An international dilapidations market

In September I had the pleasure of chairing the RICS Dilapidations Forum Conference in London, which was attended by around 400 delegates.

The conference took a different approach from previous years, with a much broader view of the state of the market, global influences, the trend for shared workspaces after the rapid expansion of WeWork – and inevitably Brexit. A few of the key themes from the day that stood out were: what dilapidations means in a global market; the growing preference for dispute resolution rather than litigation; and the challenges being faced in the retail sector.

It should be remembered that, although real-estate investment is an increasingly cross-continental business, there is no universal approach to dilapidations. In fact, outside the UK, Ireland and Australasia. 'dilapidations' is not a commonly used term.

Global markets have adopted inclusive leases that remove the need for dilapidations claims, with repair costs generally included in rents – leaving the landlord with the risk that they haven't allowed for enough to cover those costs in the rent they have set.

Conversely, repair costs in the UK fall to the tenant, making the market more attractive to investors as there are better mechanisms to recover their costs, and the lease is seen as being favourable to landlords. Even in countries where the emphasis is on the landlord to cover the cost of repairs, though, each jurisdiction has slightly different rules, so taking advice from specialist surveyors who have local knowledge is advisable.

Meanwhile attention is increasingly being paid to the role of alternative dispute resolution (ADR) in preference to lengthy litigation. In his keynote at the conference, Property Litigation Association chair Bryan Johnston talked about the need for surveyors and litigators to maintain strong relationships, stressing that parties should use ADR unless there is good reason not to.

In the UK tiered dispute resolution clauses are becoming more prevalent, though this is not reflected internationally, except in Spain where expert determination is used regularly to resolve disputes.

As advisers we have a duty to do what is best for our clients, and this often means resolving conflicts and disputes in the quickest and most cost-effective way possible. Avoiding court hearings reduces expert costs accelerates progress towards a resolution and avoids the public airing of laundry that comes with a hearing. Mediation and arbitration therefore appear to be a good option for resolving dilapidation disputes.

Elsewhere though, news has not been so positive. As the retail sector has continued to struggle, it has had a number of impacts on the dilapidations process for retail property because the two have always gone hand in hand. In a panel session Graham Chase of Chase & Partners. RICS chief economist Simon Rubinsohn and Tom Sleigh of Colliers International told us a tale of mixed fortunes. Both the retail and mid-market restaurant sectors continue to struggle, which increases the pressure on landlords to recoup costs via the dilapidations process.

On average, it is now taking 340 days to let a shop, and around three years to let a retail unit of more than 930m². By the third quarter of 2019, too, more retail units had closed than the total of 2481 for 2018. Many landlords are thus considering repositioning their high street and other retail assets. On the flip side, flexible office and retail space is in high demand, and converting units to respond to this interest will enable landlords to let them much more quickly. However, this has an impact on the way they go about claiming dilapidations from outgoing retail or leisure occupiers.

Reflecting on the conference, I think that we should always keep our clients' commercial endeavours in mind. They don't pay us to score points and engage in expensive ego-fuelled debates over trivial matters. We should all strive to understand the bigger picture, providing relevant, commercial advice that gets a deal done at the right time and at the right level.

Christopher Sullivan is a partner at Hollis  christopher.sullivan@hollisglobal.com

Related competencies include: Landlord and tenant