The importance of repairing obligations in a lease cannot be overstated. While a tenant will be fully aware of the likely rent and rates liabilities at the start of a lease, repair obligations can provide an unwelcome trap for the unwary.
The common law provides some protection for occupiers – for example in Scotland, a landlord is taken to warrant that its premises are fit for purpose and also impliedly undertakes to keep them wind and watertight throughout the lease. Scots law also draws an (admittedly ill-defined) distinction between "ordinary" and "extraordinary" repairs- with a tenant only liable for the former.
However, these rules are almost always displaced by the lease agreement which the tenant signs. And by far the most common form of commercial lease in the UK is the "FRI" - or full repairing and insuring - lease. This transfers all liability for repairs (and decoration) of a property to the tenant so that the occupier is liable not just for routine day to day maintenance but also for major structural repairs, including a complete overhaul of the property, and even potentially its entire building in the event of destruction! When, in the 1970s and 80s, commercial leases were commonly granted for periods of 30 years or more, it was perhaps understandable that an occupier should take on such an extensive liability. But as leases have gradually become shorter – with five years or less now being almost the norm, an occupier may well be less willing to pay for, say, a completely new roof.
A survey is therefore of key importance so that the tenant has a clear idea of the condition of the unit. If the property is in poor condition then the tenant may want to see the landlord carry out upgrading works as a pre-condition of the lease. Only once these have been completed to the tenant's satisfaction will it take entry to the Property.
Alternatively, an occupier might want to "water down" the repair obligations by making clear in the lease that it will not be liable to put the subjects in any better condition than its present condition at the start of the lease – a photographic schedule of condition can be annexed as a record of the state of repair on day one. However, beware that this does not oblige the landlord to carry out any works – so a schedule of condition is of little value if, say, the roof starts leaking and the use and enjoyment of the property is affected as a result. The landlord is still entitled to demand rent in full.
If a property is newly constructed, beware of the potential for latent or inherent defects due to issues with the design or construction of the unit. Some landlords may be prepared to offer an exclusion from liability for any such issues for, say, the first three years of the lease. More common however is for the professional and construction team to grant a set of "collateral warranties" stating that they have acted with due skill and care so that liability for any repairs issues which emerge due to faulty design or construction can be passed on to them.
Special considerations also apply to multi-let buildings, where what is let is effectively only the internal airspace of each unit, with the tenant's repairing clause relating only to internal surfaces and finishes. The real obligation – for e.g. roof and structure – is contained in the separate service charge clause and so it is important to ensure that this clause contains the usual exclusions, e.g. for insured (or uninsured) risk damage which you'd otherwise want in the repairs clause.
Lastly, occupiers should also be aware of a clause in the lease which obliges them to make payment of a sum – as assessed by the landlord or a surveyor - representing the cost of repairs at the end of the lease. This seemingly innocuous provision closes down a number of opportunities which a tenant might have to resist an otherwise hefty claim for dilapidations and can make an enormous difference to the size of the bill facing a tenant at lease termination.
In this area it's therefore particularly important to ensure that expert legal advice is obtained when taking a lease of commercial premises.
This is the second of a series of articles breaking down a commercial lease. View the first article here.
Brodies' corporate occupier team are delighted to assist in guiding tenants through this minefield. Please contact Laurence Douglas or your usual Brodies contact if you want to discuss further.
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