DILAPS UK | News
Dilapidations remain outside-the-scope of Vat
After a long period of uncertainty, HMRC have finally issued their decision as to whether or not valued added tax (“VAT”) is chargeable on dilapidations payments.
Historically, dilapidations payable by a tenant at the end of a lease had not been subject to VAT. The payment was to compensate the landlord for having its premises returned in disrepair, contrary to the tenant’s promise to keep them in repair. Truly compensatory payments have historically been treated as not subject to VAT as it was considered they were not payments for a supply of goods or services.
A vacant building does not equal vacant possession
The High Court has ruled in the recent case of Capitol Park Leeds PLC v Global Radio Services Limited [2020] that a tenant’s attempt to exercise the break in a lease, which was conditional on the tenant giving “vacant possession of the Premises” to the landlord, was not effective after the tenant had removed a substantial number of the landlord’s fixtures and fittings.
Dilapidations and Covid-19
There is nothing in the Coronavirus Act 2020 or in the government guidance which prevents landlords pursuing a terminal dilapidations claim against a tenant in respect of outstanding breaches of covenant when a lease comes to an end.
Dilapidations - Looks Matter
Blue Manchester Limited v North West Ground Rents Limited [2019] EWHC 142 (TCC) was listed by the Estates Gazette as one of the Top 10 cases of 2019.
The case involved a claim by a long-leasehold tenant of a hotel, seeking specific performance against the hotel’s freeholder, ordering it to comply with its repairing obligations under the lease. The case is noteworthy in that not only did it involve an order for specific performance, but it also clarified new issues of law.
Top Ten Dilapidations Facts
1. Schedule of Dilapidations – What is it?
A schedule of dilapidations records the works required to be done to a property in order that it is put into the physical state the property should have been put in if the tenant had complied with its covenants or obligations contained within the lease of the property.
Landlords - need to be sure that they get the best advice and practice to avoid drawn out expensive settlements.
IFRS 16 is now operational and may reduce future lease lengths
Summary
From 1 January 2019 new “International Financial Reporting Standard (IFRS) 16 Leases” makes significant changes to lease accounting for affected tenants who are now required to report lease liabilities on their balance sheets. This is likely to influence the length of leases taken by tenants in future and will impact tenants’ earnings and liabilities with consequential effect on covenant tests.
Why obtaining early dilapidations advice could be crucial, particularly when exercising a break.
Office Depot International (UK) Limited v UBS Asset Management (UK) Limited & others [2018] EWHC 1494 (TCC)
This decision may close down one of the potential options available to tenants who are unsure of their lease ‘dilapidations’ obligations and want clarity before committing to a programme of remedial works.
The tenant of a large warehouse in Manchester brought a claim against its landlord for a declaration as to whether any works were required to put the roof into repair and if so, what those works were.
Break notices: give me a break?
Goldman Sachs International v Procession House Trustee 1 Limited [2018]
Summary
A tenant's break option was conditional on compliance with the requirement to yield up the premises with vacant possession on the break date. However, the High Court has ruled that this condition did not extend to requiring full compliance with the tenant's obligation to reinstate.
Where is the Schedule of Condition?
In Dem-Master Demolition Ltd v Healthcare environmental services Ltd [2017] CSOH 14 the Outer House of the Court of Session considered the interpretation of the repairing clause in a commercial lease which referred to a photographic schedule of condition. The schedule of condition had never been prepared.
In its absence, what repairing standard would apply at the termination of the lease?
How a Lease Can End
There are various ways in which a lease can end. The appropriate method of termination depends on several factors including whether the lease has the protection of the Landlord and Tenant Act 1954, which party wants to bring it to an end, whether the lease is coming to its contractual end or one party wants to get out of it early, and whether the tenant is in breach of any of the lease terms. This note provides an overview of the most common ways in which a lease may end and highlights some of the key considerations.
Business Tenancies – Landlord and Tenant Act 1954 (the “Act”)
The Act offers protection to business tenants when the contractual term of a lease is ending, though the landlord and tenant may contract out of the Act if they wish. This protection gives the tenant a right to remain in occupation of the property and to take a new lease at a market rent. Unless the parties have contracted out before the lease is granted, a protected lease will automatically continue after the contractual termination date. If either party wishes to bring the lease to an end they need to follow a specific procedure.