The standard form of commercial leases in Scotland are full repairing and insuring (FRI) leases. As the name suggests, they transfer liability for repair and decoration of the leased premises to the tenant. Depending on the age and condition of the premises and given the potential cost, tenants may seek to limit this obligation. One way of doing so is by way of a schedule of condition. Here we look at the key aspects of schedules of condition.
Purpose of the schedule of condition
A Scottish FRI lease places a full obligation on the tenant to maintain their premises in good and substantial condition. That means that the tenant may have to put the premises into a better condition than they were at lease start to meet that test. To provide the tenant with a degree of certainty as to the standard of repair required during the lease term – and in particular the condition they have to put the premises in at lease expiry and likely cost of doing so – the parties may agree that the tenant only needs to keep the premises in the same condition it was in at lease start. For certainty as to what that condition is, that condition is documented by a schedule of condition. That is usually a selection of photographs of the premises, but can also include a written description.
When is a schedule of condition appropriate?
A schedule of condition is not always appropriate. If lease premises are new or in a good condition the starting condition is sufficient to minimise the potential repair cost to the tenant. In that situation restricting the tenant's repair and removal obligation is not appropriate and a schedule of condition would not be needed. Schedules of condition are therefore most commonly seen with older premises or premises which have had intensive use (e.g. an industrial units).
One also needs to have regard to the extent of the premises being let:
- If the premises are in a multi-let building, such as a retail unit in a shopping centre, the premises are likely to be internal only. With internal only leases, the general rule is that the 'premises' comprise the internal facing of walls, ceilings and floor. In essence, the tenant is only repairing the carpet, paint on the walls etc. They would need to repair dents to the walls, for example. The structural elements of the walls would likely be common parts, so repair of those would fall to the landlord and be recoverable via the service charge. Here, a schedule of condition may be of limited use.
- With single let properties, or terraced properties, the premises are likely to be the entire building and/or include structural elements. That includes the external walls, roof, external yards and the like. As mentioned above, depending on their condition a schedule of condition may be likely.
Content of the schedule of condition
When preparing a schedule of condition, one should consider the following:
- when is the schedule prepared? The schedule should only show the condition at lease entry: if the landlord is doing works before lease start or a prior tenant is carrying out dilaps works, the schedule of condition should be prepared following completion of those works. Those works will form part of the premises at lease start so should be included in the schedule of condition.
- only include the lease premises No common parts or external areas out with the lease demise should be included as they do not fall within the tenant's repair obligation. The parties / surveyors agreeing the schedule of condition should therefore be aware of the extent of the premises, as mentioned above. If the schedule of condition includes areas that are within the landlord's property but not part of the lease premises, that is confusing as it could imply that the tenant's service charge or obligation to contribute to landlord repairs of those areas are also capped or restricted. That's not the intention.
- can the damage be identified in the premises? Many will be familiar with photographic schedules showing dents in walls, cracks in facilities or the like. But can those actually be located in the premises? If a photo isn't clear as to where the damage is, consider adding a brief description (e.g. entrance corridor wall; staff room toilet).
Agreeing the schedule of condition
There is no hard and fast rule as to who prepares the schedule of condition, but ordinarily one party's surveyor prepares it; there's then a negotiation with the other party's surveyor; and it's then agreed. That is usually done prior to lease start and immediately after any works are completed. The agreement for lease preceding the grant of the lease will cover that process, including any third party determination if the parties cannot agree. The agreed schedule is then annexed to the lease.
Interface with the lease obligations
The schedule of condition would usually be referred to in the tenant's obligations to repair, decorate and on lease expiry (yielding up or removal). A key aspect is whether the tenant is to repair in no better or no worse condition than shown by the schedule of condition:
- no better condition means that's the best / 'ceiling' condition. Provided that condition is met, the tenant needs to do no more; and
- no worse condition means that's the baseline condition and the tenant could put the premises in a better condition than shown by the schedule of condition.
Understandably, tenants usually look for 'no better' and landlords for 'no worse' a condition. That is a commercial decision for the parties and will depend on the nature of the premises and their overall condition.
Key takeaways
Whilst a schedule of condition is a common way for a tenant to restrict their repair obligation, they should only be included in the lease where appropriate having regard to the condition of the premises; and clearly record the condition of the premises (only) at lease start.
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