The high cost of Office Dilapidations – Are you sure you can afford them?

By Crispin Maby

When looking for a new office to move into, the cost of rent, rates and service charges are not the only costs to consider.  Making alterations and fitting out the interior space to suit your needs is another potentially large cost, but often overlooked is the cost of putting it all back as it was at the end of the lease – dilapidations.  This can be a very nasty sting!

Most office occupiers will be aware of the end-of-term dilapidations lease clause which normally requires them to reinstate their office back to the same specification and condition it was in when they moved-in, but many are unaware of how far reaching and costly this can be. It’s not uncommon for the cost of dilapidations to be as much as, or even more than the amount they paid to have the office fitted-out in the first place.  Yes, you read that correctly but I’ll say it again, in a different way.  The cost of handing back your office to the landlord at the lease end could be greater than what you spent fitting it out when you moved in!!   So, before you commit to a property, you need to be absolutely sure you can afford the cost of both fit-out and dilapidations.  Even if you simply move straight in and do absolutely no fitting out (no partition walls, no new flooring, no electrics etc) there will almost inevitably still be a dilapidations cost in the end, and that could be substantial.

The cost of dilapidations is, to a certain extent, relative to the specification of the office space the landlord has provided (i.e. whether a new build or newly refurbished, what has been included and the quality of fit out) and how much the tenant then alters or adds to the space and causes wear and tear to the landlord-provided finishes.  The newer and higher specification of the landlords building and their base fit-out, the more it is likely to cost you both in terms of your own fit-out and dilapidations.

Taking on a shiny new office can be a very exciting time for an expanding SME, but they must be sure they can afford it. Not only are there the rents, rates and service charges but also the cost of fit-out (a topic for a separate article) and dilapidations. It should not be overlooked that dilapidations, although maybe 5 or so years down the line, are going to come into play at exactly the same time that the company is having to pay out on the fit out of the next office they take on, so in effect potentially doubling the cost of the office move.

The landlord will be uncompromising. Whatever is stated in the lease agreement must be done. Try as they (the tenant) might to point out that they have made significant improvements, or that the fabric has only been subject to normal wear and tear, these justifications are highly unlikely to hold water. It is up to the tenant to identify these issues whilst drawing up the heads of terms so that if there are any justifiable exceptions they can be written into a legal contract. And if the office is not newly refurbished and in pristine condition, then the tenant must identify this and get an upfront agreement stating the exact condition of every surface (walls, ceilings floors etc), fixtures and services, and what measure is going to be used in order to determine how everything is going to be reinstated back to the same condition.  This is not simple because, for example, the landlord might have left in place expensive carpet tiles which are in good condition but not new. After 3 to 5 years further use, it is most likely that these carpet tiles will be showing considerable wear, so what is the landlord expecting the tenant to do when they move out?  Do they replace them with exactly the same brand and colour in the same ‘nearly new’ state they were found – unrealistic and almost impossible – or are they expected to replace them with brand new carpets, and if so, do they need to be the same tiles or can they be a budget range?  Or do they simply come to an up front agreement that because they are not new and that it is impossible to therefore replace like with like, that an agreed settlement fee will be charged upon exit?   So, defining and setting out in writing at the outset exactly what is required at the end of the term is essential.

If you are planning on doing anything that you consider will be a significant improvement to the office space, and that will be beneficial to the landlord in helping them to re-let it after you have moved out, then again this is something you must identify upfront and tie into a written agreement – either that you will not be required to remove these items, or perhaps that they will be allocated a monetary value that will be deducted from the dilapidations bill (although in such circumstances it would be more normal for the landlord to make an up front contribution towards such works.  The sort of things that might qualify here would be the provision of (if not already in place) underfloor electrak power distribution systems, floor boxes, new and improved ceiling lighting and significantly improving wall and ceiling surfaces (perhaps re-plastering, drylining etc) if in a poor state initially.

Here’s another very important factor to consider.  More often than not you simply won’t have time to carry out any dilapidations works yourselves. These works can not take place whilst you are still occupying the space, and although  you might have all best intentions to leave sufficient time between moving into you new office and the lease-end date for the existing office,  most often it goes down to the wire and the two dates coincide.  Once the lease has officially ended, the landlord is highly unlikely to let your contractors back in for a few weeks (or even a few days) to carry out works and that means that you’re going to have to pay the landlord a settlement fee which is likely to be considerably higher than what it might have cost you if your own contractors had done the work.  Furthermore, even if you do manage to get the work done yourselves, you have to be absolutely sure that the finished result is exactly what the landlord is expecting (or what is written into the contract) otherwise you could get another bill from the landlord over and above what you have already paid out to your contractors for them having to put it right themselves.  In a nutshell, what I am saying is that when you enter into an office lease, you must consider the worst case scenario and ensure you have the budget to cover it.

