A tenant entering into a lease of commercial premises, whether of a whole building or of a part will be taking on a range of financial obligations in respect of the premises, some of which are more readily apparent than others.
The lease will clearly set out obligations as to rent and the method for its review and any VAT, as well as containing mechanisms for the calculation of service charge and insurance costs, but what will often not be apparent is the cost to the tenant of repairs over the term of the lease or indeed at its end.
For what repairs is a tenant usually responsible?
Leases of commercial properties are often called FRI, or ‘full repairing and insuring’, meaning that the landlord has the ability recover most, if not all, of its day-to-day costs on the property from its tenants.
If a tenant has a lease of the whole of a building, then it will usually be responsible for all repairs to the building. If a tenant has a lease of part of a building, then it will usually be directly responsible for the repairs to the part of the building it occupies, but the landlord will be able to recover the costs of the repair of the structure and common parts, et cetera, of the rest of the building from the building’s tenants via the building service charge, so that the landlord is not left out of pocket.
To repair, repair or repair?
Small differences in the wording of a tenant’s repair clause in a lease can lead to significant differences in the tenant’s obligations.
“To keep in repair” will require the tenant to fix disrepair existing before it took occupation. “To keep in good repair and condition” can require works to be carried out even where there is no disrepair. How a repair obligation is construed is often based on the specific facts, including the age, character and location of the property, but the specific wording can have a serious impact on what the tenant is responsible for and the financial burden.
Can a tenant restrict its repair obligations?
In negotiations with the landlord for a commercial lease, a well-advised tenant can also seek to exclude various types of disrepair, whether to the building as a whole or to the tenant’s part.
Typically, disrepair due to risks which the landlord has or should have insured against should be excluded, but depending on the type and age of the property it may be possible to have expensive elements of the structure of the building excluded or for disrepair caused by a latent defect in the property’s construction to be excluded.
The most powerful tool in the tenant’s arsenal remains, however, the schedule of condition.
Utilising a Schedule of Condition
Often where a property is not new or otherwise in some disrepair, and the tenant has not received any rent allowance to account for that existing disrepair, the tenant’s repair obligations can be restricted so as to exclude liability for items of disrepair and condition existing at the date the tenant takes occupation, as documented in a schedule of condition. The schedule will set out any items of disrepair, often evidenced by photographs and is often prepared by a specialist surveyor acting for the tenant before being agreed with the landlord as an accurate record of the property’s condition and annexed to the lease before it is completed, and the tenant takes the property. A lease can often state that the property is in good condition when it is not. Schedules of condition are not only useful for a tenant in detailing just what disrepair it is and is not responsible for, but also in the assessment of dilapidations when the lease comes to an end.
Dilapidations – the final hurdle that catches the unwary tenant out
Tenants often believe that at the end of the lease term their obligations will end when they have removed their effects and handed back the keys.
However, near to the end or at the end of the lease the landlord will inspect the property and will inevitably serve a claim document detailing what the landlord contends are the tenant’s breaches of the tenant’s lease obligations and covenants, usually in respect of any reinstatement which the tenant may have failed to carry out for any tenant’s alterations, lack of redecoration or lack of repair. These are called dilapidations.
If the lease term has been for a substantial amount of time the cost to the tenant of remedying such dilapidations, or of payment to the landlord of compensation, instead of remedying such dilapidations, can be considerable. A landlord’s claim for dilapidations can amount to a cost of more than a year’s rent.
A professionally produced schedule of condition annexed to the lease and referenced in the tenant repair provisions in the lease will provide invaluable evidence of what had been agreed, sometimes decades earlier, between the landlord and tenant as to the tenant’s repair obligations and the standard of repair to which the tenant would be held liable, thus helping to restrict the extent of dilapidations for which the tenant is responsible and any compensation the tenant may have to pay.
Conclusion
It is in the tenant’s interests to ensure that the lease is explicit on the condition of the property the tenant is taking on, the extent of the tenant obligations on repair and decoration and the basis of what is expected of the tenant in terms of reinstatement of alterations made by the tenant. The team at Weightmans has extensive experience in dealing with commercial leasing and can offer expert guidance on lease drafting. Should you require assistance, please do contact us.
