© Burak Kebapci unsplash.com
I spend most of my working life dealing with dilapidations and I am interested, as I'm sure many of you are, in seeing how net-zero carbon will be achieved in this area of practice.
As building surveyors, we probably all instinctively know that a dilapidations claim and the completion of dilapidations works is, or can easily be, wasteful. So let's focus on how to address this issue of waste, and in particular the excess carbon emissions it causes.
We are all familiar with the tried and tested leasing cycle: first there's a category A fit-out – the landlord's original open plan – and then a category B fit-out to the tenant's specification. At the end of the lease, the category B fit-out is removed and it's back to category A before a new category B fit-out, which is in time stripped out and refurbished to category A – you see where I'm going.
But in each cycle, the category B reception and the kitchen will always be in the same place, and the meeting rooms will have the best view. So there must be circumstances where that category B fit-out has some merit and does not actually need to be stripped out. However, my experience is that outgoing tenants' fit-outs rarely survive to demonstrate their worth to the next one.
There are probably good market reasons for this, and we often hear agents tell us that the best opportunity to relet office premises is to strip them back to an open-plan arrangement.
But it is time to challenge that received wisdom, as my company TFT is doing, so dilapidations can become green. The only question is how to achieve this. Unfortunately, the answer is 'not easily'; but we are still making a start.
TFT has devised a green dilapidations service to help clients reduce the additional material, resources and cost associated with repeatedly fitting and stripping out commercial property spaces over their lifetime. Taking a long-term view of tenancy, occupier and market requirements, the process seeks more efficient, sustainable dilapidations claims to benefit both landlord and tenant.
Either landlord or tenant can propose to the other party that the green dilapidations procedure be used. If both parties agree, they can sign up to TFT's template process, as set out in a memorandum of understanding, or adapt it to their particular circumstances.
Should the new tenant receive a premium from the landlord to take on a liability to strip the existing fit-out at the end of the new lease term, then that amount can form part of the claim against the outgoing tenant. If the new tenant has no obligation to remove the fit-out at the end of the new lease term, then a notional 40% of the day-one cost of such removal is factored into the current claim against the outgoing tenant.
Alternatively, if there is a mix-and-match approach where some fit-out is retained and some is not, then the amounts payable are based on appropriate proportions of the above sums. If more than one such sum is relevant – as when the landlord pays for repair and redecoration and there is a premium payment to the new tenant to strip the fit-out at the end of its lease term – then the average of the applicable figures can form part of the claim against the outgoing tenant.
If on the other hand marketing is not successful then the landlord strips out the fit-out, and that cost can form part of the claim against the outgoing tenant. The cost of the original repair and decoration works, it is agreed, is not superseded by the subsequent strip-out.
In case there is a disagreement about the scope of the claim or the figures – and let's be honest, there will be – there is also a dispute resolution clause in the TFT memorandum, just as there should be in every lease for dilapidations disputes.
All this might look a bit complicated; but dilapidations can always be complicated, so when involving any new procedure we unfortunately need to try to predict all eventualities.
'Green dilapidations is a procedure that either party can propose to the other'
While green dilapidations can be considered at the end of the lease term, greater progress towards net zero can be made if the principles of sustainability, the circular economy and waste reduction can be thought about at fit-out stage.
Most commercial leases will allow the tenant to make changes to the premises if landlord's consent is obtained, and landlords are normally obliged to act reasonably in giving that consent. However, we need to think about what 'reasonable' means today, and what it should mean.
At the moment it probably means that changes shouldn't affect the performance of the building, that they can be reversed if the landlord wants them removed, and that they should not disrupt other tenants.
But what if 'reasonable' also had sustainable implications? Suppose landlords decided to define the parameters by which any application for consent from a tenant would be judged – and suppose those parameters were green? That would be good, no?
It is likely that, if a landlord were going to depart from what a court would decide was reasonable, plenty of notice would need to be given to a potential tenant, and indeed to existing tenants.
It would also seem to be appropriate for a landlord to abide by its own parameters when completing its own category A works, when carrying out service charge works, and when completing previous tenants' dilapidations works. It is likely that being green would also be more expensive; so tenants will need to be on board at an early stage if disputes are to be avoided.
What might these parameters be?
The law does not help in the transition to net zero.
Claims at lease-end are usually concerned with damages; that is, for enough money to put the injured party back into the position it would have been in had the breach in question not happened, so far as this can be achieved financially.
If landlords carry out the dilapidations work, there is a firm expectation that a court will decide that the tenant should pay for these, even where they were damaging to the environment. A court will probably be particularly impressed with a landlord's claim if the latter can show that it was following professional advice from a surveyor or agent when it decided to remove that fit-out.
What if the professional advice started to change, though, and more and more tenants rejected the idea of resources being wasted before their occupation? Suppose courts started expecting landlords to have considered the environment before – or at least in conjunction with – cost? We need to consider a new currency: damage measured in carbon emissions, as well as damages measured in pounds.
These things might happen by themselves; but what can we do as building surveyors to try to encourage the necessary change? We are talking to our landlord clients and their agents about the possibility of fit-outs being retained. We can also calculate the carbon emissions associated with stripping-out and replacing fit-outs.
We can talk to RICS about updating the content of its Dilapidations in England and Wales and Dilapidations in Scotland guidance notes to take account of changing thinking in this area. And we can talk to the Ministry of Justice about the courts' expectations, as set out in the Dilapidations Protocol.
I’ll be doing the latter two myself – but it would be good to know if I have your support. It’s easier to propose change if you are not a lone voice.
I haven't mentioned green leases in this article. But I hope that some of the above suggestions can be incorporated into leases as a matter of course, so we don't need green leases. That way, we will just have either leases or polluting leases.
Dilapidations is not a green process, but it will become greener, and we need to help our clients achieve that. I have identified a couple of possible approaches but there will be other ideas – and probably better ones.
Let's get this moving, and quickly. Let's have a race to the top.
PROPERTY JOURNAL
Vicky-Jayne Lee MRICS 19 April 2024
BUILT ENVIRONMENT JOURNAL
Neil Hope-Collins 16 April 2024
PROPERTY JOURNAL
Zhana Lennox MRICS 12 April 2024
