Office Dilapidations – A Costly Business!
It’s usually completely unexpected – and usually quite a shock. I’m speaking of the huge cost of vacating an office at the end of a lease.
Typically, businesses enter into a 3 to 5 year lease agreement and detailed in the ‘Heads of Terms’ is a dilapidations clause committing them to returning the office space back to its original state and specification upon expiration.
5 years seems like a long time, and in any case there’s a good chance that the lease may be extended so why worry now about how much its going to cost to move out? Hence, most don’t worry – indeed, most don’t even think about it. But the fact is that its going to be expensive – really expensive – and it will become apparent at exactly the time when its too late to do anything about it, and when funds are severely stretched because of all the costs associated with signing up to the next lease, moving and fitting out the next office.
To put this all in perspective, you may need to budget at least as much for returning your office back to its original specification when you vacate it as you paid to have it fitted out in the first place!! Yup, if you spend say £300,000 on your initial fitout, expect it to cost around the same amount and possibly much more to take it all out again and get everything back looking sparkling and new – exactly as it was when the landlord handed it over to you – to the finest detail!!
Here’s a recent example. We don’t usually get to see the landlord’s detailed quote but we did on this occasion. The office is 10,000 sq ft (1,000 sqm) over 2 floors. The lease was 10 years old and the original office space as presented by the landlord was not new but simply clean, decorated and carpeted (whether new or good condition existing not known). There were some existing partition walls and electrical floor boxes installed by the previous tenant, and the suspended grid ceiling and air conditioning and ventilation had already been in place for 15 years so that was not new. Upon occupation, the tenant spent an apparently very modest amount on adding a few partition walls, installing a couple of teapoints and fitting a feature ceiling within a small area beneath the existing suspended grid. SO, not much was apparently done, and not much (apparently) was spent. BUT, the expectations from the landlord were considerable.
Having notified the landlord that they were exercising their break clause in a few months time, the client received a reminder pointing to the dilapidations clause. Upon requesting the landlord should identify exactly what their expectations were, they sent a surveyor who compiled a 50 page report itemising every item – down to the minutest detail – that had to be addressed. With the usual expectation that the tenant would not have time to carry out these works themselves, the landlord quoted a price of £230,000. in addition to this, there were a number of items that had yet to be costed (tbc) and a further statement “this repair schedule is not exhaustive and the landlord reserves the right to require further works to be carried out, as required” !!
BUT, that’s not all. The real sting is this:- The landlord would also claim for loss of rental opportunity and other costs whilst they were carrying out these works – 18 weeks worth of rent, service charge and rates! Again I’m guessing, but given the specification, location and time that the lease was taken, I think it would be fair to assume the tenant was paying in the region of at least £100 per sq ft for these costs combined, so that’s 10,000 square feet at £100 = £1 million per annum, or £350,000 for an 18 week period.
To summarise, the tenant is potentially in for an estimated £500,000 dilapidation settlement if they can’t get the works done themselves before they vacate the building. So why not do it themselves? It would still be a pretty hefty bill, and there would invariably be substantial savings through their own contractor – not least they’d save the entire estimated £350,000 cost for rent claim – but the question is simply whether they can get the work done before the lease expires. The point to appreciate here is that the landlord is going to be ruthless and uncompromising. They are not going to allow the tenant’s contractors back into the building to complete the works after the last day of the lease term. Once the lease has expired, that’s it, the tenant has no further control.