Businesses are continuing their flight to quality, seeking out top quality office space in order to meet their ESG aspirations. The definition of what constitutes ‘Grade A’, however, continues to mean different things to developers, landlords, and occupiers, and due care and attention must be given to how the dilapidations provisions are considered.

With this in mind, there are two common scenarios. Firstly, large scale developments (or redevelopments) with occupiers taking shell and core space on a pre-let. Secondly, the repurposing of existing assets where the landlord is refreshing, but ultimately retaining, the high quality CAT-B fit-out left by the previous tenant to market a ‘plug-and-play’ solution. This also works in relation to a landlord providing a speculative, but new, CAT-B fit-out complete with furniture.

For larger occupiers who are able to take a pre-let, the shell and core aspect plays into their ESG aspirations by avoiding waste. Gone are the days where a developer would deliver a CAT-A space, just for it to be ripped out by the tenant to meet their occupational requirements.

However, this often creates ambiguities when it comes to how the occupier must return the premises at lease end. Reinstatement clauses often reference a hypothetical base build specification that previously would have been delivered by the landlord, but now takes the shape of a financial contribution instead.

This, if not carefully considered, can, in some instances impose an even greater obligation than either party had originally intended. As much thought needs to be given to the hypothetical base build scenario as it would to physically delivering the space in that configuration.

Reference to fixtures, fittings, services and plant that will likely be outdated can have an unintended, but significant impact on dilapidations. Similarly, seemingly generic references and the inclusion of terms such as ‘modern equivalent’, or even ‘new’, can impose onerous obligations. There is no one-size-fits-all solution as each case will depend upon a number of factors.

Occupiers taking CAT-B or fitted-out space under traditional leases must also be aware. Have they adequately created an itinerary for furniture and chattels and is the obligation to ‘yield-up’ subject to a fair wear and tear exclusion? What if they make alterations to the already fitted-out space, do they need to put this back to a previous arrangement? Does the lease require them to reinstate back to an open plan CAT-A configuration or does it instead require that they deliver up the fitted space in full repair? Without due consideration to all these variables, both landlords and occupiers leave themselves exposed to a dispute with potential costly consequences at lease end.

So what does this mean in practice?

These changes in how space is delivered can create both opportunities and issues for occupiers, meaning care needs to be taken when exiting an existing lease, or signing up to a new one. Landlords are now looking beyond the simple repair and reinstatement covenants to ensure they can still recover dilapidations, which in short means they are becoming increasingly creative with their clauses.

The issue may seem unimportant at the beginning of the term, however,  we see many occupiers facing significant dilapidations liabilities when previously they had assumed there would be none. No business wants to spend £20 million on a building that will almost certainly be razed to the ground due to a stealth conditionality.

Ultimately, the devil is in the detail when it comes to dilapidations.

Further information

Contact Martin Heffron or Alex Bush

Building & Project Consultancy