When entering into a commercial property lease, it is easy to focus on the headline terms: the rent, length of the lease, rent reviews and any break clauses.
However, one area that can have significant financial consequences for both landlords and tenants is often given far less attention: repairing obligations.
The condition of a commercial property and responsibility for maintaining it can become a major source of disagreement, particularly towards the end of a lease. Understanding your commercial lease repair obligations from the outset can therefore help reduce unexpected costs and the risk of a commercial property dispute.
What Are Repairing Obligations in a Commercial Lease?
Repairing obligations are the responsibilities placed on a landlord or tenant to maintain and repair a commercial property.
Unlike residential property, there should not be an assumption that the landlord will automatically be responsible for maintaining the building. The terms of the commercial lease will generally determine who is responsible for particular repairs and maintenance.
Depending on the wording of the lease, a tenant’s responsibilities could potentially extend beyond routine maintenance and include substantial repairs to the property.
This is why the repairing covenant should be carefully considered before a commercial lease is signed.
What Is a Full Repairing and Insuring Lease?
One term frequently encountered in the commercial property market is a Full Repairing and Insuring lease, often referred to as an FRI lease.
Under an FRI lease, the tenant will typically have responsibility for repairing and maintaining the property, while the landlord arranges insurance and recovers the cost from the tenant.
For a standalone commercial building, this may mean that the tenant is responsible for the interior, exterior and structure of the property.
In a multi-let building, the landlord may instead retain responsibility for repairing the structure, exterior and common areas, with the cost recovered from tenants through a service charge.
The precise position will always depend upon the wording of the lease, making it important that both parties understand exactly what they are agreeing to.
Why the Condition of the Property Matters
One of the biggest risks for a commercial tenant is taking on a repairing obligation without properly considering the existing condition of the property.
For example, a tenant could take a lease of premises that are already showing signs of deterioration. If the lease contains a wide repairing covenant, the tenant may later find themselves responsible for carrying out works even though the underlying issue existed before they occupied the property.
The wording of the lease is therefore critical.
Before committing to a commercial property lease, tenants should consider obtaining professional advice on the condition of the premises and whether the repairing obligation should be limited.
Should You Have a Schedule of Condition?
A Schedule of Condition can be extremely valuable when negotiating repairing obligations within a commercial lease.
This is normally a detailed record of the property’s condition at or around the start of the tenancy, often supported by photographs.
The lease can then be drafted so that the tenant is not required to return the property in any better condition than evidenced by the Schedule of Condition, subject to the precise terms agreed between the parties.
For tenants, this can provide important protection against potentially significant repair costs.
For landlords, a properly prepared Schedule of Condition can also provide clarity about the state of the property at the beginning of the lease and help reduce disagreements later.
The key is ensuring that the Schedule of Condition and the repairing covenant work together effectively.
Repairs, Maintenance and Alterations Are Not Necessarily the Same
Commercial tenants should also be aware of the distinction between repairs, maintenance and alterations.
A tenant may have made alterations to a property during the term of the lease, perhaps to create offices, install partitioning, change signage or adapt the premises for their business.
The lease, together with any Licence for Alterations, may require some or all of those changes to be removed and the property reinstated when the tenant leaves.
Consequently, a tenant’s financial exposure at the end of a commercial lease may involve more than simply repairing damaged areas.
This is one reason why alterations should be properly documented when they are made rather than left to be addressed when the lease is approaching its end.
What Are Commercial Property Dilapidations?
Dilapidations are closely connected to repairing obligations and can become particularly important towards the end of a commercial lease.
Broadly, they concern breaches of a tenant’s lease obligations relating to the condition of the property. Depending on the lease, this might include:
- outstanding repairs;
- failures to maintain the premises;
- redecoration requirements;
- reinstatement of alterations; and
- other breaches relating to the physical condition of the property.
A landlord may serve a Schedule of Dilapidations identifying alleged breaches and the works considered necessary to remedy them.
The potential cost can be substantial, particularly where a tenant has occupied a commercial property for a number of years without adequately addressing its repairing responsibilities.
Don’t Leave Dilapidations Until the Lease Ends
A common mistake is treating dilapidations as something that only needs to be considered once a commercial lease has expired.
Both landlords and tenants can benefit from considering the property’s condition well before the end of the term.
For tenants, reviewing repairing and reinstatement obligations early can provide time to assess potential costs, obtain advice and decide whether works should be undertaken before vacating.
For landlords, considering the condition of the property before lease expiry can help identify possible breaches and assist with planning for the property’s future use or reletting.
Early advice can also create more opportunity for the parties to resolve issues commercially rather than allowing them to develop into a formal commercial landlord and tenant dispute.
Repairing Obligations When Negotiating a New Commercial Lease
Repair obligations should ideally be considered at the beginning of the transaction rather than after the lease has been signed.
If you are a commercial tenant, questions to consider include:
- What parts of the property am I responsible for repairing?
- Does my responsibility include the structure or exterior?
- What condition is the property currently in?
- Should my obligations be limited by a Schedule of Condition?
- Will I contribute towards repairs through a service charge?
- Am I required to redecorate the premises?
- Will I need to reinstate alterations when the lease ends?
For a commercial landlord, the lease should clearly set out the required standard of repair and maintenance, together with appropriate provisions dealing with access, inspection, alterations and reinstatement.
Clarity at the outset can significantly reduce the potential for disagreements later.
What Happens If Repairing Obligations Are Not Met?
Failure to comply with repairing obligations can have serious financial consequences.
The options available to a commercial landlord will depend on the terms of the lease, the nature of the breach and whether the tenancy is continuing or has ended.
At the end of a tenancy, a landlord may pursue a dilapidations claim in relation to breaches of the tenant’s obligations. In England and Wales, terminal dilapidations claims are subject to a specific pre-action protocol designed to encourage the early exchange of information and, where possible, settlement without litigation.
For tenants, this makes understanding potential liabilities before the lease ends particularly important.
Read the Repairing Covenant Before You Sign
Commercial leases are legally binding agreements, and repairing provisions that appear relatively straightforward can carry substantial long-term financial implications.
A tenant should therefore avoid looking at the rent in isolation when assessing the true cost of taking commercial premises.
A property with an attractive rent could ultimately prove considerably more expensive if the tenant takes on extensive repair, maintenance, service charge and reinstatement obligations.
Similarly, landlords should ensure that their commercial leases contain appropriate repairing provisions to protect the condition and long-term value of their property.
How Bennett Oakley Solicitors Can Help
At Bennett Oakley Solicitors, our Commercial Property team advises both landlords and tenants on all aspects of commercial property leases, including negotiating repairing obligations, Schedules of Condition, alterations, lease renewals and issues arising at the end of a tenancy.
Taking advice before signing a lease can help you understand the financial and practical implications of your repairing obligations and ensure that the lease accurately reflects what has been agreed.
If you are already approaching the end of a commercial lease or are concerned about potential commercial property dilapidations, seeking advice early can also help you understand your position and the options available.
If you are entering into, renewing or approaching the end of a commercial property lease, get in touch with Bennett Oakley’s Commercial Property team to discuss how we can help protect your interests.
James Pitcairn is Head of Commercial Property at Bennett Oakley Solicitors and advises individuals, businesses, pension companies and trusts on commercial property matters, including leases, acquisitions, disposals, refinancing, development and option agreements.
