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THE TENANT'S NEGOTIATING POSITION

Further Guidance Topics

 

There are many factors which may influence a tenant's negotiating position and in order to assess the many options available to the tenant it is essential that surveyors are involved at an early stage otherwise the options available will be reduced. For instance, once a Terminal Schedule of Dilapidations is served after the end of the term, it is too late for the tenant to carry out the building works.

The main influences that will affect the tenant’s negotiating position are outlined below, with a very simplified assessment of some options that will be available to a tenant which will influence their negotiating position.


The Market
The property market plays an important role in the field of dilapidations and influences many areas. For example, currently in many locations there is an over supply of office space in some areas and a lack of demand in others. The result is that landlords are granting higher incentives and more flexible leases, which also affects the rental and capital values.

Tenants now want shorter leases on more flexible terms, which includes the provision of break options. In difficult times, landlords would try to satisfy as many of the tenants requirements as possible, whilst keeping a look out on any long term effect on their investment in the property.

The state of the market will influence, in particular, the end of term liability of the tenant, and as such, tenants will look to plan their exit strategy before the end of their lease. Tenants may use the market to their advantage by negotiating early surrender of the their existing lease, and take on a new lease for a lower rent. In some cases, onerous repairing obligations that were drafted in a more favourable market for the landlord can then be renegotiated on less abrasive terms.

Summary of Option 1 – Stay and renegotiate a new lease on more favourable terms.

On the other hand a tenant who wishes to vacate the premises at the end of their term will argue, in a poor letting climate, that the landlord is unable to let the premises in its existing condition without substantially improving the premises to suit current day tenants who are perhaps more picky as to the standard of accommodation they are prepared to take on. If the landlord is to improve the property, the dilapidations liability of the outgoing tenant will be substantially reduced.

Landlords now realise that unless they carry out repairing works they will be substantially disadvantaged in the market place, when compared to those premises that have been fully repaired in an over supplied market. They are therefore more likely to carry out repair works.

If the landlord does carry out building works what should the tenant do? In today’s letting climate (2002/2003) it is likely that the landlord will need to carry out a degree of improvements in order to secure a new letting. The tenant should therefore look closely at the proposed works in order to assess where these items of improvement overrides the landlord’s original claim for breach of covenant. This is known as supersession.

For example, the landlord may claim for damages for poor condition partitioning. Based on the facts, a tenant may have to agree that the partitioning is in poor repair and even agree an associated cost. However, if the landlord is going to strip out the partitioning the repair work that would have been carried out to the partitioning has been superseded by the landlord’s intention to strip it out.

The RICS Guidance Note Fourth Edition refers to supersession and a landlord’s surveyor is now obliged to distinguish between items that are and are not superseded, and this will be reflected in the Section 18 (1) Valuation.

Summary of Option 2 – Establish the landlord’s intentions after the end of the term, and where the landlord intends to do the work, analyse these works to establish whether supersession applies. Agree a reduced financial settlement.


What Happens After the End of the Term?
Supersession is one example of how the Landlord’s claim can be affected by circumstances after the end of the term. The Protocol states that the landlord must now declare his full intentions and if he intends to carry out the works. If so, he must state when he intends to do the works, what steps have been taken towards getting the works done, and enclose all accompanying documents to prove this intention such as Specification and Bills of Quantities.

In the case of Ultraworth Limited V General Accident Fire and Life Assurance Company Limited 2000 EGCS19 the large office building in this case was let on a 25 year lease with full repairing and insuring terms. The lease expired on July 1998. The office market at the date of expiration was poor, and conversely the residential market was booming and made this property attractive to residential developers. It was sold for £1 million in March 1999 to such a developer. The tenant, by the end of the term, had carried out none of the repairs.

The landlord’s Schedule of Dilapidations was costed at £1 million and the tenant was able to demonstrate that the landlord had no intention of carrying out the works. The property was sold for development and as the residential scheme involved significant internal alterations, the developer would not have benefited from the building being in repair. This is a classic example of supersession. The tenant carried out a Section 18 (1) Valuation and was able to show that the property had not changed in value due to the state of repair of the property and the dilapidations settlement was nil.

