Commercial tenants beware: Make sure you understand your repair obligations
When taking a lease it is important to fully assess your repairing obligations. Most leases will have an express provision for repairs. This may be stated to keep the property in “good and substantial” repair and condition; but how is the standard of repair of a building to be assessed? How do you know what you are supposed to repair? How do you know when you are supposed to make repairs?
As a general rule, repair means making good damage so as to leave the subject property as far as possible as though it had not been damaged. Repair should also be appropriate to the type and age of the property. Therefore, a mechanics workshop will require different repairs from an office and an old dilapidated building will require different repairs from a newly constructed building.
Sometimes repair will involve some form of renewal because components become defective and require replacement and will normally be replaced by a new component.
So how as a tenant can you limit your liability for repair, or at the very least offset it, at the outset of a lease? They could use the following:
Rent free period
Where the property is in a poor state of repair a tenant might use the negotiation tool of a rent free period. This could offset the costs it will incur in carrying out works which are needed to get the property into a state of repair and fit out to allow it to be used by the tenant. More importantly it would meet the standard as required by the terms of the lease. A tenant should be aware that other payments due under the lease such as insurance rent, service charges as well as rates and utilities will still be payable during this period.
Schedule of Condition
This involves getting the landlord to agree that the subject property need not be kept in a better state of repair and condition than exists at the date of the lease. As it is the landlord’s burden to establish the condition at the beginning of the lease in order to establish the extent of the disrepair so that it can make a claim it is likely that a Schedule of Condition will need to be prepared to evidence the condition of the subject property at the date of the lease. This can be done by a written schedule, photographic schedule or as seen in more recent years – a video schedule which can be particularly useful for evidencing dripping pipes and flapping cladding!
The Schedule of Condition must be agreed with the landlord and reference is made within the lease to only return the property in the condition evidenced by the schedule. The schedule, in whatever form it takes, is then attached to the final lease. You may also wish to consider including an electrical inspection report, engineers reports on lifts and even underground CCTV drainage surveys to highlight faults. As you must only return the property in no worse a condition than you received it in, the idea is to limit your liability by carefully recording the condition you received the property in. Bearing in mind the landlord has the burden to establish if there are any dilapidations for disrepair it will be up to market conditions and negotiations as to who should bear the cost of preparing the schedule of dilapidations.
Environment & repairs
Repairing obligations can impose environmental liability on tenants. Take, for example, a requirement to keep the building in “good and substantial repair”. This could mean a tenant is responsible for any subsoil contamination that has affected the foundations of the building.
Similarly, a tenant’s obligation to repair can give rise to liability under section 4 of the Control of Asbestos Regulations 2012. You may also have heard of the MEES (Minimum Energy Efficiency Standards) regulations, which require commercial property (apart from those qualifying for exemption) to have a minimum EPC rating of Band E in order to be let. If the property requires upgrading to improve it’s energy efficiency and obtain a higher rating, these repairs are borne by the landlord and not the tenant.
Service charge leases
At the negotiation stage you should try to agree a cap on the annual service charge to give you certainty over the extent of your repairing liability. It may also be possible to limit the extent of the items that you will have to pay for as part of your service charge by agreeing a provision called “Excluded Costs”. These are items which will not form part of your service charge; therefore limiting your repairing liability. Key items to exclude are inherent defects in construction and design, future development costs and costs due to breach of covenants by other leaseholders in the building.
Definition of ‘demised premises’ or ‘property’ in the lease along with the lease plan
It is critical to check the description and plan of the unit or building you are leasing. Does it include foundations, doors, windows or plants? If this is poorly defined in the lease or goes beyond what was agreed, you could end up with more onerous obligations or ambiguity which could lead to dispute. The obligation to repair is likely to be to repair the demised premises or property so you may need to consider reducing the extent of your obligations to repair the property by reference to the extent in the definition.
Inspection & survey
If in doubt about the condition, carry out a thorough inspection and enlist the help of specialist surveyors to assist you in thoroughly ensuring that you are not taking on a property with greater repairing liabilities than anticipated.
Remember as a tenant you are likely to be responsible for the cost of the preparation of a dilapidations schedule and the carrying out of any disrepair in accordance with the standard provided by the lease, so be sure to budget for this from the outset. Typically a Terminal Schedule of Dilapidations will be prepared in the last 6 months of the lease, but if you have an especially long lease you can expect the landlord to prepare an Interim Schedule of Dilapidations part way through the lease. Rather than requiring the tenant to carry out the repairs under any terminal schedule of dilapidations, the landlord will often look to agree a payment in lieu of the repairs.
Don’t forget that if you don’t agree with the items within the dilapidations schedule, you can instruct your own surveyor (at your own expense) to contest certain items which you reasonably believe ought not to be repaired. You should also be aware the landlord may want compensating for the period of time it will take to carry out the repairs as it will not be able to let the property and receive rent whilst the repair work is being undertaken.
Remember you can ask for amendments to be made to the lease to soften the repairing terms within it. Beware the use of “keep in good condition”. This phrase has often been used to infer that a tenant taking a building that is not in good condition will be required to put it into good condition as well as keep it in good condition thereafter. Therefore a tenant taking an older property or a property in poor repair will have a greater repairing burden. Specialist legal advice should be sought from your solicitor who can advise on what sort of amendments may be possible.
At the beginning of the lease, you should ascertain if the landlord has claimed capital allowance relief and also obtain advice from an accountant with regard to any tax relief elected in the form of Capital Allowances relating to any plant and equipment at the property and whether or not you are able to claim existing Capital Allowances reliefs.
Repairs are one of the main areas of dispute between landlords and tenants. The critical time to limit your liability for repairs is at the outset of negotiations. If, on inspection of the property, you have any concerns about the state of repair, it is important that you seek expert advice from a surveyor before agreeing heads of terms.
If you need legal help taking a lease and agreeing your repairing obligations or you are currently in dispute with your landlord about repairs, Rix & Kay has specialist lawyers who can assist you. Please contact: