Ashfords Dilapidations – November Updates: Week Two

Dilapidations – To reinstate, or not to reinstate? that is the question

As 2021 draws to a close, what are the key forces and drivers that are impacting on reinstatement issues and litigation in the current market?

Economic uncertainty, the pandemic, repurposing buildings, growth of online sales, and the increased demand for residential accommodation (facilitated by enhanced permitted development rights) mean that for many landlords and tenants reinstatement is a complex and thorny issue. Landlords are often having to take reinstatement decisions before marketing, and any development appraisals, have been undertaken. Likewise tenants are frequently having to take a view on reinstatement at short notice, with a paucity of information. Sometimes the reality is that rushed reinstatement decisions can be little more than an educated guess and are something of a shot in the dark.

If reinstatement is an issue, from a legal perspective there are numerous factors for landlords and tenants alike to be aware of.

The lease, and any relevant licenses, may contain strict deadlines for the service of a Notice to Reinstate. Generally, it is accepted that Notice to Reinstate can be given by way of timely service of a properly drafted dilapidations schedule. Although the law is unclear, unless the lease or license stipulates otherwise generally it is accepted that it is implicit the tenant should be given a reasonable opportunity to carry out the reinstatement works. Therefore, landlords will need to take a view on how long it might reasonably take the tenant to procure the reinstatement works, especially in today’s market, and to time the service of the Notice to Reinstate accordingly. Potentially landlords may also need to allow the tenant to remain in occupation after the lease ends and to ensure this is properly and fully documented.

Invariably, with reinstatement the devil is in the detail. The contractional obligation to reinstate should be scrutinised. More often than not the obligation to reinstate will be found in the alterations covenant, the yield up covenant, or in a relevant license. The contractual liability should be analysed carefully. If the alterations were carried out before an assignment of the freehold reversion, or prior to an assignment of the tenancy, arguments can arise especially in the case of pre 1995 Covenants Act leases. It will also be important to understand when the alteration was carried out, and whether or not the alteration predated the lease. Unless there is a covenant to reinstate, liability for any unlawful alterations usually expires after 12 years.

If the covenant to reinstate is conditional, for example on Notice to Reinstate being given, or on Notice to Reinstate being given by a specified date, or the reinstatement obligation requires Notice to Reinstate being given in a prescribed form, the conditionality must be adhered to strictly.

Any protocol compliant schedule of dilapidations should separate out the reinstatement issues from the repair based breaches and claims. If reinstatement is an issue, the tenant’s liability will be based on the landlord’s actual loss. Importantly, it must have been reasonable for the landlord to reinstate. This is often a key concern, and in today’s evolving property market reasonableness can be a contentious and subjective issue. When reinstatement is in issue, unlike repairs Section 18(1) is irrelevant and not a concern.

The legal position will need to be fully assessed and understood before any Notice to Reinstate is served. In turn the decision, and timing, of any Notice to Reinstate will need to factor in procurement issues and concerns, including the availability of contractors, materials, etc. In the opinion of Chris Randall, from Lancer Scott, when landlords are considering dilapidations and reinstatement, it is important to understand just how much the world has moved on from when they previously let the property to the exiting tenant.

As Chris Randall emphasises, the requirements and expectations of any prospective tenants will have vastly changed from that of the exiting tenant. This shift is partially due to the change in office usage and future utilisation following the recent Covid-19 based events, as well as being due to the ever growing need to supply tenants with an attractive high specification facility, providing a flexible solution whilst creating a more agile working environment. Any refurbishment resulting from dilapidations should reflect these changes to attract the next tenant or accommodate any future incoming tenant’s aspirations to create a space that will help them achieve their business needs, reflect their brand values as well as provide an attractive environment for their employees and clients. Using dilapidations settlement payments wisely and early engagement with designers should in Chris’ view be encouraged to ensure smooth tenant transition and attract the right new tenants.