Summary of Option 3 - The tenant’s clear negotiating position in this case is to establish what the landlord’s intentions are at the end of the term. If a landlord intends to substantially refurbish the premises, which would result in many of the items of disrepair being superseded, then the tenant should consider carrying out a Section 18 (1) Valuation, and negotiating a financial settlement. This is likely to be substantially less that the cost of actually carrying out the works during the term of the lease.


To do the Works or Not? The Tenant's Dilemma
Having discussed the influence of the market and the landlord’s intentions for the property after the end of the term, the tenant may well decide that the landlord intends to carry out substantial improvements to the premises and therefore a financial settlement is in their best interests. However, what happens if the premises that they occupy is not affected by the landlord’s intentions? Furthermore, what if the market conditions for this particular property are such that there are tenants eagerly waiting to take up occupation of the premises providing that it is left in repair?

In this situation the landlord will be in a better position to establish loss. They could either prepare a Schedule of Works and carry these out providing that they reflect the outgoing tenant’s responsibilities under the repairing covenants, or grant new terms to the incoming tenant which reflects the disrepair. This may be reflected in a Schedule of Condition or a rent free period granted in lieu of a tenant carrying out the repair works themselves within a certain time period. The landlord will be firmly in the driving seat and be able to carry out the works to their own interpretation of the meaning of repair. This will naturally be more onerous than the tenant’s own interpretation and they can then recover loss of rent, service charge, and professional fees.

Summary Option 4 - In these situations the tenant should consider whether or not it is in their best interests to carry out the works themselves. This may involve having to vacate the premises early but it will mean that they can dictate the interpretation of the meaning of repair and the nature of the works themselves.
If this option is to be considered it is imperative that an early assessment of their negotiating position is carried out. There is also a risk that the tenant’s own assessment of the repairs necessary, may not accord with the landlord’s. The landlord may serve a Schedule of Dilapidations in any case.


The Formal Response
Under the terms of The Protocol a tenant should respond to the landlord’s claim within a reasonable time period which is usually two months. The tenant’s response should have regard to the landlord’s Schedule in sufficient detail for the landlord to understand clearly the tenant’s views on each item.

The more detail the tenant provides, the less room the landlord has to manoeuvre. This can also be said as vice versa when the landlord is preparing the claim.

The tenant should, in essence, prepare their own assessment of the dilapidations, which will include the same principles for which the landlord has had to go through in order to prepare the initial claim. These will include establishing the Lease documentation, the repairing obligations, extent of the demise, and other associated documents. The tenant must first establish whether the landlord’s alleged breach is in actual fact a breach.

The tenant will then question whether the remedy reflects the tenant’s obligations. Has the landlord required an item to be 'put into repair', when the repairing obligation is only to 'keep in repair'?

On the question of remedy it should be remembered that a landlord is likely to interpret the method of repair in slightly more onerous terms than that of the tenant. A landlord will be looking to relet the property and will therefore want the property to be “in repair” in the future. However, the tenant’s repairing obligation extends only so far as the end of the term. It is therefore important for a tenant to also consider taking documentary evidence such as photographs as close to the end of the term as possible to establish the state, repair and condition of the premises should questions arise in the future.

If the tenant is negotiating a financial settlement with the landlord then it must establish the cost of remedial works. This will involve carrying out their own detailed inspection of the premises on the same basis as the landlord used to carry out the original dilapidations assessment. It will include detailed site notes, measurements, and rates to arrive at a fair assessment of the costs. The notes will prove extremely useful in negotiations with the landlord in trying to establish the facts.


Negotiations with the Landlord's Surveyor
Using the landlord’s Scott Schedule, which should be provided electronically in a format, the tenant should make comments and state clearly those items that are agreed or not. The object of the Scott Schedule is to narrow down those areas where there is a clear dispute between landlord and tenant. The items in agreement can be set aside and surveyors can concentrate on settling the outstanding issues.

The Protocol states that professional advisors should meet before the tenant is required to respond to the claim and must generally meet within one month following the tenant’s response. The meetings will be “without prejudice” and preferably on site, to review the Schedule and to ensure that the tenant fully understands all aspects of the landlord’s claim.

The aim of The Protocol is to settle all issues, however, if there are still issues in dispute following the period of negotiation, then it is these issues that the Court need to decide rather than a whole host of issues. At this point negotiations may reach a stalemate and Alternative Dispute Resolution should be considered.