In previous blogs, we have looked at what options are available to an occupier when agreeing with a landlord how space will be delivered, and the meaning of the commonly used terms to describe fit out, namely Category A (CAT A), Category B (CAT B) and the hybrid Category A+ fit-outs which can be viewed here. In this blog we are looking at what an occupier can do to mitigate its exposure and protect its position in respect of its repairing obligations when taking on new space within a building which has been recently built or has undergone major refurbishment.
The size of the unit being occupied relative to the whole of the building, whether the premises include any structural elements and how long the occupier's lease is for will all have an impact upon on any agreement reached between the parties on who takes on the cost of repair of any structural elements of a building.
Potential mitigations to consider include:
- Limiting the repairing / yielding up obligations – where the structural elements of the building are included within the occupier's premises, excluding or limiting responsibility for dealing with latent and inherent defects and potentially referencing schedules of condition.
- Limiting exposure to costs – where the premises do not include any structural elements, i.e. you have an "internal" demise, the responsibility for maintaining and repairing the structural elements and common parts of the building remain with the landlord, with costs being recouped via the service charge. Therefore, the service charge provisions are key in determining what costs an occupier may be exposed to. Occupiers can exclude / limit costs by:
- excluding an obligation to contribute to the costs of repairs arising from latent and/or inherent defects in the structure / common parts where the landlord benefits from collateral warranties / product guarantees; and/or
- agreeing an annual service charge cap with the landlord.
- Landlord warranties – where the occupier's premises is internal and the landlord benefits from collateral warranties, in addition to limiting costs (see above) an occupier can ask for positive obligations to be included on the landlord requiring the landlord to make and pursue claims under the collateral warranties / product guarantees where it is appropriate to do so.
- Tenant warranties – occupiers may be able to secure a pack of collateral warranties from the professional team and relevant contractor(s)/subcontractors for its own benefit. This would allow the occupier direct recourse to the professional team and the relevant contractor(s)/subcontractors (to the extent the defect is due to the relevant contractor(s)/subcontractors/professional team's breach of contract) to either:
- recover costs and losses incurred by the occupier due to defects in parts of the building which are included within its own demise or where defects in the structural or other common parts of the building are the cause of damage to the premises; or
- procure that works are undertaken to rectify any damage (if within the defects liability period).
- An alternative to an occupier being granted a pack of collateral warranties would be to consider whether third party rights are available to an occupier under the Landlord's construction pack.
An occupier being able to benefit from a pack of collateral warranties will be particularly important where substantial parts of the building which have been the subject of recent construction or refurbishment are demised to the tenant under the lease and so fall directly within the occupier's repairing obligation (rather than under the service charge regime).
In our next blog we will take a closer look at what considerations an occupier should bear in mind when reviewing a collateral warranty pack and how an occupier can input into the construction process if they have entered into a pre-let agreement.
If you have any queries about this topic, or anything else related to real estate or construction matters, please email Leonie Hall, Gillian Watson, Kate Morrison or your usual Brodies contact.
