Going green: Are sustainable dilapidations possible?
The current practices of dilapidations are inherently wasteful, due to the lease cycles of Cat A and Cat B fit-outs. This process allows for tenants to transform a space to their own specifications and landlords to regain the space at the end of the lease in prime condition for the next tenant. However, the reality is that many buildings are fitted out almost identically between tenants due to the shape and nature of the space, which means that dilapidation liabilities offer a significant opportunity to help reduce the environmental impact of the lifecycle of the commercial space.
Currently, the legal assumption for dilapidations in England is that landlords will argue for tenants to pay for reinstatements at the end of a lease. However, a new framework as discussed by RICS could provide tenants with a way to reduce a landlord’s dilapidation claims by taking into account net-zero targets, and the ideas of a circular economy. Some tenants are already using the environmental impact of excess waste and carbon of a complete Cat A fitout as a defence to some claims, and this practice is only expected to rise in the coming years.
The first steps towards more sustainable dilapidations started nearly two decades ago in the shadow of the 2008 financial crisis. To enable compliance with the Financial Reporting Council’s accounting standard FRS12, which requires occupiers to budget for dilapidations in their accounts, tenants began to take earlier advice on likely dilapidations claims by commissioning Dilapidations Assessments. The creation of a strategy for dilapidations before signing the lease meant that tenants began to consider the design of fit out versus the cost of reinstatement. Cat B fit-outs that were easier, quicker, and less expensive to reinstate were often less environmentally damaging, but the motivation was more financial than environmental.
Today, the commercial property sector has the opportunity to find an evergreen strategy that meets both tenant and landlord requirements, including:
Ensuring future Cat B fit-outs use materials and are designed in a way that can be easily adapted by a future tenant.
Commissioning an environmental audit at the end of a lease to assess the impact of a Cat A fitout and which elements of the current build could be retained or reapplied by a future tenant.
Marketing the space with the aid of virtual reality, so that future tenants can explore the space as a blank canvas and decide whether it meets their requirements before seeing the current tenant’s fitout to decide what they may want to maintain for their own space.
Working with highly-skilled contractors who are able to adapt elements from one design to another with limited waste.