Dilapidations: License over Lease

LibertySpace

 

Let’s face it at the time of signing for a new commercial space things can be emotional, challenging, exciting, worrying and life changing. Vision and dreaming have brought you to this exciting stage of your business growth. However, don’t let you emotions overrule what should be a sensible and pragmatic approach to your lease contract. At some point you are likely to want to grow or downsize so you need to think of the exit now.

 

What are dilapidations?

 

When you sign for a traditional property lease there is very likely to be a clause referring to dilapidations. There should also be mention of a schedule of condition. It documents the condition of the property at the beginning of the lease period.

The recorded schedule of condition is a snap shot of what condition the property was in at the start of the lease period. The schedule can then be used to benchmark the condition of the property at the end of the lease. Most leases require the tenants to get things back to the way they were. Even if you think you have improved the property by adding lots of lovely features and new spaces, most leases do not see “improvements” as advantageous and you may find you have to pay to have them removed and the property taken back to the original condition.

Even if you have not altered any of the physical space, some leases will state certain maintenance expectations. Examples may include clauses stating “painting every 3 years” inside and out, clearing of gutters, maintenance of flat roofs etc. In this case it could be that there is automatically a certain amount of liability before you even start.

 

How much can dilapidations cost?

 

Often times the tenant doesn’t actually organise and pay for the works. Rather, estimates are formed by a Building Surveyor or a QS. Once estimated, a settlement figure is negotiated between the landlord and outgoing tenant. Believe it or not in my experience a dilapidations settlement tends to be comparable to around 12 months of rental. This can mean that a five year lease actually ends up having an additional 20% to the term amount. Sometimes it can be wildly different from this, but it is not a bad rule of thumb.

So if you are thinking of taking on a leased space remember there could be a sting in the tail.

 

How to guard against future dilapidations.

 

Read the Lease and seek advice. I know it might seem patronizing, but it always amazes me how many people and businesses don’t seem to take the time to read through a proposed lease. To reduce the possible impact, make sure you have taken the time to read through the lease clauses concerning dilapidations and accurately record the property condition. It is exciting to be taking on a new space for your business, but make sure you don’t sign up to a guaranteed future liability.

It is important to try and build a good relationship with your landlord, but don’t rely on this. At the start everyone has the same goal of getting your business into a unit. However, those goals can change over time. You might have a great relationship with your landlord but if they sell, the incoming landlord will only have the paperwork to refer to. Over time we have purchased a few leased properties and it is amazing what the lease dilapidations clauses have included.

 

There is an alternative to leases.

 

There is another way! Seek out properties and workspaces that are let with a “License to occupy”. This is very different to a lease and can be much more flexible. Typically the initial license period is 12 months. There can still be some exit costs for damage, but this clause if there is one, tends to be much less onerous. This type of contract works readily in multi-let commercial buildings. However, it is not so popular for those seeking long term security on single let units. Serviced or managed space let under a license to can include office space, storage space and workshops. We even have some serviced warehouse units that work really well.

Although Leases form the most common contract type for commercial space, the Commercial property market is gradually and steadily moving towards more flexible offerings. This is driven by customers and landlords with a more hands on approach, seeking to innovate and respond to changing customer demands.

Here at LibertySpace, we let on a License basis rather than leased. This gives both our clients and ourselves more flexibility. In terms of Dilapidations, the main difference with a License to occupy is that the landlord or “Operator” will more often than not provide general maintenance as part of the license agreement and not serve a large schedule of dilapidations at the end of the contract period potentially saving thousands.

 

Good luck with your business growth.

 

Do your homework, look for some modern alternatives to Leases and don’t get too emotional with the whole experience.

Leasing and investing in Commercial property can be daunting if you are not used to it. At the best of times the industry can seem a little opaque. So if you need any advice seek out a reputable surveying practice, or get in touch, we would be happy to help.

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