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The cost of maintaining and repairing property should be covered by the tenant, Property maintenance is exciting - discuss. No really it is, but not necessarily in a good way. Unfortunately there are no accolades for maintenance perfection. In the main, it's a bad news business and a thankless task. The only time it becomes a priority is when something obvious has gone wrong. And problems are seldom trivial or inexpensive. This is the sort of excitement we can all do without. As a landlord, you will have a tenacious opinion. For you, maintenance has to be balanced against repair. It's either one or the other. There is no third option. And maintenance is always cheaper than repair. So for you the decision is very straightforward. The view of the tenant But tenants don't necessarily share your view. They have different business priorities and this creates a degree of tension between investor and occupier that can prove difficult to resolve. This tension has been exacerbated by the recession. Market conditions have given tenants the upper hand, so these days it is even more important for landlords to apply assiduous attention to this matter. It is a curious anomaly that many companies have a different approach to the maintenance of motor vehicles than they do to that of property. Clearly there is an obvious and strong case for vehicle upkeep that goes way beyond the financial considerations. Accidents do happen and - if blame can be attached to poor governance - legal penalties and reputational damage may be disproportionately severe. So, unsurprisingly, company vehicle maintenance is not in the front line when it comes to cost cutting. And there are cultural considerations at work here. It is counter intuitive to drive a new car and ignore service schedules. The notion that anyone would abandon the vehicle service schedule, in the expectation that the cost and disruption of unscheduled repairs would be the beneficial long term option, is an absurd proposition for most people. Risk and Cost Somehow, this logic is not as prevalent in the case of property maintenance. The risk and cost factors remain, but typically the profile and priority are lower. However, the price of neglect can be substantial. For example, in the case of a listed building, the cost of replacing just one period box sash window could be in excess of £2,500. Repair costs can escalate. Asset values can plummet. There are risks to be taken into account. Poor maintenance of M&E components can lead to personal injury or worse; witness the well publicised and ongoing case of the high performing city banker who met her very untimely end in a lift shaft. And the cost of replacing M&E structures can be immense. Cost and risk factors are clearly significant and it would be reasonable to expect that they alone would ensure appropriate preventative maintenance, but there have been many recent cases of landlords incurring major liabilities as a result of poor or non-existent property maintenance. It makes sense to maintain, but the real issue is one of priorities and tenants may take a commercial view that positions maintenance as a low priority. When the going gets tough, guess what suffers? Vehicle maintenance is uncomplicated. Standardisation and industry maturity have produced straightforward service schedules based on standardised processes and components. The industry has made it easy for us by providing transport to work and courtesy cars - reducing disruption and easing the process. There's no excuse really and as a result we have witnessed a steady and visible improvement in the standard of vehicles on the road today. However, as we know, property maintenance is more esoteric. Maintenance programmes and practices must be tailored and there is very little industry standardisation. It is easy to delay preventative work to the point where it fails to prevent. Woolworths is a prime example of what can happen if buildings are allowed to fall into disrepair. When the company ceased trading, the cost to the landlords of remedial work is estimated to exceed 15% of the asset value. Full Repairing and Insuring Clearly, in the case of an FRI lease, the responsibility for maintaining the property lies with the tenant. But given the current trading conditions and cash flow challenges, there is a potentially increased risk of default. In such an event, discovering that the tenant was failing to adequately maintain the property is a potential disaster. Therefore a strategy that avoids such circumstances is a necessity in today’s challenging conditions. Take the case where you have a tenant with a 10 year lease and let's suppose he is ignoring the maintenance. What action should you be taking? Firstly, you need to put in place a schedule of remedial works and ensure that it is enforced. The programme can be served on the tenant with enforcement timescales. If the tenant still fails to carry out his obligations, you can obtain a proviso for re-entry, to gain access to the premises, carry out the essential repair work and then charge the cost of works to the tenant. This charge can be enforced as a legal debt. Such radical action is both undesirable and disruptive, but it may be preferable to the alternative. However, more preferable still is to ensure that tenants agree and adhere to a programme of preventative maintenance, thereby reducing avoidable dilapidations. Plan to prosper As a general rule, it pays to be ahead of the game when dealing with this topic and the following checklist may prove useful in your planning activities. 1) Ensure all FRI leases include a full maintenance programme. 2) Carry out regular building inspections. 3) Assess tenants; what is the risk of them defaulting on the lease and leaving you with a major repair cost? 4) If you have tenants with heavily fitted out buildings, plan to protect yourself against the cost of major reinstatement costs, by ensuring the tenant deposits sufficient funds in an interest earning escrow deposit account. 5) In a multi-let property, ensure major maintenance works are carried out during periods of full occupancy – this way the total cost is shared equally between the tenants (with no requirement for a contribution from the landlord). 6) Match your strategy to the strengths of your tenants and leases. For example, if you have tenants with short leases, they may try to avoid maintenance charges claiming that - due to the short duration of the occupancy - they should not incur any repair charges. In this case the remedy is to use a schedule of condition, where tenants agree to maintain the condition as it was when they took over the lease, using a formal photographic record to monitor any dilapidations. Although most of the above will look like common sense, putting it all into practice can be a daunting prospect. But having the right experience and expertise can ease the journey and reduce the incidence of tenant default, improve the condition of properties and reduce the overall cost to the landlord. This is where NB Real Estate can deliver tangible assistance to boost your business performance. So if you want to reduce your exposure to unforeseen costs and ensure that your tenants maintain your investment, why not give me a call. I’m Bob Cooke and you can contact me on 020 7544 2021, or email me at bcooke@nbrealestate.co.uk. |