The mistakes that cost tenants most: an interview with dilapidations specialist James McAllister FRICS

The biggest mistake happens before the lease is even signed

We asked James what it is that tenants consistently get wrong at the end of a lease; his answer starts somewhere unexpected: the beginning.

"The real mistake is not taking professional advice at the early stages of lease negotiations, namely at the heads of terms stage. Tenants often walk blindly into signing a full repairing and insuring lease that has onerous obligations they might not be aware of until the end of the lease. That's when the issues arise. The pre-lease negotiation stage is the time to consider and deal with future liabilities."

The second early mistake compounds the first: taking on a property that is already in poor condition without recording that fact.

"If a tenant signs a lease with a covenant that requires them to ‘keep’ the property in repair, that also obliges them to firstly put it in repair, and to leave it in repair on exit. If the property is in disrepair to begin with, they're walking straight into a load of liability. That would be a good opportunity to have a schedule of condition agreed with the landlord and appended to the lease. This will absolve the tenant from having to put right defects that already exist – the inherited liability."

Why does it keep happening?

"Because new tenants are focused on the business, not the exit. Their priority is getting their fit-out done and getting operational. Potential pitfalls at the end of a five or ten year lease are usually the furthest thing from their mind."

The most expensive mistake: getting a break clause wrong

Asked for the costliest error he has seen, James doesn't hesitate: mishandled break clause exits.

"Some break clauses require payment of rent up to the full quarter, beyond the break date, and some tenants just pay to the break date. That might violate the conditions of the break clause. Some clauses require any antecedent breach to be remedied as a ‘condition precedent’ to the operation of the break clause, and that's dilapidations. Tenants often just give the keys back without taking advice on what they need to do to return the property in a compliant condition, only to then find they have not satisfied the break conditions and the lease remains extant."

"The cost of this mistake is having to then continue paying rent on a property they may have vacated. That might be another five years of rent until the next break date arises or to the end of the lease. The problem is exacerbated if that tenant has already signed a new lease elsewhere."

What indicates that a tenant has not taken professional advice?

A landlord's surveyor can usually spot an unadvised tenant from their first response to a schedule.

"If the tenant is responding to the schedule on their own without a surveyor involved, it is usually obvious. They don't understand the law and they approach it from an emotive viewpoint. The usual arguments of 'well, it was like that when we came here' without understanding that the legal implications are deeper than that."

"A dilapidations claim is ultimately a claim in damages for breach of contract. A lease is a contract, and the reason you've been served with a claim is because you've failed to observe those covenants. It's a serious matter, which few tenants properly appreciate."

Where do tenants overpay, and where do they roll over too easily?

The money in dilapidations claims, James says, can be lost in both directions. Tenants pay for things they could have easily argued out of the claim, and fail to challenge things that were never really a loss to the landlord.

"They overpay for things that could easily be argued, i.e. where there might be supersession, for instance. Had they played the long game, they might find works are superseded because the incoming tenant puts in their own fit-out or does works that mean the outstanding breaches no longer cause the landlord a loss."

"I've seen tenants pay for things that, had they taken proper advice, they probably would have avoided having to pay for because there's no discernible loss or no evidence of an actual breach of covenant. Tenants who aren't properly advised will roll over and accept things that could have been challenged on legal grounds."

The same theme runs through the disputes that end up in litigation, where James is often instructed as an expert witness or mediator. In his experience, claims usually escalate because one side's advisers don't understand dilapidations law and procedure and thereby mismanage their client's expectations, or because neither side has properly assessed the landlord's actual loss early in the process.

Beware of the dabblers

Dilapidations used to be seen as a dark art, James says. Now more firms offer it as a service line within building consultancy, but few are properly equipped with the skills and knowledge to execute the task professionally.

"There are a lot of dabblers. Even among qualified chartered building surveyors. They might be also dealing with project management, pre-acquisition surveys, homebuyers reports or rights of light cases. It's an area where you need to be doing that and pretty much that alone. You wouldn't have a local GP who also dabbles in heart surgery, you need to be a specialist."

He is equally wary of the growing number of contractors selling strip-out and reinstatement works to outgoing tenants, and he shared a statistic that should give any tenant pause before booking the builders:

"In all the claims I deal with, the works are only ever undertaken by the tenant in probably less than 5% of cases. Most tenants will exit without doing the works and settle the claim as a financial payment. It might be the case that no works are needed, and even if they were, you could end up spending a lot of money on works that might have been negotiated out of the equation by way of legal argument."

In other words: paying for works before taking advice can mean paying twice for the same mistake, once to the contractor, and once more in a settlement for works it transpires have not been done to the landlord's satisfaction.

The takeaway

Every answer James gave comes back to the same point. The tenants who lose the most are the ones who act without specialist advice: at pre-lease negotiations, when agreeing the heads of terms, at the break date and when the schedule of dilapidations lands. The ones who achieve the best outcome get a genuine dilapidations specialist involved early, before positions harden and options close.

Our thanks to James McAllister of The Dilapidations Consultancy for his time and candour.