Both tenants and landlords are tied by repair obligations in commercial leases. When a commercial lease comes to an end, disputes can often arise between tenant and landlord regarding the state of repair in which the tenant is required to leave the premises. Leases invariably contain a repair clause and tenants often think they only have to return the property in the same condition in which they were received, but this is often not the case and tenants can find themselves left with an unexpected (and potentially very expensive) repair (or dilapidations) liability at the end of the term.
So, what are the different types of repair obligations and what should be done before taking the lease to limit a tenant’s obligation to repair?
Different types of repair obligation
The majority of commercial leases will be, what is called, a “full repairing lease”. What this means in practice will differ depending on whether the lease is of the whole or part of a building. In a lease of whole, the tenant will have full responsibility for the repair of the whole of the building, including structure and roof. In a lease of part of a building, the tenant will usually only be obliged to repair the internal area let to them, with the landlord retaining liability for the structure, exterior and common parts. However, the landlord will then usually be able to recover the cost of those repairs from tenants through a service charge.
Commonly a lease will oblige a tenant to “keep the premises in repair”. As a covenant to “keep” a property in repair is deemed to also include an obligation to “put” it into repair, any disrepair existing at the time the lease is granted will become the tenant’s liability to put right at its own expense, even though it pre-dated the tenant’s occupation, a point that tenant’s commonly do not appreciate.
If the lease requires the tenant to keep the property “in good repair and condition”, this is a more onerous obligation than purely one to keep in “good repair” and can require works to be carried out to the premises even if there is no actual disrepair.
What should a tenant do before taking a lease?
The first thing a tenant should do before entering into a new lease is to inspect both the property and the building of which it forms part. This will allow them to understand the state of disrepair and assess any potential repair costs, whether relating to repairs for which the tenant will be directly responsible or via the service charge.
An important way a tenant can limit their repair obligation, so that they are not obliged to return the premises in any better state than they were in at the start of the lease, is through a Schedule of Condition evidencing the state of the premises when the lease commenced. This would comprise a full set of photographs and, ideally, also a detailed description of any existing items of disrepair. Depending on the size of the premises and value of the rents, the Schedule should be professionally prepared by a surveyor to ensure it covers all items. The Schedule should then be kept with the lease for future reference and ideally signed by the parties.
Tenants should also check they are satisfied with the condition of any plant and machinery at the property (including heating and air conditioning systems that exclusively serve it), as the tenant will usually be obliged to keep these in good working order under the lease. The tenant should request copies of recent testing certificates, inspect and, in larger premises, may consider engaging its own consultant/contractor to inspect and report back.
When a lease of part is being drafted, thought should be given to ensure there are no gaps or overlaps between landlord and tenant as to who is responsible for an item of repair and a detailed description of what comprises the premises should be inserted, e.g. are windows and window frames to be included? This will ensure the respective parties’ obligations are clear and reduce potential ambiguities further down the line.
In a newly or recently constructed building, a tenant would also want to exclude liability to repair “inherent defects” and any disrepair arising from those defects. Instead putting the onus on the landlord to repair them at its own expense. Inherent defects are defects in the design or construction of a building, or materials used, which existed when construction was completed, but would not have been apparent on inspection and may come to light in the first few years of the term of the lease.
In summary, advice early on in lease negotiations on potential repair liability is key for tenants to ensure any existing disrepair is picked up and also to ensure the repair covenant is fairly drafted and does not come back to bite them at a later date. Once the lease has been signed and dated, it will be too late and the obligations will be fixed.