Sheffield and South Yorkshire landlords could see the value of their property eroded by as much as 30 per cent if tenant businesses fail to honour their repair obligations because of the recession, leading Sheffield property consultancy Knight Frank warned today.
Jonathan Ingleby, partner in the building consultancy team at Knight Frank’s Sheffield office, says: “In the large majority of leased premises, responsibility for repairs rests firmly with the tenant but, in these tougher economic times, can the landlord be guaranteed that the tenant will be there at the end of the lease to fulfil their obligations?”
Jonathan explained that almost all commercial leases have provision for the landlord to undertake interim dilapidation inspections to ensure that the tenant completes the necessary repairs and maintenance to comply with the terms of their lease. This is included to protect the landlord’s asset throughout the term of the lease not just at the termination stage, prior to the property being handed back.
Jonathan added: “Landlords can often take a relaxed approach to dilapidations during the course of the lease and trust the tenant to maintain their property in good condition without actively checking it for themselves. Property maintenance, particularly in leased premises, often drops off the radar during times of recession which clearly increases the potential exposure for the landlord.
“Dilapidation liabilities typically run at 10-15% of the asset value of the property but this can sometimes extend as far as 20-25% of the value if the property has been neglected. When this liability is added to a loss of rental income, a void period whilst repairs and maintenance are carried out, and professional fees for arranging work, it is easy to see how a landlord could be staring down the barrel of a 20-30% erosion in the value of their property should the worst happen.
“Similarly, where a landlord retains part of the responsibility to maintain the property and recoup expenditure via a service charge arrangement, costs can generally only be recouped once the work has been completed. A typical example of this would be where a landlord is responsible for maintaining the external walls, windows, roof and common stairwells in a multi-let development. In these situations the landlord should be more pro-active than ever to minimise the risk of being left with a service liability charge and no tenant to allocate it to.
“A very high profile example of this was the collapse of the high street chain Woolworths. This has undoubtedly left a large amount of property investors and landlords with a significant liability resulting in a loss in asset value. Of course, nobody can predict where the next casualty might come from. It seems the only thing that is guaranteed in the current climate, is that nothing is guaranteed. The best advice for landlords is to take reasonable steps to mitigate this risk should they find themselves with an unexpected vacancy.
“In almost every case, the cost of instructing a building surveyor to inspect a property on behalf of the landlord will be rechargeable to the tenant under the terms of the lease. Therefore, it is in every landlord’s interest to make full use of this service and ensure they don’t run the risk of a liability swap.”
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