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Covid-19 and the potential impact on Retail dilapidations claims

Traditionally, retail dilapidations claims have been easier to defend for Tenant dilapidations surveyors than other sectors, such as office and industrial sectors. However, Coronavirus may prove a further difficult hurdle for Landlord dilapidations surveyors in enforcing claims at lease end.

Retail properties, particularly ageing high street buildings, frequently suffer from low maintenance budgets which often sees them delivered in poor condition at Lease end, so making it hard for Landlords to achieve new lettings. Contractor costs to repair buildings are not insignificant, which can frequently be prohibitive to Landlords who might be fearful of spending with no apparent dilapidations settlement in sight.

In the past, the relative low value of high street properties has encouraged valuation arguments when defending claims (see below). In addition, supersession arguments – caused by new incoming Tenants willing to fit out a retail unit to their own tastes - has often allowed outgoing Tenant surveyors to adopt supersession arguments.

The high street was already in difficulty with retailers suffering from the rise in online shopping, and now, following the effects of the worldwide Covid-19 pandemic, the outlook for high street occupiers looks even more bleak without considerable Government tax, legislative and strategic support.

How will this impact dilapidations claims? With rental incomes for high street retail properties reducing, this drives down the property values. Under Section 18, Limb I of the Landlord and Tenant Act 1927, the value of a dilapidations claim may be limited by the difference in the value of the property ‘in’ repair against its value ‘out of’ repair at Lease end – Its ‘Diminution Valuation’.

With the values of such properties becoming lower, it is possible that valuers will appraise the difference in value ‘in’ and ‘out’ of repair to have constricted further, so that the Diminution Valuation becomes less than it might have been previously, resulting in Tenant dilapidation surveyors achieving lower settlements for their occupier clients.

There are however key points to consider:

Section 18 Diminution Valuations can normally only be adopted where Landlords do not complete the works – which incentivises Landlords completing the works, which is likely to be better for their beleaguered agents who are trying to let the properties to new Tenants.

In addition, prime retail areas in towns and cities such as Bath, Cambridge, Exeter, central London and Bristol are likely to be less affected, as they have greater demand, whereas those towns and cities with less strong demand for retail might be more affected, such as Swindon, Gloucester and Plymouth. A Tenant dilapidations surveyor might utilise the involvement of a Section 18 valuer extremely effectively in such locations.

An issue however is that frequently Tenant dilapidations surveyors have little experience of utilising the expertise of valuers or Section 18 Diminution Valuations. They pose a further fee for their clients, and if carried out at the wrong time of the negotiation, can be virtually useless.

Also, it is largely overlooked that a Section 18 Diminution Valuation can be utilised very effectively by a Landlord dilapidations surveyor to enforce a claim against a Tenant. Whilst this strategy is unusual, at Devonshire Partnership, we have used this approach with success in certain scenarios.

Whilst the next few years are likely to be difficult for many shop retailers, conversely, it is possible that some occupiers might see their dilapidations exits costs reduced as a result, if their Tenant dilapidations surveyor is able to incorporate Diminution Valuation defences effectively.

At Devonshire Partnership, like retailers, we don’t offer a one size fits all approach. Our specialist dilapidations surveyors have extensive experience of dilapidations claims across retail, industrial and office sectors, operating nationally from our South West Bristol office and London and South East office.

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