So why does everything cost so much and what are those costs? I like to break this down into 2 areas: 1) Wear and tear or damage to landlord provided fixtures, fittings & services and 2) alteration works or additions that you have carried out.

Let’s look first at the landlord-provided aspect. Your new office is likely to be either Cat A or Cat B, or somewhere in between. Cat A is where the landlord has provided a base or basic fitout – basic in this case meaning essential services-only but not necessarily low cost or inferior quality. The essential services can, and very often are, done to a very high specification. For instance, it might have brand new high spec lighting and air conditioning, a new raised access floor and newly decorated walls and ceilings. Whatever you do with the office thereafter, however you might alter it or use it, you will normally be required to bring it back to exactly the same basic but quality state at the end of the lease. This would involve stripping everything out that you’ve put in, repairing (making good) any damage, and replacing any worn or damaged original fixtures and fittings so that it is ‘as new’. Normal wear and tear is usually not considered a ‘get-out’. You will have entered into a legally binding contract and agreed to replace or repair pretty much everything.

Any additions or changes that you make to the space during your own fitout would need to be removed and/or put back as originally presented.  A typical example would be the occupier  spends tens of thousands of pounds installing glass  and solid partition walls, expensive carpet tiles and floor coverings, new lighting and much more, only to find that the landlord demanded that they remove it all, make good all the decorations and replace the carpet tiles with new carpet tiles of the same specification that was in place when they moved in.  The outgoing occupier argues that they have made great improvements to the office so surely they should not be penalised for this.   The landlord argues that even though the tenant replaced the original carpet tiles with much more expensive ones,  they are now 5 years old and are showing signs of wear, whereas the carpets he fitted prior to their occupation, albeit of an inferior quality, were brand new. He will also argue that the layout of partitions is bespoke and is unlikely to suit another company’s needs, so it will make it more difficult to find a new tenant.  The landlord does not want to foot the bill for stripping out and making good the office, and nor does the incoming tenant, so the onus is on the outgoing tenant to make things right at their expense.

So is this fair? Not always, but if that is what is in the legal document, that is how it must be.  The main point I want to make, particularly to SMEs who may not be quite so experienced in these matters, is that the cost can be vast and run into £10s or £100s of thousands, so please, be careful!

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How much office space do I need? The HSE’s 11 Cubic Metre Rule

by Crispin Maby

I have re-written this article since first publishing it in 2014 because at the time I was critical of the vague definition provided by the HSE in one of their regulations.  But 7 years on I have re-read the same regulation and, although I might be wrong,  I think perhaps the wording has changed slightly.  Nevertheless, it is still its not entirely clear and I will explain why later. 

Also, in the light of Covid 19 I’m wondering whether regulation relating to this matter might become policed more strictly or indeed whether they might actually amend it.  If it is amended, I will endeavor to update my article again.

One aspect of office space planning that often gets overlooked is the personal space allowance as stated by the Health and Safety Executive (HSE).  It accounts not only for the floor area taken up by desks, but also the volume of space required per person.  So we have to consider a 3 dimensional aspect rather than just the 2D floor plan.

This is of particular importance to you, the office occupier, because it may well be the determining factor in establishing how many people you can have legally working from your office.  I’ll cover this later, but the point of this article is to explain that even though you might be able to physically fit a given number of desks (and therefore full time workers) into your office space, you might not be permitted to do so.

In a nutshell, the regulation (Regulation 10 of the Workplace Regulations 1992 to be precise) states that you have to allow a minimum of 11 cubic metres of space per person working in the office. Unfortunately though, even though this is a regulation, and therefore we must assume that it is law rather than a recommendation, the information they provide us with is somewhat vague.  The key areas of confusion as far as I’m concerned are that:

1. There are 2 contradictory statements,  one referring to the ‘the number of people who may work in any particular room at any one time’, and the other ‘the number of people normally working in a room‘ .  So which do they mean?   
2. The second vaguery is the wording in the following statement: ‘The figure of 11 cubic metres per person is a minimum and may be insufficient if, for example, much of the room is taken up by furniture etc‘.  What do they mean by ‘much of the room’, and what sort of furniture are they talking about?  Do they mean cupboards and large solid objects, or are they also including the desks and chairs that we sit on?

