Don’t forget the schedule of condition!

The negotiation of commercial leases can be complex and time-sensitive, and so it is understandable that parties might overlook certain documents as they rush completion. However, a recent case in the Court of Session highlights the importance and value of a properly agreed Schedule of Condition.

What is a schedule of condition?

A Schedule of Condition is a record (often by way of a set of photographs) capturing the state of a property at the start of a lease. Its purpose is simple: to provide a baseline against which a tenant’s repairing obligations are measured.

Why is it important for tenants?

Most commercial leases impose obligations upon the tenant to keep premises in “good and substantial repair.” If left at that, a tenant is obliged to restore the property to a fairly high standard even if it was far from such condition when they took entry. Parties will often reach an agreement to vary this position to better reflect the reality of the property’s condition as at the start of the lease. A properly agreed Schedule of Condition limits tenant’s liability to restore the property to the condition recorded on entry, protecting them from unexpected costs.

Why is it important for landlords?

The benefits do not fall solely on the tenant’s side of the ledger. For the landlord, a properly agreed Schedule of Condition avoids ambiguity and strengthens the enforcement of the tenant’s repairing obligations. If the property was in good condition at the start the Schedule provides clear evidence of that. This protects the landlord from the old “it was like that when I got here” defence . It also helps landlords plan dilapidations claims and works necessary to ensure the property can be brought back to the original state of repair when the lease ends including any works they may need to carry out before any future letting.

However, without a properly agreed Schedule of Condition, costly and time consuming disputes can arise, as was seen in the recent case of Nicol’s Worsteds Limited v Hlt Stakis Operator Limited.

The case

In this case, the tenant was obliged to keep the property in “good and substantial repair and condition” with a qualification that “nothing herein shall require the Tenant to deliver up the [the property] in a better state of repair and condition than that evidenced by the Schedule of Condition.” When the lease expired, the landlord claimed the tenant had breached its repairing obligations and sought damages. The tenant relied on the Schedule of Condition to argue that its obligations were limited. The problem? The original Schedule could not be found and questions arose as to whether one had even been agreed in the first place.

The tenant contended that copies of a video survey of the property and an overview report prepared constituted the Schedule. The landlord argued there was no agreement that the video and accompanying report constituted the Schedule and without a Schedule the limitation on the tenant’s liability “flew off,” leaving them fully liable to deliver up the property in a better state than when it took entry.

In short, the court sided with the tenant on the basis that the video and report were “the only show in town” and so in all the circumstances of the case must have been intended to constitute the Schedule. This outcome, however, was far from inevitable. Ultimately, the absence of a clearly agreed and finalised Schedule of Condition forced both parties into a protracted, fact‑heavy dispute over what the tenant’s repairing obligations actually were – all of which will have incurred significant time, cost and uncertainty that could have been avoided.

Summary

Many agreements for lease provide for the Schedule of Condition to be agreed at a future point, at or close to entry, often after one of the parties have carried out works or the previous tenant’s have vacated the property. For this reason, the preparation of a Schedule of Condition can get overlooked as and when the tenant takes entry but we recommend that if the lease provides for one that this is prepared, agreed and properly preserved to ensure that the parties can properly benefit from it at the end of the term.