Repair and maintenance for a commercial lease is a complicated subject, with many terms and phrases having specific and detailed technical meanings. In this guide, our commercial property solicitors will help you understand your responsibilities for repairs and maintenance.
We'll be covering:
- Identifying a commercial property and considering its state of repair
- Using Heads of Terms to agree the extent of repair obligations
- Is the tenant responsible for repairs on a commercial property?
- Internal vs full repairing: is the tenant or landlord responsible?
- When you might need a survey for repairs on a commercial property
- Using technical drafting of the lease
- Preparing a Schedule of Condition to limit your liability for repairs
- New buildings and repairing a defect in original construction
- Tenants' responsibilities for repairs during the lease term
- Can a landlord inspect repairs?
- What happens if a tenant refuses to pay for repairs?
- Tenants' responsibilities for repairs at the end of the lease term
- Repairs and renewing your commercial lease
- What about damage caused by insured risks?
- Summary
Identifying a commercial property and considering its state of repair
Whether you intend to enter a new lease or to take on an existing lease (by assignment), the condition of a property might be one of the first things that you notice – size, location and price all being important determining factors before your first visit. Whilst you may note the state of repair of the property, it might well be forgotten once the formal negotiation process is underway. Personnel changes within organisations, or timing constraints can often make that initial visit and impression of the building a dim and distant memory.
Alongside rent, the cost of repairing a property on an ongoing basis during the term of a lease is one of the biggest liabilities for a prospective tenant; and the liability doesn’t end just because the lease does. A landlord will inspect a property at the end of the term and is likely to serve what is known as a terminal schedule of dilapidations. Rather than requiring a tenant to carry out the repairs, a landlord will often look to agree on a payment in lieu of the repairs.
Using Heads of Terms to agree the extent of repair obligations
If the property meets your organisational requirements, then the next step is to agree on a deal with the landlord or existing tenant. The key terms will be agreed between you and the other party before lawyers are instructed to formally document the agreement. The heads of terms stage is a key stage for identifying and agreeing on the extent of your responsibilities for repairs.
The type of property and length of the lease will factor into discussions. When taking on A Grade office space, a tenant should expect to keep the property in a high state of repair, whereas taking on industrial warehousing in a building which is at the end of its economic life should result in minimal obligations. The longer a lease the greater the burden that you can expect as some items might need replacing during that time, whereas with a shorter lease, it might be disproportionate to expect you to pay for the cost of replacement, as you will only have used it for a short period.
Is the tenant responsible for repairs on a commercial property?
In most modern-day commercial leases, tenants will be responsible for repairs, but the extent of repairs they are responsible for will very much depend on what has been negotiated, agreed upon, and contained in the wording of the lease. It also depends on the type of lease being granted and the property being leased. The extent of repairs will be greater If the lease is what is known as a “full repairing and Insuring lease” (FRI), rather than a lease of a unit as part of a wider estate, where often the tenant’s responsibility is limited to non-structural repairs.
In general, you should note the following key points regarding the extent of a usual tenant’s repair obligation:
- It is a question of fact and degree whether works constitute repair.
- The standard and nature of the work to be carried out depends on the age and nature of the property at the grant of the lease. An old building will not require modernising as part of a repair obligation.
- A tenant will usually be able to choose the method of repair and whether to repair the damage or replace the damaged part of the property.
- It is generally considered that a covenant to keep in good condition has a wider meaning than a covenant to repair.
- Repairing covenants may include ‘replace and renew’ wording, but even where they do not, the courts recognise the reality that repair includes renewal of subsidiary parts.
Internal vs full repairing: is the tenant or landlord responsible?
It is worth considering the type of property and how this will affect your responsibilities for repairs. If the property is standalone, then the lease is likely to be full repairing, meaning that the tenant's responsibilities are for the entirety of the building, including its structure.
If the property is part of a larger building or an estate, then the landlord will retain responsibility for the repair of the structure of the building(s) and the common parts of the building and/or estate. In this situation the tenant's responsibilities will be for the internal repair – the extent of the property being defined within the lease. Usually, a fair proportion of the cost incurred by the landlord in repairing the structure and/or common parts will be recouped from you via a service charge. The level of services and costs that can be charged by the landlord will be dealt with in the detailed wording of the lease and can be extensive.
Whether the property is standalone, or part of a building/estate you can see that, ultimately, you will have to pay for the repairs. Your repairing obligation and exposure to costs via a service charge will be addressed by the detailed drafting of the lease. Before that, at the heads of terms stage it is important for you to identify any key areas of concern and to ensure that these are addressed up front.
When you might need a survey for repairs on a commercial property
If you have any concerns about the repair of the property, then we would strongly advise you to seek a professional survey as soon as possible, before you commit to the lease. We work with many surveyors who can assist in the preparation of a survey and who will be able to advise of the most suitable form of survey, with more intrusive surveys taking longer and costing more than a ‘walk-around’ survey.
Using technical drafting of the lease
If an issue is identified and is considered in the heads of terms (which should always be checked with your legal adviser before being agreed) then we can agree on detailed technical wording to minimise your exposure to the costs of repairs relating to a certain item or items.
