Watch out for surprise repair bills

Cupola Gallery, Sheffield, is fundraising £40,000 for urgent repairs after learning a collapsing floor is their responsibility under the terms of their lease.

Many lease agreements require tenants to restore their property to its original condition at the end of their lease term, and to pay for certain repairs or rectifications – known as ‘dilapidations’. 

The economic environment is contributing to the trend of tenants seeking shorter, more flexible lease arrangements. As a result, landlords are facing a growing risk of empty properties and increasingly exercising their rights to seek reimbursement. The risk of a property being empty carries an exposure to landlords for rates and maintenance bills, and getting tenants to pay for the dilapidations is a means through which they preserve their income levels.

Panic can set in and a dispute between landlord and tenant can follow

Arts organisations are particularly exposed to these costs. Many rely on relatively short-term funding schemes that don’t permit them to take on long-term leases so, when negotiating a tenancy, it is important for them to be aware of the potential costs of dilapidations at the end of the lease and to include these in budgets, cashflow forecasts and, if possible, annual accounts as well. 

Spreading the cost

If you do not provide for dilapidations in your annual accounts you can find yourself faced with a significant expense when the tenancy ends. Key financial decisions may have been based on a stronger financial position, resulting in misinformed decisions. This can also affect bank loan covenants that are based on financial performance.

Recognising future dilapidation costs annually gives a more accurate view of your financial position and reflects the period over which the company has benefited from the tenancy. Accounting standards require this, but it isn’t always straightforward as it may be difficult to accurately measure the costs. 

UK accounting standards state that a provision must be made in the accounts when:

• a present obligation (legal or constructive) has arisen as a result of a past event
• payment is probable (“more likely than not”)
• the amount can be estimated reliably

Signing a lease is the past event that creates a present obligation. Whether the payment is probable is a matter of judgement. Often it’s not clear whether, or to what extent, repairs or rectifications will be needed. Advice can be sought from surveyors in order to assess this probability and to come up with a value for the provision. This should include the costs of ‘making good’ any works that you perform on the property, such as removing or installing internal walls. 

Unfortunately, all too often organisations fail to seek professional advice on their exposure to dilapidations or give them little consideration until that large invoice comes through the door. At this time, panic can set in and a dispute between landlord and tenant can follow.

So, it’s best to keep a regular check on your dilapidations exposure and plan accordingly, whether through a programme of maintenance or through positive engagement with your landlord. 

Jane Askew is a Director in haysmacintyre’s not-for-profit team and advises many arts organisations.
haysmacintyre.com

This article, sponsored and contributed by haysmacintyre, is part of a series of articles sharing insights into how organisations in the arts and cultural sector can manage their finances to maximise their commercial potential.