MPA leasehold estate - dilapidations reserve

Report: 5
Date: 18 September 2001
By: Treasurer and Commissioner

Summary

With the Local Authority financial regime now applying to the MPS it is suggested, subject to the Finance, Planning and Best Value (FPBV) Committee making appropriate financial provision, that an ear-marked reserve be established by the MPA from which will be drawn funds to contribute in all or part towards the costs of dilapidations liabilities at the termination of property leases.

A. Recommendation

Members are invited to consider whether they wish to approve in principle the establishment of an ear-marked reserve for the payment of ‘dilapidations’ fees subject to the FPBV Committee making appropriate financial provision.

B. Supporting information

1. Prior to July 2000 and the establishment of the Metropolitan Police Authority, the financial regime of the Metropolitan Police Service did not support the practice of holding reserves which are built up over a number of years and from which funds can be drawn to contribute towards occasional but specific expenditure.

2. There are a number of properties within the MPA estate that are held under normal commercial lease terms and conditions. Most, if not all, of these leases impose on the tenant the obligation to return the property to a stated condition. Sometimes this is as the building was at the commencement of the lease. In other cases, it may require reinstatement to a fully repaired condition. Most leases provide for a cash payment as an alternative to carrying out works. This is known as ‘dilapidations’.

3. In the past, because of its accounting conventions, it was usual practice for the MPS to plan these sums into its annual budgets and pay them as and when required. These payments are not incurred every year. They range from a few thousands of pounds for smaller buildings and shorter leases to the occasional multi-million pound payment at the end of a long lease on a large building. For example, Members will be aware of the potential dilapidation liability were the Tintagel House lease not to be renewed.

4. The leasehold buildings occupied by the MPS and which include a dilapidation clause has been examined. (The study reviewed the year of due payment and an assessment of a level of liability.) An accurate estimate is not possible until the end of the lease is imminent. The circumstances applicable at the end of the lease will be subject to future plans and initiatives of the property owner, the current needs of the MPS and prevailing market conditions. These may enable a lower sum to be negotiated or leases may be extended, renewed or sub-let to others prior to termination.

5. For the purposes of establishing the size of a reserve to cover dilapidation costs a number of assumptions were made based on past experience. These are summarised as follows:

• The view is taken over the next ten years;
• An average dilapidation cost of £350 per square metre;
• An assumption that 60% of the leases will be extended;
• An assumption that 20% of the properties will be redeveloped with consequential reduction or elimination of dilapidation costs.

C. Financial implications

1. Analysis indicates that averaged over the next 10 years there is an assessed liability of £3m (subject to planned and reactive changes in the programme of accommodation requirement and the above assumptions).

2. An even contribution from revenue over the next 10 years would indicate therefore that approximately £300,000 needs to be transferred into the earmarked dilapidation reserve on average annually. Historically dilapidation fees would be charged to Property Services’ budgets but no major leases have terminated in the past decade, consequently current budgets do not include any funding for this purpose. Funding will need to be found from such budgets in future years and they will need to be sufficient to sustain a £300,000 budget growth charge.

3. Analysis also indicates that there will be periods (four or five years out) when the indicative dilapidations might exceed the level of the accrued reserve. In these years, any excess dilapidation liabilities would have to be funded from revenue budgets. However, it may be possible to make additional transfers to the reserve in the coming years in the event of revenue underspend.

4. The analysis also indicates significant potential dilapidation fees towards the end of the 20-year period. Accordingly, if Members approve the proposals it will be necessary to review the requirements of the dilapidation reserve on an annual basis. If the reserve were created external audit would normally expect a regular review to justify the level of reserve held.

5. Reserves, both general and earmarked, are held in the balance sheet. The balance sheet belongs to the Police Authority. Accordingly, requests to draw on this reserve to contribute towards dilapidation expenditure will have to be approved by the Finance Planning and Best Value Committee on the recommendation of the Treasurer. The concept of a reserve such as this is supported by the Treasurer and Auditors as prudent financial management and a development arising directly out of the move to accruals accounting. If Members wish to approve the proposals in principle, it will be necessary to refer the report to the FPBV Committee for consideration of the financial provision.

6. The MPS’s Resource Allocation Committee of the MPS (14 August 2001) has endorsed the recommendations of this report.

D. Background papers

None

E. Contact details

The authors of this report are Trevor Lawrence, Director Property Services Department, 020 7230 8370, and Bob Alexander, Director of Finance, 020 7230 8437

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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