Do you know your commercial lease end obligations?
It is often the case that when our Building Consultancy team are acting for either the landlord or tenant, the tenant is unaware of what their lease end liabilities are. Lease end dilapidations are often overlooked by outgoing tenants and careful consideration is required prior to taking a lease, during a lease and after a lease has ended.
Tenants often report having a good relationship with their landlord; however, this can often decline when the landlord’s Building Surveyor serves a Terminal Schedule of Dilapidations which hasn’t been accounted for in the firm’s balance sheets. Landlords expect their properties to be properly maintained throughout the lease term and that they will be handed back in the condition they were let, yet unfortunately, this is not always the case and can lead to disputes.
Although a dilapidations claim is often made at the lease end, consideration should be made at the beginning of the process, prior to the lease being signed. When agreeing to take on a commercial building, a lease will be drafted by the landlord’s solicitor setting out the obligations of both landlord and tenant. At this stage, it is important that any prospective tenant takes advice from their solicitor to review the obligations and set out the terms and the implications they may have.
The first point of reference should be the property definition and description of the ‘demise’ – for instance, what is the tenant taking liability of? Leases are often referred to as FRI (Full Repairing and Insuring) or ‘Internal Only’. Is the tenant responsible for external elements or the structure of the building, including windows or the roof? Establishing this at an early stage is key to assessing the potential repair liability during the lease and at lease end.
Secondly, it is important that the clause terminology is understood as subtle differences in lease terms can have significant cost implications when the lease comes to an end. A solicitor will be able to advise if the lease is ‘subject to fair wear and tear’ or if there is a requirement to ‘put’ in repair or ‘keep’ in repair. Well advised tenants will often attempt to negotiate the inclusion of a schedule of condition at the outset of the lease term which is appended to the lease.
A schedule of condition report records the condition of the subject property at a point in time and often the lease will then include a clause such as ‘to keep in no better condition to that recorded in the schedule of condition’. The report is usually prepared at the cost of the tenant and agreed by the landlord and unless specifically detailed within the lease clause, is unlikely to limit the decorating liability at lease end. It is important that any schedule of condition takes into consideration the demise and terms of the draft lease. For instance, in scenarios where the roof hasn’t been recorded within the schedule of condition, this can often lead to costs attributed to a large portion of the claim against an outgoing tenant.
Prospective tenants are also advised to undertake a pre-acquisition survey of the property prior to taking on a lease, to highlight any areas such as inherent defects which can become the tenant’s liability. Unless an inherent defect is specifically excluded, case law shows us that the tenant can become liable in a lease end dilapidations claim. A survey will either allow the tenant to make an informed decision about the liability they are about to take on or give them the ability to negotiate the liability of the specific item out of the lease obligations.
Something often overlooked by prospective tenants during the process of taking on a lease is the ongoing repair and maintenance costs of leasing a building. These costs are not budgeted for and so matters of disrepair are allowed to progress and become much larger issues at lease end. A proactive tenant will have a Planned Preventative Maintenance Programme in place that takes account of the lease terms and allows an annual budget and expenditure for regular maintenance. Undertaking repairs and redecoration prior to lease end allows the tenant to retain control of the repair and costs, limiting the landlord’s fees and contractor costs should there be a disputed claim.
In summary, advice from both solicitors and Building Surveyors at an early stage is strongly recommended, prior, during and at lease end. This is key to reducing potential lease end liabilities and disputes when the lease comes to an end.