Most tenants’ hold their premises under a full repairing and insuring (FRI) lease and for the most part, are unaware of the significance of the repairing clauses they have committed to.
In commercial leases the repairing covenant is usually split into a number of separate clauses:
- the basic obligation to repair.
- a separate obligation to redecorate periodically.
- a covenant to yield up in repair.
Generally this means keeping the building in repair i.e. in good tenantable condition. A tenant is bound to keep the property of the landlord in ‘substantial repair’, but is not bound to do ‘mere ornamental repairs’.
It is very important that the tenant reads the lease as a whole and not to read any one clause in isolation from the rest of the lease. The tenant should obtain legal advice before entering into any lease arrangement and the premises should also be inspected by a Chartered Building Surveyor.
What typically should a tenant be concerned about in terms of their repairing obligations?
During the term of a lease, a landlord can serve a ‘Schedule of Dilapidations’ on a tenant, which is essentially a notice to repair. The Tenant must now decide what their obligations are under the terms of the lease.
Take the roof which is always a significant element of repair both in terms of cost and disruption to the day to day running of the business should it happen to fall into disrepair. The big issue for a tenant is how far he/she should go in repairing the landlords building. E.g. a flat roof covered with asphalt that is leaking. A tenants approach to this repair will differ significantly, depending on whether the schedule is an interim situation served perhaps midway through the lease or a terminal situation at the end of the lease period. The only obligation on the tenant is to repair, so technically going up with a bucket of bitumen and a trowel will comply with his repairing obligations. However, this will necessitate annual/ongoing maintenance and the risk of increased water damage to the interior is obvious. A prudent tenant will choose to overlay the roof with a torch-on felt giving them perhaps a 15-20 year repair.
In the case of a terminal schedule, the landlord may not be happy with such a patch repair. He may not even want to accept a torch-on overlay and insist on an asphalt renewal. However, the obligation on the tenant is to repair and the difficulty for the two surveyors acting for the tenant and the landlord is to agree on a satisfactory acceptable solution. Very often a monetary contribution towards the cost of replacing the roof is agreed on.
Another example is blemishes to cladding: A surveyor can argue that this is not disrepair. It is a blemish only, which is not having any detrimental disrepair affect on the building. If does not affect the landlords reversionary interest and there is no loss.
The Role of the Surveyor
So how does a surveyor set about to advise a client where there are failures by a landlord or tenant to comply with their legal obligations to repair, decorate or reinstate alterations.
There are four basic steps a surveyor should consider:
- Clarify the instruction by issuing terms and conditions of engagement and advise on the likely fee. Be clear on whether or not it is an interim or terminal schedule that is required.
- Ensure you as surveyor have no conflict of interest with either the landlord or tenant.
- Seek all relevant documentation relating to the tenancy/lease agreement, ingoing schedule of condition, licences or consents issued during the tenancy.
- Before going to site, be fully aware of the extent of the demise and the level of repairing obligation, e.g., is it a full repairing and insuring lease or is it confined to the interior only or particular floors within the building.
Doing the Works v Damages
When a landlord serves a Schedule of Dilapidations on a tenant, they generally have 2 options:
- Physically do the repair works themselves.
- Damages i.e. agree on a monetary settlement to cover the cost of the landlord executing the works.
Most tenants when running a business don’t have the time or resources to physically get the repair works done so the most common approach (and often the most expensive) is to pay a sum of money to the landlord. This is usually agreed between the landlords and tenant’s surveyor.
A prudent tenant will have a sinking fund in place to cover the settlement of such a dilapidations claim. But how do they know how much to set aside. All leases are for a fixed term, so if a tenant’s financial advisor knows that a lease is coming to an end in five years, they can employ the services of a Chartered Building Surveyor to prepare a ‘Schedule of Anticipated Dilapidations’ and have these costed. This schedule will obviously be subject to negotiation with the landlord’s surveyor and his estimate of the cost of the claim. However, it will give a tenant a good indication for their exposure under the terms of the lease and a sum can be set aside each year to cover the anticipated claim (sinking fund). Most surveyors acting for a tenant in this capacity will slightly over state the claim so hopefully there should be some money left over once the dilapidations are agreed with the landlords surveyor on termination of the lease.
Precautions a Tenant can take.
The tenant should carry out annual maintenance on the building to ensure it is maintained to a reasonable standard. If this is not being done then a Chartered Building surveyor should be employed to assess the buildings condition, prioritise repairs and prepare a planned maintenance programme over a three, five or ten year period. In this document works will be prioritised and routine day-to-day maintenance will be scheduled in at the appropriate times.
Prior to signing a lease, a tenant should consider an ingoing schedule of condition. The purpose of such a schedule is to record the condition of the property at a particular moment in time, i.e. at the signing of the lease. The usual purpose of the schedule, which should be agreed between both parties and then attached to a lease, is to modify or clarify the repairing obligations. The idea being that the tenant is not obliged to put the building back into any better condition than that existing at the commencement of the lease.
Surveyors must take care not to put a ‘spin’ on the schedule and it should be just an evidential record.
Services such as heating, lighting, ventilation and air conditioning are an important consideration as these can represent up to 40% of the costs of maintaining a property. If opening up works are necessary, then this should be undertaken, e.g. suspected timber decay.
In Conclusion, as Landlord’s seek to maximise the return on their investment, tenants are coming under increased pressure to keep their premises in good condition. They must be aware of their repairing obligations under the terms of the lease and prepare financially for this inevitable outcome.