By Alastair McCoan, building consultancy partner at Knight Frank Scotland
After nearly three years interrupted by Covid-19 and macro-economic disruption, 2023 could be the year many businesses start making big decisions. With staff continuing to return to their workplaces, making an office move could well be among the top priorities.
As exciting as that is for any company, a move can also come with a sting in the tail if it’s not handled properly. While it’s understandable that an occupier might be focussed on its new space – and, likewise, the landlord on its new tenant – they also need to think carefully about the accommodation left behind.
Firstly, and perhaps most importantly, landlords must provide compelling evidence of their loss. If there is no process set out for the works, it is open to question whether the landlord actually intends to deliver them – a list of works is unlikely to suffice.
Early on, the landlord should assess the condition the premises is in and draw up a list of any works that are required. In fact, well before an occupier vacates, they should find out their plans and consider how this might impact the necessary works, and then begin tendering.
On the other side, occupiers should remember that landlords typically have the right to ask for the removal of any alterations made to a property and request repairs are delivered to a good standard. Even if what the occupier has done might be seen as an improvement, it needs to be accepted by both parties.
In practice, this means landlords are usually looking for clear, open floor plates. However, in an industrial context, occupiers can often legitimately argue some alterations are a benefit to the property, whereas retail landlords are more inclined to want a ‘white box’ to re-let.
The actual assessment of a landlord’s perceived loss can be a difficult figure to agree, with many cases going to court. With this, there are important nuances in the legislation between Scotland and England – north of the border, for example, claims are potentially limitless.
Each scenario is unique, but it’s not unreasonable to suggest that a tenant occupying a typical 5,000 sq. ft. office may face a claim of up to £80,000-£90,000. This can escalate significantly depending on the extent of the occupier’s repair obligations and may include payment of additional rent if the premises have not been left in the condition required.
While the cost of works is often the tried and tested method of arriving at a measure of the landlord’s loss, it may not be the most appropriate.
In the past, occupiers have successfully argued that, unless the landlord has genuine intentions of carrying out the works, another method should be used. ‘Diminution in value’ is one approach, taking into account the value of a property in good condition compared to its current state.
The potential costs to occupiers and landlords at the end of a lease mean both of them need to consider how they can accurately measure and evidence their case. Regardless of the minutiae involved, they owe it to each other to avoid a dilapidations bill leaving both of their finances in disrepair.