Repairing Obligations In Commercial Property

Whether you are planning to enter a new lease or to take on an existing lease (by assignment), the condition of a property may be one of the first things that you consider, alongside the size, location and price.

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 a payment in lieu of the repairs.

Using heads of terms to your advantage

Once there is some form of mutual/informal agreement between the landlord and the tenant, the key terms will be agreed between them before legal representatives are instructed to streamline and formalise a lease agreement. Therefore, the heads of terms stage is a key stage for ascertaining and agreeing the extent of each parties’ responsibilities for repairs.

A key negotiation factor to consider for repair purposes (landlord and tenant perspective) is 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 or landlord responsible for the repairs?

The scope of the tenant’s repairing obligation will depend on the extent of the property demised (i.e. leased to them). If the whole of the building is being leased to the tenant, the whole of the building will be subject to repairing obligation.

If only part of the property is being leased to a tenant, it is important that the lease sets out precisely what structures fall within the responsibility of the landlord and what structures fall within the responsibility of the tenant.  Care should be taken in the legal drafting to ensure there are no gaps or overlaps in the respective parties’ responsibility for repair.

The importance of adequate drafting is that if a tenant fails to comply with a repairing obligation in full, a Landlord may issue a claim for damages for breach of the repairing covenant or agree a payment in lieu of the repairs.

Preparing a Schedule of Conditions to limit liability for repairs

Whilst technical drafting can minimise risks, a tactical way to mitigate against any repair claims (also known as dilapidations claim) is agreeing to a Schedule of Condition, sometimes also identified as a defect report.

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. It is essential to note that anything that isn’t covered by the Schedule will be the tenant’s responsibility. A Schedule of Condition should be produced by a professional surveyor.

A common negotiating point is 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.

Tenants’ responsibilities for repairs during the lease term

Once a tenant has entered into a lease or taken an assignment, they will be responsible for the repairing obligation (s) that has been agreed upon. At any time, the landlord can ask to inspect the property and 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 requiring for the repairs to be addressed and fixed. The tenant will have an agreed period to carry out the repairs, failing which the landlord will be able to carry out the repairs at their cost, for which the tenant will be required to reimburse. The tenant will also be responsible for the landlord’s professional fees in serving the notice and supervising the repairs.

The following points regarding the extent of a usual tenant’s repair obligation should be noted:

• 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.

Tenants’ responsibilities for repairs at the end of the lease term

At the end of the lease term, the landlord will inspect the property and will issue what is known as a Schedule of Dilapidations, if the property is in a state of disrepair. The Schedule 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.