Perhaps its just badly written or poorly thought through, both of  which would be unforgivable considering this is a legal obligation for us to adhere to,  so maybe we should give them the benefit of doubt and assume that they realise it is simply too difficult and far reaching to cover every scenario and instead they are giving us guidance to which we need to apply a common sense approach.

For your own office, you will have to make your own judgement on this as I’m simply pointing out what is being said and what different interpretations mean you might, or might not be able to do.

Firstly to item 1 above – ‘the number of people who may work in any particular room at any one time’, and  ‘the number of people normally working in a room‘.    If you take the first statement literally, and you have, for example, 110 cubic m of clear air volume, then it means that you can only have 10 people seated at a desk at any one time. But if you take the second statement to be true, then perhaps you can have far more people working there on occasions, as long as there are normally no more than 10 people. But in this scenario, who decides what is normal and could it simply mean more than 50% of the time?  Also, specifically in relation to the 11 cubic metre rule, nowhere does it state how many desks you can have in relation to the number of people. So, hypothetically, in relation to both statements, you could have (as long as the space permits) a far greater number of desks than you would either a) have people working at any one time or b) normally working in the room. I suppose it could be argued that if the desks are there, it must then be assumed they could all be occupied and therefore encouraging the breaching of the rules.  My personal opinion on this would be that common sense must prevail here. Firstly, volume permitting or not, the 2 dimensional layout of the office has to be such that it allows for safe and practical working and this is covered (albeit extremely briefly) in the regulation.  But as long as it can be done in a sensible manner, then there is no reason why you shouldn’t maximise your layout to include extra desks as long as you take a common sense approach and risk assessment and ensure that your principles are adhered to.  After all, even in a busy office with full desk occupancy of full-time desk workers,  how often is it that everyone is at their desk (or indeed in the same room) at the same time?  People go for meetings internally or externally, people take different lunch and coffee breaks, people start and finish work at different times and so on, so even in these environments its very rare that every desk is occupied simultaneously.    

And on item 2 above,  we need to be sensible about this, and I don’t think anyone can be expected to start calculating how much volume each desk and chair takes up, besides which there is air flowing beneath and around them, so personally I would only be concerned about the impact of large cupboards and other very bulky items.  

Finally, before we move on, I should be clear that the rule applies only to workrooms and not meeting & lecture rooms (assuming they are used as such and not as full time work rooms).

So, onto some examples to help make everything a little clearer.  Given how unclear the regulation is as I outlined above,  I’ve decided to use the worst case scenario for my examples, that being the assumption that each desk must have an average 11 cubic metres rather than each person (therefore the assumption that each desk is occupied all the time).

In my experience,  the typical modern office has a ceiling height between 2.4 metres and 2.7 metres, so let’s go with 2.5m as a good compromise.  Firstly we need to calculate the volume of the room by multiplying the floor area by the ceiling height and then dividing it by 11. The resulting sum will give us the maximum number of people we’re allowed to fit into this space (if we have cupboards we will have to make a deduction for this before the division).   How does this look in practice?  Below I have done 2 CAD drawings (Figures 1 and 2), figure 1 showing an open plan office packed with as many 1200mm by 800mm desks (these are the smallest of the regular sized desks generally used in offices) that will physically fit, and figure 2 with the same office showing how many desks we would have to remove in order to achieve the capacity we are actually allowed.  To save you counting, there are 104 desks in figure 1, and this is reduced to just 58 in figure 2 – a reduction of 44% no less!

Ok, you say, but that’s an unrealistic office layout. We’d never have so many people in one area. We’d have other things like storage cupboards, reception counters, larger desks, meeting areas, breakout areas and probably also additional rooms.  Well I have to tell you that I’ve seen offices just like this (figure 1) and although perhaps an extreme example, the rule applies no matter how large or small the office is; – for example, we might not be looking at the main office, but a smaller room within the building into which you want to get as many desks as possible because your reception, meeting rooms and the like are in different parts of the building.  So the sake of continuity and simply to demonstrate a point, we’ll stick with the original plan for the time being and I’ll start introducing other factors.  Let’s assume that we’re now down to our 58 desks and we’re looking to fill the rest of the space as best we can with other furniture.   In figure 3 I have inserted 36 tall free-standing cupboards (let’s say 2m high) a couple of meeting areas, reception counter and waiting area.  The cupboards now have an impact on the permitted desk volume because I have had to factor in that each one has a volume of 1 cubic metre, and as a result it has reduced our room volume somewhat and in turn we’ve had to take out 2 more desks to compensate.

