The Lab Life Cycle: Unlocking the Genome of Dilapidations and Lease Liabilities

The property ladder. It’s not just something that applies to young people looking for their home. It also applies to businesses. Whether it is time to pull out or upgrade, letting go of existing premises is an integral part of the Life Sciences corporate journey, from startups to established names. With the government announcing plans aimed at encouraging innovation space development across the nation through incentivising the expansion of new lab and data spaces, the leasehold laboratory market is set to expand, offering greater possibilities to companies looking for new space in the months and years to come.

However, whether you are in serviced space or hold your own longer-term lease, if you are coming up to or considering, a move then one of the many things you will need to be considering are the matter of dilapidations.

Most leases put in place covenants on the tenant’s part to ensure they keep the premises in a set state of repair during the term. When the term of the lease ends (either through surrender, or a break, or contractual expiry) you are likely to find that your lease also contains “yielding up” covenants – requirements that you hand back the premises to your landlord in keeping with that standard of repair. What this state of repair is will vary from lease to lease and, in some cases, will be bench-marked against a set Schedule of Condition. 

Although this might seem like a “tidying up” job done once the decision to leave is made, it is wise to look to what these yielding up provisions are in your agreement in advance of making that decision to terminate. We have come across several situations in which companies eager to upgrade have rashly exercised tenant-break options before they realise how the yielding up provisions bite. This is even worse if the break is conditional on the yielding up provisions being complied with as it could wholly scupper your plans to exit.

If you leave a property and fail (in the landlord’s view) to comply with the yielding up provisions and state of repair, the landlord is entitled to bring a claim against you for “dilapidations”: the costs it will put the landlord to in putting the premises back into the condition it should have been, together with some associated costs like loss of rent if the needed works take the premises out of the rental market for a period. 

What will be critical is what the exact wording of your repair covenant is. There is a sliding scale of liability (and cost) depending on what words are used. For example, a covenant to keep in “good repair and condition” can extend to the need to do works beyond actual disrepair if they would be classed as being in keeping with good practice in maintaining condition (to the point of potential upgrade). Similarly, a covenant to “keep” a property in repair extends not only to disrepair during your term but can extend to any disrepair that was present before your time (i.e. an obligation to bring it into repair if it wasn’t before). In short, it can be a minefield and here legal interpretation is an art, not a science.

In some cases, yielding up provisions don’t simply touch on state of repair but can include requirements on tenants to restore premises to their condition when the lease was started (known as “reinstatement”). If you have been the one which has kitted out the lab or made alterations during your tenure, a reinstatement request could put you under expensive pressure to effective turn back the clock. Such requests are becoming more common in non-purpose built temporary, site-sharing properties where landlords might flip between lab and office spaces within a building. 

What you ideally want to avoid when moving into pastures new is to carry round with you a protracted and costly dispute about what condition you may, or may not, have had to leave your previous premises in. Although many dilapidations disputes are settled between the parties’ surveyors, in a tough property market landlords are more willing than ever to litigate in the hopes of maximising damages claims – to put that money back into making now-vacant premises more attractive in a buyers’ market. 

It sounds pessimistic but – in keeping with the adage that those who love peace should prepare for war – when you take on new premises you should always have an eye to what you will have to do when you leave it. Ideally, thought should even take place when negotiating entry into the lease!

However, for any company considering a new lease, or considering exiting an existing one, there are some golden rules to help limit the prospect of dispute. 

• Keep a record – keep your own photographic schedule of condition when you enter and exit a property but especially so at the start. This often helps ward off arguments about what a property was like years ago.
• If you are fitting a premises out or making alterations to it, ensure you document it and get an idea, early on, as to whether you may be required to reinstate its original condition at lease end.
• Keep on top of routine maintenance during the term. Just because it can be dealt with at the end doesn’t mean that it should!
• Don’t be afraid to get outside advice. Whilst negotiation and dialogue between parties limits most disputes, don’t be afraid to get specialist outside input on what you are discussing with your landlord. With dilapidations the Devil is in the detail and seemingly innocuous words can make all the difference and that difference often amounts to thousand of pounds in reality. An external advisor isn’t a luxury; it’s an investment.