When leasing (or buying) commercial premises, the implications of Repairing Covenants in leases need to be carefully assessed in relation to the age, character and type of building under consideration and the limitations of liability afforded by Statute and Case Law.
Depending on the type of building and length and terms of the lease, a Report in the form of Schedule of Condition might be more appropriate than a normal Building Survey Report. This will often be accompanied by photographs which will be helpful in recalling the state of the building at the commencement of the lease.
When a lease is executed, the lessee undertakes to keep the demised premises (a whole building or part of a building) in an agreed state of repair recorded in the lease. Most landlords try to let buildings on what is called Full Repairing and Insuring terms (FR&I) because they want the lessee to be wholly responsible for everything to do with the building, thereby receiving a rent from which there will not be any deductions.
However, there are many variations of repairing covenants, which include a liability for internal repairs. There are endless permutations of wording of repairing covenants.
At the end of the lease, by what is called ‘the effluxion of time’, the lessor expects the building to be given back in a state which reflects full compliance with the repairing covenants of the lease.
This is the simplistic setting, which, in practice, rarely happens, not least, because the daily routine of occupying an office or other leased building is not compatible with carrying out effective decoration and other work at the end of a lease.
There are also some background principles of Law which have to be borne in mind. Paraphrased, they include, inter alia, :-
The starting-point for examining repair is that there must be disrepair, and there are three tests : there must be damage; there must be deterioration from a previous, physical condition; and that damage must be the subject of a repairing covenant.
Having agreed the correct extent of works meeting the three tests, prima facie, the cost of works represents the landlord’s loss.
However, Section 18(1) of the 1927 Landlord and Tenant Act sets a cap on the amount which can be claimed by a lessor. ‘Damages for breach of covenant…………………shall in no case exceed the amount (if any) by which the value of the reversion……is diminished owing to the breach of such covenant’. In simple terms, this is assessed by preparing two valuations : one is of the building in a repaired state with compliance of repairing covenants, the second is of the building in its unrepaired state.
Once a lease has expired, the former lessee has no legal right to access for any purpose unless the lease expressly provides for such action, and/or unless further access is agreed between the parties to the lease. In such cases, the lessor’s remedy for breach of contract is Damages (a monetary settlement), usually agreed between the parties’ surveyors. If a lessee holds over after expiry of the lease by the effluxion of time, a lessor is entitled to what are called ‘mesne profits’ which is another way of saying rent for use and occupation of the premises. (See below for comment on the mesne (pronounced ‘mean’) profits aspect of your expired lease.)
From a lessee’s point of view, one way of trying to disprove any deterioration from a previous physical condition is to prepare a Schedule of Condition at the commencement of the lease (with or without photographs), but to stand a good chance of being effective, the Schedule should be agreed by the lessor and physically annexed to the lease.
It is arguable that the better the state of the building at the commencement of the lease, the less value the Schedule will have at the end. However, a Schedule of Condition and photographs of an ‘old’ building have the potential to be of greater benefit, because, in the absence of express covenants to undertake works agreed with/specified by the lessor, the state of the building at commencement of the lease sets the overall standard of repair required at the end of the lease. As mentioned above, the lessee is not required to hand back a building substantially different from that originally demised.
The above paragraphs explain some of the basic points around which issues of Dilapidations are assessed. I must stress that I have just taken some of the fundamental principles for this note. There are others, and they are inter-related. Some are enshrined in Statute, many others are the result of Case law. Books on this subject tend to be very fat ! Readers must seek specific advice on their circumstances.
It is unfortunate that a substantial majority of new lessees do not take advice before signing a lease of commercial buildings. They later find themselves with potentially-expensive Dilapidations contained in Schedules served by their lessors, which could have been better challenged with paperwork to support the state of the buildings at the commencement of the leases, and/or if lessees had been warned of likely costs, so that financial provision could have been made.