Leases: Understanding Repair Obligations
One of the biggest issues for both a tenant and a landlord in a lease is the repair obligation. For the tenant, a repair obligation could prove to be a substantial liability at the end (or even during) the term of a lease. In practice, such potential liability really depends on the size, location, nature and age of a property and so it’s important to think about what repair obligation you are either taking on as a tenant, or imposing as a landlord.
Following on from Alex Greenwood’s article about some pointers when considering heads of terms for a new lease, we’ve set out below some food for thought specifically in relation to lease repair obligations which you may find handy if you are a tenant who is taking on a lease, exiting a lease or has had a schedule of dilapidations served on you. Alternatively if you are a landlord, and you are granting a lease, a tenant has or is about to vacate the property or a tenant has let a property get into a state of disrepair.
FRI leases are ‘fully repairing and insuring leases’. This means that the repair obligation is not limited and is usually expressed so that the tenant must keep a property in ‘good’, ‘good and substantial’ or ‘good and tenantable’ repair and condition. Case law has shown that there is not much of a difference in any of these descriptions in terms of the practical effect of a repair obligation.
Be aware that a tenant covenant to ‘keep’ a property in repair also means you must ‘put’ the property in repair. Also, often a tenant’s repair covenant will extend to the landlord’s fixtures, fitting, plant and machinery in a property.
Even if, as a tenant, you keep a record of the state of repair of the property prior to commencement of a lease, unless the repair obligation is properly limited (e.g. by way of a schedule of condition – see below) you are likely to face a full repair obligation during and at the end of the term.
Internal only demise
Many leases will demise only the internal parts of a property (for example, leases of floors in an office block or a lease of a ground floor retail shop). In such cases, usually only the internal parts of the demise (such as the non-structural walls, internal finishes of the walls and ceiling, floor boxes and floor coverings and windows in exterior walls) will form part of the tenant’s repair obligation. The obligation as to the repair, maintenance and decoration of the structural and common parts of the building (of which the property forms part) will normally be retained by the landlord. However, the costs associated with the repair, maintenance and decoration of the structural and common parts are usually recovered by way of a service charge.
It’s therefore important as a tenant that you have a good idea of not only what the state and condition of the property that you are taking a lease of, but the state and condition of the building of which it forms part to ensure you aren’t going to be surprised by any exorbitant service charges. Ideally, from a tenant’s perspective, a lease would include various carve outs for unreasonable items of expenditure to ensure they are not passed on.
Schedule of condition
Before entering into a lease, a tenant may wish to agree to limit the repair obligation (along with the decoration and yielding up obligations) by reference to a ‘schedule of condition’. A schedule of condition is normally comprised of detailed photographs of the property, along with a description of the state of repair, highlighting any issues, defects or wants of repair. A lease can then be drafted to link the repair obligation to this schedule of condition – i.e. the tenant does not have to keep or put the property into any better state or condition than is evidenced by the schedule of condition.
This means that during or at the end of the term, when a landlord serves a schedule of dilapidations on a tenant, the tenant’s liability may well be greatly reduced, sometimes even negated, if the tenant has undertaken any works, decoration or repairs that have put the property or any parts of it into a better state than was evidenced by the schedule of condition at the start of the lease (e.g. as part of general upkeep).
Irrelevant of what the repair obligation in a lease between the parties is, we would always recommend that a tenant undertakes a survey of a property to identify any issues or defects so that there are no hidden surprises that may crop up during, or at the end of, the term of a lease. A surveyor can also undertake schedules of condition (often at the same time as undertaking a survey).
If you’d like any more information on repair obligations in a lease, or would like to know who you can contact for surveys and schedules of condition, please contact Nick Ripper or call us on 0345 070 6000.