This time last week I had the pleasure of chairing the annual RICS Dilapidations Conference in London. The day long event provided an opportunity for the industry to come together to look at some of the key issues facing those dealing with dilapidations. Here are a few key take-aways from the various sessions:
Dilapidations – que est-ce?
Despite real estate investment being an ever increasingly cross-continent business, there is not a universal approach to dilapidations. In fact, outside of the UK, Ireland and Australasia, it is not a commonly used term. Dilapidations – what is that?
The widespread use of inclusive leases in global markets removes the need for dilapidations claims because the costs of repairs are generally included in the rents. This is something that makes the UK market especially attractive to international investors because they see the leases as being favourable to landlords.
Even in countries where the emphasis is on the landlord to cover the cost of repairs, each jurisdiction has slightly different rules, so taking advice from specialist surveyors who have local knowledge is advisable.
Litigation vs dispute resolution
There is a growing focus on the role of alternative dispute resolution (ADR) and a move away from lengthy litigation. Bryan Johnston, in his keynote, talked about the need for surveyors and litigators to maintain strong relationships, stressing that parties should be using ADR unless there is a good reason not to.
In the UK, tiered dispute resolution clauses are becoming more prevalent, although this is not being reflected internationally. The exception to this is in Spain where expert determination is also used regularly to resolve disputes.
Mediation is common place across all areas of law now, with real estate litigation no different. As advisors we have a duty to do what is best for our clients, and often this means resolving conflicts and disputes in the quickest and most cost effective way possible. Avoiding court hearings reduces expert costs, quickens the path to a resolution and avoids the public airing of laundry that comes with a hearing.
Mediation and arbitration appears to be a good option for resolving dilapidation disputes.
The perils of retail
Dilapidations and retail have always gone hand in hand. As the retail sector has continued to struggle, it has had a number of impacts on the dilaps process for retail property. On average, it is now taking 340 days to let a shop – and around three years to let a retail unit over 10,000 sq.ft – which increases the pressure on landlords to recoup costs via the dilapidations process. In 2018, 2,481 retail units closed, a figure already exceeded in 2019 by the third quarter of the year.
Many landlord’s are now considering re-positioning their retail assets.
On the flip side, flexible office space is in high demand and converting empty office and retail space to meet the demand for flexi space will enable landlords to fill the space much more quickly. This of course has an impact on how landlords can go about claiming dilapidations from outgoing retail or leisure occupiers though.