All very good, but it’s all very open plan and maybe we need some private space with sound and visual privacy, so figure 4 again shows the same office but this time with a large partitioned meeting room and 2 cellular offices.  Because we’ve introduced partition walls, the areas within these new rooms can no longer be considered to be part of the open plan area and the cubic capacity of the new and smaller open plan area reduces dramatically as a result. I have had to remove yet another 20 desks of the remaining 56, giving us now a mere 36 desks (a further reduction of 35%).  I must be honest, I don’t know whether I’m allowed to include the corridor as part of the open plan space (HSE guidance is not specific about these issues) but for the benefit of doubt I have not.  If it is permissible, then we would have been able to add back in a couple of desks.

So there you have it.   If the ceiling was higher, then we could have taken this into account and increased the volume and therefore quantity of desks, but this applies only up to 3m – there above we have to ignore any further height advantage.

How does this relate to typical office capacities?

If you are interested, the plans I have drawn in figures 1 to 4 have an overall footprint of 259 square metres (2,787 square feet).  When companies are looking for a new office, a very general but typical rule of thumb is that on average you allow 100 square feet per person (this takes into account the entire office, including meeting rooms, breakout areas etc). If you follow this rule of thumb, then on average, regardless of the ceiling height, the 11 cubic metre rule becomes far less relevant because in this example, you would actually only be looking to get 27 people/desks into the office and my worst case scenario allowed for 36 desks.  Be careful though, because it is all about the capacity of desks within a specific room or area and what this does show is that it’s unlikely that you would be able to cram any particular room just with desks and no other furniture or spare space.

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Space planning; why is it fundamentally important to space plan an office in advance of signing a lease?

By Crispin Maby

Don’t take a chance. Signing up to a 5 year lease on an office suite and then finding that you can’t make the layout work the way you ideally want it to, or worse still, you simply can’t fit everyone in without making some serious compromises can have a major impact on your business for a number of years.

The landlord or letting agent is only interested in getting you to commit to a long term lease at the highest possible rental rate and service charge. It’s neither their responsibility nor is it in their interests to tell you about any negative aspects of their office building and certainly they cannot be expected to make sure the space is suitable for your needs. That’s your job, and if you get it wrong, they’re not going to be sympathetic and let you off the long term commitment you’ve just signed up to.

Your own commercial property (acquisition) agent, should you choose to appoint one to assist in your office search, should be more accommodating – after all they are working for you and you are paying them – however, they usually work on a ‘finders-fee’ which they only get if and when you’ve entered into a lease agreement. Furthermore their fee is usually based on a percentage of the annual rental, so we must question whether they really have your full interests at heart, or whether their concerns are more focussed on their own pockets. Perhaps I’m being very unfair on the commercial agents – there are a lot of very good ones out there and I know a few of them – but their job is to help you find a property of the size and specification that you decide you want. You need to tell them what you want and they will find it, but don’t expect them to spend time working out how you’re going to make best use of the space, or whether you can fit everything in. At best, they might throw a few rule-of-thumb figures at you – the most typical being 100 square feet per person – but every business is different and uses the office space in different ways, so one size (or rule) certainly doesn’t fit all. Also, the usable space of two offices of identical floor size (square footage) are likely to be completely different, so any general sizing rules should be used with caution. Take a guess and you may well find that you’re either committing to and paying for far too much space, or perhaps worse, not having enough space. Either one can have a serious financial impact on your business.

Space planning will confirm whether an office is too big, too small or just the right size and shape. But this needs to be done as soon as you find what you consider to be a potentially suitable office and most definitely not further down the line when it’s in the hands of the solicitors, or when the lease has been completed.  If it comes to light that the office is unsuitable, then you will hopefully have time to find another one that is.  There are plenty of companies and individuals who can offer you a space planning and measured building survey, some of whom might do it for free and others charge, but either way it is worth getting them in to assist you in making the right choice.

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