With rising inflation, the cost of energy and the potential for a recession, times are hard. It has never been more important to understand your liabilities as a business.
People often assume that the biggest expense for a business renting a commercial space is rent, however, this can sometimes be a secondary expense.
All commercial units will come with some sort of repair and decoration obligation. If you are occupying part or a floor of the building it may just be the interior finishes and floor coverings, however, if you occupy a whole unit it will include everything including the structural parts such as the roof or foundations. The repair obligation will generally be to “keep the property in full repair and condition” and this obligation could amount to a liability costing tens of thousands of pounds.
There are three types of report which can assist you when you are taking a lease, or you occupy a commercial space including a:
This report will identify the present state of repair and physical condition of space being taken and the building being leased. The report should be obtained regardless of whether the tenant is taking a lease of part of a building or of the whole building. If part only of a building is being leased then the report should still cover the whole building, if possible, as if there are structural items in need of repair this may well impact on service charges for the building. The report will identify both present and future defects in order to give an estimated cost for repair or replacement.
Anyone who has purchased a house will have been told that best practice is to obtain a full survey to identify any potential issues. The same is true of commercial premises and a building survey may well reveal costly defects which will become the responsibility of the tenant once the lease has been granted. Much better to identify these at the outset and potentially agree a rent-free period to cover the cost of repair or to allow for a schedule of condition to be prepared limiting your liability, see below.
A Schedule of Condition provides a factual record of the condition of the property at the time of the physical inspection before the lease is entered. If part of a building is being leased, then the Schedule of Condition should only cover the extent of that area to be leased. Should a lease be obtained of the whole building then the Schedule of Condition should cover the building, interior, exterior, the grounds, and any fences or boundaries. The Schedule of Condition will identify all current defects in the property. The goal of the Schedule of Condition is for the tenant to limit its repair obligation by placing an obligation on the tenant to keep the property in no better state of repair and condition than as evidenced by the Schedule of Condition, there by limiting the cost to the tenant at the end of the lease.
Best practice is to instruct a professional surveyor who will inspect and prepare a report with both a comprehensive written and photographic record of the condition of the property. A professional surveyor will need both time to inspect the premises and time to prepare the report and this should be budgeted when considering timeframes.
Once the lease comes to an end the Schedule of Condition can be used to mitigate the cost to the tenant if the landlord serves a Schedule of Dilapidations, see below.
At the end of a commercial lease the landlord will likely inspect the premises and serve on the tenant a Schedule of Dilapidations. This will contain a detailed breakdown of all breaches of repair and decoration obligations together with the costs to be incurred by the landlord in rectifying the same.
A Schedule of Dilapidations is usually obtained either in anticipation of the existing lease coming to an end or after the tenant has handed back the keys at the end of the lease. If served on the tenant in anticipation of the lease coming to an end the tenant will have an opportunity to make good the works themselves before handing back the keys to the landlord at the end of the lease. This is, obviously, the preferred option as the tenant is likely to undertake the works cheaper than the Landlord.
Once received the tenant should instruct their own professional team of solicitors and surveyors to examine the schedule and mitigate the costs. If a Schedule of Condition was prepared at the start of the lease and the tenants repair obligation was limited by reference to it then this will prove invaluable at this stage.
Dilapidations can be a large and unexpected cost at the end of a lease. Tenants should understand their liability and take steps to quantify and mitigate these costs at all stages of the lease cycle. If you are taking a lease or have had a Schedule of Dilapidations served on you, please do contact our Commercial Property Solicitors who will be able to advise.
The commercial property team at Pinney Talfourd are here to assist on all legal matters in relation to commercial property leases – new and extensions. To discuss your requirements further, please contact Julien Pritchard on 01708 229 444 or email Julien.firstname.lastname@example.org.
The above is meant to be only advice and is correct as of the time of posting. This article was written by Inderdeep Kanda, Solicitor in the Commercial Property team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2023.