Article
How to minimise and avoid unexpected costs at lease expiry
July 17, 2024
Associated Contact
Qusain Khan
Director & Chartered Building Surveyor, New Zealand
For many commercial property tenants, the technical and legal side of lease agreements is something that is often ignored.
You’re not alone – the day to day demands of running a business mean the dull but important details including dilapidations, premises condition reports and make-good obligations are easily overlooked. However, tenants can avoid unexpected end of tenancy costs by taking the time to address a few key points early. Workspace asked CBRE Building Consultancy Director, Qusain Khan, to explain.
You’re not alone – the day to day demands of running a business mean the dull but important details including dilapidations, premises condition reports and make-good obligations are easily overlooked. However, tenants can avoid unexpected end of tenancy costs by taking the time to address a few key points early. Workspace asked CBRE Building Consultancy Director, Qusain Khan, to explain.
What are dilapidations?
Dilapidations are an area of property law that enable a landlord to claim money from tenants, at the end of a lease, to cover damage and neglected repairs, maintenance, reinstatement of alterations or other necessary remedial works outside what would be considered normal fair wear and tear as a result of reasonable use of the premises.
Dilapidations are well-established in the commercial leasing market internationally and are becoming more common in New Zealand. When a commercial property is leased, conflicting interests can arise between landlord and tenant. Naturally, tenants are more concerned with how their leased property performs and looks, while landlords are focused on optimising their financial returns and ensuring the property’s value and integrity are protected.
A robust lease agreement attempts to reconcile these points of view by placing obligations on each party relating to condition, repair and maintenance. If one of the parties (usually the tenant) fails to meet these obligations, a breach arises. These breaches are set out in a schedule of dilapidations.
Dilapidations are well-established in the commercial leasing market internationally and are becoming more common in New Zealand. When a commercial property is leased, conflicting interests can arise between landlord and tenant. Naturally, tenants are more concerned with how their leased property performs and looks, while landlords are focused on optimising their financial returns and ensuring the property’s value and integrity are protected.
A robust lease agreement attempts to reconcile these points of view by placing obligations on each party relating to condition, repair and maintenance. If one of the parties (usually the tenant) fails to meet these obligations, a breach arises. These breaches are set out in a schedule of dilapidations.
What is a schedule of dilapidations?
A schedule of dilapidations identifies the specific lease obligations that a tenant has breached and sets out the remedial works required to rectify these. Depending on the type of schedule produced, a cost is allocated to the breach, which becomes the amount the tenant is required to pay for “make good” works, repairs and remediation.
A key point here is the timing when breaches were identified. If a schedule of dilapidations is served during the term of a lease, it is called an 'interim schedule of dilapidations'. This informs the tenant of any outstanding repair, maintenance and or make good responsibilities. Essentially it’s an early warning of what works may be required. It also gives the tenant the opportunity to remedy the breach themselves during a set timeframe. Tenants can then phase their remedial works to spread the cost over time, which can be greatly beneficial in budgeting.
If the lease has already expired, the schedule of dilapidations is called “final” and does not give the tenant the right to carry out their own repairs. Instead, you may be served with a hefty bill that could easily amount to a year’s rent.
A key point here is the timing when breaches were identified. If a schedule of dilapidations is served during the term of a lease, it is called an 'interim schedule of dilapidations'. This informs the tenant of any outstanding repair, maintenance and or make good responsibilities. Essentially it’s an early warning of what works may be required. It also gives the tenant the opportunity to remedy the breach themselves during a set timeframe. Tenants can then phase their remedial works to spread the cost over time, which can be greatly beneficial in budgeting.
If the lease has already expired, the schedule of dilapidations is called “final” and does not give the tenant the right to carry out their own repairs. Instead, you may be served with a hefty bill that could easily amount to a year’s rent.
What can tenants do to avoid all this?
The wording of your lease agreement can have a large impact on your liabilities down the track, so have a close look at the dilapidations clauses and ask for advice from an expert before you sign up. Be clear about what you are taking on and who is responsible for what. A Chartered Building Surveyor or property lawyer can help.
Schedules of condition
We also advise tenants to have a schedule of condition (also called a premises condition report) drawn up. This can help limit your make-good liabilities. Essentially, these documents ensure both landlord and tenant agree on the condition of the property right from the start. If, at the end of the tenancy, you need to prove that the premises were in poor condition when you moved in, being able to present a schedule of condition gives you a strong legal footing to stand on.
Schedules of condition don’t cost a lot to produce. They aim to limit reinstatement liabilities for the tenant at lease end and they also set out ownership of fixtures and fittings to avoid any confusion later. They will also include photos to accurately record the condition of the premises. The schedule of condition is then signed by both parties and added to the lease agreement as an appendix.
Through spending a relatively small amount of time and money at the start, tenants can greatly minimise the risk of being served a final schedule of dilapidations at lease end that, more often than not, will be substantially more costly.
Involving a Chartered Building Surveyor early in the lease agreement process can greatly help in achieving a beneficial outcome for the tenant.
Schedules of condition don’t cost a lot to produce. They aim to limit reinstatement liabilities for the tenant at lease end and they also set out ownership of fixtures and fittings to avoid any confusion later. They will also include photos to accurately record the condition of the premises. The schedule of condition is then signed by both parties and added to the lease agreement as an appendix.
Through spending a relatively small amount of time and money at the start, tenants can greatly minimise the risk of being served a final schedule of dilapidations at lease end that, more often than not, will be substantially more costly.
Involving a Chartered Building Surveyor early in the lease agreement process can greatly help in achieving a beneficial outcome for the tenant.
What else can I do during the lease term to avoid liabilities?
In addition to agreeing an initial schedule of condition, good property maintenance during your lease will help minimise any liabilities at the end. If you want to do any alterations or change the fit out of the premises, check your lease agreement first as you might need to get written permission from the landlord. The lease agreement will also set out whether any alterations have to be removed at the end of the lease.
If you are served with an interim schedule of dilapidations, take advice from a Chartered Building Surveyor straight away. Your surveyor will assess the claim and negotiate with the landlord on your behalf, which will help you manage the process and may also reduce your liability.
If you are served with an interim schedule of dilapidations, take advice from a Chartered Building Surveyor straight away. Your surveyor will assess the claim and negotiate with the landlord on your behalf, which will help you manage the process and may also reduce your liability.
How do I find an expert to help?
CBRE’s in-house Building Consultancy team specialises in dilapidations and can assist tenants with schedules of condition, make-good assessments, due diligence reporting, reinstatement cost assessments and planning a forward schedule of any remedial works required.
Our team has helped many tenants reduce their dilapidations liabilities and we work with large corporate occupiers right down to small businesses. Contact us to find out more.
Our team has helped many tenants reduce their dilapidations liabilities and we work with large corporate occupiers right down to small businesses. Contact us to find out more.
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