity of being selected as the Client, through the cost and quality procurement procedure may decide that the higher bid represents better value than a lower bid.

To conclude, Clients need to take time when procuring the services of Consultants to understand what the Consultant will provide for their fee and to establish whether they are getting best value.  Consultants on the other hand will always remain competitive with their fees however this should not be at the detriment of their bottom line.  Suicidal fee bidding does not do Clients or Consultants any favours and in fact serves just to undermine the credibility of the built environment professions.  If the general public want and expect high quality Professional Consultancy services then we should not give the impression through the fees we charge that they can buy these services from a high street discount store.  There is nothing wrong with healthy competition, however if Consultants continue to undercut each other and submit unsustainable fees, then this is not healthy competition but professional suicide, which is not in the interests of the general public because as we have seen, lowest price very rarely represents best value.

Please feel free to share this article and other articles on this site with friends, family and colleagues who you think would be interested

Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.