Repairing Obligations - A Guide for Commercial Tenants
An important area in commercial leases relates to a tenant’s repairing liability.
At times, there is a temptation for tenants to focus on the ‘direct’ financial obligations when negotiating the Heads of Term with the landlord or the agent, such as rent and service charge. Therefore, by the time that the lawyers are instructed and the Heads of Terms are circulated, the tenant might be about to take on full repairing liability (unintentionally).
What does full repairing liability mean?
A full repairing liability means that at the end of the lease term (or even during the lease term), the tenant must put the property in repair even if that tenant was not actually responsible for that disrepair in the first place – i.e. it may have been caused by the previous tenant or by wear and tear/the age of the building. Because of the harshness of this rule, this obligation sometimes comes as a surprise to tenants and they assume that they need not put the property in any better state of repair and condition than it was when they entered into occupation. This is not the case and the tenant should take time to water down the repairing obligation from the outset - when negotiating the Heads of Terms.
Defences to a claim for dilapidations
The harshness of a full repairing obligation may only be discovered at the end of the lease term when the tenant is served with a Schedule of Dilapidations (repairs) - requiring it to put the property in repair. We will not be focusing on dilapidations in this note but a tenant’s solicitor and surveyor will seek to limit the tenant’s exposure in relation to dilapidations when vacating a property. For example, if the landlord’s loss can be questioned because the property is about to be re-developed or if the landlord has been successful in securing a replacement tenant at market rent, then such matters may be used to help limit a tenant’s exposure for dilapidations. Rather than looking for defences at this stage and incurring professional costs, it is important to negotiate a suitable limitation to the tenant’s repairing obligation from the outset.
What are the options when limiting a tenant’s repairing obligation in a lease?
A popular way to limit the tenant’s repairing obligation is to ensure that a Schedule of Condition is attached to the lease - containing both a narrative and photographic evidence of the state and condition of the property at the beginning of the lease term. The wording of the repairing obligation in the lease will need to be amended so that it is clear that the tenant need not put the property in any better state of repair and condition than that evidenced by the said Schedule of Condition.
When preparing Schedules of Condition, some tenants are happy to prepare the narrative and photographs themselves – especially if the lease contains an internal only repairing obligation. Care should be taken here and it may be prudent to engage the services of a surveyor to prepare the Schedule of Condition on the tenant’s behalf. If the repairing obligation extends to the structure and external parts of the building (including the roof), then clearly, a surveyor would be better placed to document any disrepair. It would be necessary to gain access to the roof for this purpose.
Is a Schedule of Condition sufficient?
This is to be decided on a case by case basis. If a tenant is taking on a lease of a dilapidated building (for example which is affected by water ingress) then the starting point may be to document the affected areas in the Schedule of Condition. But, is that going far enough? The tenant will not be responsible for dealing with the water ingress during the term of the lease (or indeed at the end of the lease term), so who is responsible for dealing with these issues? In the absence of appropriate clauses to deal with such issues, there will be a ‘gap’ in the repairing obligations within the lease. Clearly, it is in the tenant’s interests to ensure that the property is not affected by water ingress throughout the lease term so it may be appropriate to ensure that they form part of the landlord’s repairing obligations. This is also important because the water ingress may lead to further disrepair in the future and such future disrepair will not have been documented by the Schedule of Condition – so this will fall within the tenant’s repairing obligation.
Repairing obligations in relation to service charge liability
It is very important to be mindful of ‘indirect’ repairing obligations by way of service charge liability. For example, if a tenant is taking on a lease of part of a building, the tenant is likely to be subject to an internal only repairing obligation. That being the case, the temptation may be to focus only on the internal areas and the Schedule of Condition will ignore any external areas. Whilst that may be the correct approach for the Schedule of Condition, the structure and external parts (including the roof) cannot be ignored. It is highly likely that the tenant will find itself liable for a percentage of the costs that the landlord incurs in maintaining, repairing and renewing these areas by way of the service charge. Therefore, inspection of these areas should still be carried out and/or the tenant may try to negotiate a maximum cap per annum on service charge liability or exclude certain areas (i.e. the roof) from the service charge provisions.
If you would like any more information on this topic or a related topic, please contact our Commercial Property team.