Preparing a Schedule of Condition to limit your liability for repairs
Whilst technical drafting can minimise your exposure, another level of comfort can be obtained by agreeing to what is known as a Schedule of Condition, sometimes known as a defect report.
You may negotiate that the repairing obligation ought to be limited to keeping the property in the same state it was in at the grant of the lease. This is particularly important when the property is in a poor state of repair because a covenant “to repair” would require you to put the property into repair.
A Schedule of Condition could be narrative, photographic or, ideally, a combination of both. It can provide documented evidence of the state of the property and limit the tenant’s liability for repairs. Caution should be applied as anything that isn’t covered by the Schedule will be your responsibility, so we’d always advise employing a professional to prepare the Schedule.
A Schedule of Condition may be particularly important to a tenant taking on a sublease (also known as an underlease). You may argue that it is unreasonable to expect to hand back the property in a better condition than when the sublease was granted, especially if it is only for a short term.
New buildings and repairing a defect in original construction
If the property is a new building, there is an additional point to consider: defects or lack of repair due to the original construction of the property. In this situation you may seek to exclude from your repairing obligation any damage which results from a defect in the original construction of the property. You might also (or instead) seek a warranty from the building contractor and professional team to cover such damage.
Tenants' responsibilities for repairs during the lease term
Once you have entered the lease or taken an assignment, you will be responsible for the repairing obligation that has been agreed upon.
Your exact responsibility and the extent of it will be outlined in the lease, but in general, tenants can expect the following when it comes to the repairs, maintenance, health and safety of the leased property:
- maintain the premises to a good standard (at least the standard it was in when you first took on the lease)
- perform routine maintenance such as cleaning, tidying, removing rubbish
- comply with all building and health and safety laws and regulations regarding the use of operation of the premises
- obtain the landlord’s consent before making any alterations or improvements to the premises that may impact the structure or functionality of the building (or as otherwise set out in your lease)
- repair any internal damage and replace any damage caused to fixtures or equipment caused by the tenant, Its employees or Invitees
- decorate the property at the end of the lease (for eg painting) to the satisfaction of the landlord so that it is ready for use by the next tenant
- report any property damage to the landlord
- allow the landlord access to the premises for inspection and to conduct any necessary repairs
Can a landlord inspect repairs?
Modern-day commercial leases typically reserve the right for the landlord to inspect the property to check on the condition of repairs. If there is anything which hasn’t been repaired in accordance with the terms of the lease, then the landlord will be entitled to serve a notice on you requiring you to carry out the repairs. You will have a reasonable time period to carry out the repairs, failing which the landlord may carry out the works and recover the sums back from you. . It is likely that you will also be responsible for the landlord’s professional fees in serving the notice and supervising the repairs.
What happens if a tenant refuses to pay for repairs?
A tenant who refuses or fails to pay for repairs that they are responsible for under the lease will technically be in breach of the agreement. Landlords could apply to the court for specific performance, compelling the tenant to comply with the terms of the lease and their repair obligations (although in practice this is rare).
The more likely scenario is, having exercised your rights under the lease to enter the property and carry out repair works at the tenant’s expense, you apply to recover these sums as a debt (rather than damages or compensation). The former avoids any statutory cap on damages for disrepair.
Tenants' responsibilities for repairs at the end of the lease term
At the end of your lease term, the landlord will inspect the property and will issue what is known as a Schedule of Dilapidations. This will list all items of disrepair and will quantify the cost of carrying out the repairs, including a calculation of lost rent for the period during which the repairs are carried out. The intention of the landlord will be to agree a payment in lieu of repairs. It is not unusual for a landlord to come in with a very high figure which can shock tenants. At this stage professional advice is advised. Clearly, the more you considered your obligations at the beginning of your lease, the better placed you will be when it comes to discussing the Schedule of Dilapidations.
If a landlord believes you are in breach of the repair covenants, then they could issue a dilapidation claim.
Repairs and renewing your commercial lease
Provided you have the right to ask for a new lease, and you seek to renew the lease, be aware that repeated disrepair is one of the grounds which a landlord could use to object to renewal. Again, having a clear view of what the tenant’s responsibilities for repairs are and complying with those obligations is key.
What about damage caused by insured risks?
Landlords will arrange insurance of the building housing the leased property, and recover the premiums from the tenant. Tenants should be mindful to notify their landlords promptly upon becoming aware of property damage (and in most cases, the lease will place this obligation on them). Tenants do not need to repair or bear the costs of damage caused by insured risks under the terms of a policy, but the lease may contain specific wording if the damage was caused by a negligent act or omission by the tenant.
Summary
Alongside rent, a tenant’s responsibility for repairs is another large cost when taking on a lease. It is crucial to seek expert legal advice at the outset before committing to the lease, to ensure any repairing obligation is manageable and reasonable. Your commercial property solicitor will be able to negotiate your best position taking into account the type of property being leased, as well as the type and length of the lease itself. Whether you need help negotiating repair obligations at the start of your lease, or find yourself dealing with a schedule of dilapidations at the end of it, here at Harper James we have wide-ranging experience to help protect your interests.
