Guide
Office dilapidations: fit-out, reinstatement and the per square foot trap
Updated
In offices, the argument is usually less about the fabric of the building and more about what was done to it: partitions, cabling, kitchens, air conditioning and floor boxes.
Reinstatement is the office-specific problem
In a typical office letting the tenant fits out: partitions, meeting rooms, comms rooms, kitchens and tea points, additional cooling, data cabling and floor boxes, feature reception areas. Each of those works is usually authorised by a licence for alterations, and it is normally the licence, not the repairing covenant, that says whether the tenant has to take it all out again at the end. Two offices with identical wear can therefore face completely different claims.
What to check, in order
- Assemble every licence for alterations granted during the term, including ones granted to previous tenants if the lease was assigned to you.
- Read what each licence requires: reinstatement in all cases, reinstatement only if the landlord elects, or no reinstatement at all.
- Check the election mechanics. Where reinstatement depends on the landlord requiring it, there is usually a notice and a deadline. Whether it was validly given matters.
- Check whether the landlord actually wants it out. A landlord re-letting to a similar occupier may prefer the fit-out to stay; that conversation is worth having early and can remove a large part of a claim.
- Then look at repair and decoration in the ordinary way, and at any schedule of condition.
- Then look at value, because everything is still subject to the section 18(1) cap. See the diminution cap.
The per square foot benchmark, and why to be careful
Office dilapidations are often discussed in pounds per square foot, and finance teams reasonably want a figure for provisioning. Be careful what weight you put on one. Any benchmark comes from other buildings with different covenants, different licences, different schedules of condition and different landlord intentions, and section 18(1) means the recoverable sum depends on the effect of the breaches on the value of your landlord's reversion. A benchmark can frame a conversation. It cannot support a provision, and it will not survive a properly argued response.
The accounting treatment of a dilapidations provision is a question for your accountants and auditors under the reporting standard you apply, and the tax and VAT treatment of dilapidations payments depends on the facts. We do not give accounting, tax or legal advice, and we do not publish figures for any of them here.
The cheapest moment to act
- Twelve to eighteen months before expiry, when there is still time to do works yourself, at your own contractor's price, rather than pay damages calculated on someone else's.
- Before a break date, where a break condition may require vacant possession or compliance with covenants. Break conditions are strictly construed, so get advice well ahead.
- Before signing a new lease, when a schedule of condition can be annexed and reinstatement obligations negotiated. This is the single most valuable moment in the whole subject.
- On assignment, when the incoming tenant's position and any authorised guarantee arrangement change who ends up carrying the liability.
Get a liability assessment on your actual lease and licences rather than a benchmark. Send the details and dilapidations surveyors will quote for one.