Keeping commercial property insured and in good repair is important for both landlords and tenants, but for different reasons. The tenant needs to be able to run a business from a well-maintained property. The landlord needs to preserve the value of the property as an investment, at little or no net cost. The landlord achieves this by granting a full repairing and insuring lease, which passes liability for the costs of repair and insurance to the tenant.
There is still scope for disagreement about who is responsible for repairing specific parts of the property and to what standard. Both parties must seek legal advice before they enter into the lease and throughout the term, so they know what they are expected to maintain and how much it is likely to cost them.
Hannah explains;
‘A full repairing and insuring lease is the gold standard for a commercial landlord, but it doesn’t mean they can leave everything to the tenant and have no involvement over the state of the property throughout the lease,’
‘The landlord remains responsible for parts not let to the tenant and for arranging the insurance, so it really is important to understand what the lease says about those issues.’
What must the tenant maintain?
In a full repairing and insuring lease, the tenant must maintain the parts of the property demised to them in the lease. Where the whole of a commercial building is let to one tenant, the tenant must maintain it all.
It can become more complex in a multi-let building, where leases will often include only internal parts, with the structure and common areas retained by the landlord.
In these circumstances, tenants are responsible for the parts let to them, and landlords are obliged to repair the rest (for example external landscaping, structural external parts of the building, parking areas and building security systems). The landlord will attempt to recover as much of these costs as possible through the service charge.
The description of the premises in the lease is crucial; every item or structure referred to in the definition of premises will fall upon the tenant to keep in good repair.
Insurance
In principle, the landlord will insure the whole building and will recover the premium from the tenants. If there is damage by an insured risk, tenants do not have to repair it, unless, of course, they have breached the terms of the building’s insurance policy. Instead, the landlord will claim the policy and use the insurance money to fix the damage.
In practice there can be gaps in the cover, for example if it is not possible to get insurance against a particular risk. This is unusual but, in the past, insurers have warned that they may withdraw cover for damage by terrorism and, in some areas, flood.
Many modern commercial leases now deal with uninsured damage (i.e. damage caused by a “risk” that is not covered under the insurance policy). In these scenarios, if damage is caused by an uninsured risk, one would not expect the tenant to repair the damage caused – but it is not always the case so it is something to look out for.
Standard of repair
A full repairing and insuring commercial lease will typically require the tenant to keep the property ‘in good and substantial repair’ or ‘in good and substantial repair and condition’. If the property is not in good repair at the start of the lease, the tenant may have to bring it up to that state and then maintain it.
What counts as ‘good and substantial repair’ will depend on the nature, location and age of the property, and the tenant of a unit in a well-worn parade of shops would not be expected to bring it up to the standard of a unit in a brand-new shopping centre. This flexible view of the standard of repair is helpful in one sense, but it does leave scope for argument.
An alternative approach
Where a property is in a poor state of repair at the outset and especially if the tenant is taking a short lease, the tenant’s solicitor may be able to negotiate a less onerous repairing obligation.
A common alternative is to agree a detailed schedule of condition, showing the state of repair at the start of the lease, and to limit the tenant’s obligation to keeping it in no worse a state than as shown in the schedule.
Occasionally, the landlord will accept that the tenant need only leave the premises clean and tidy (sometimes referred to as broom-swept), as long as the tenant has not actually caused any damage.
How we can help
Failure to repair causes problems for both landlord and tenant, especially at the end of the lease. The landlord wants the property back in a lettable state and the tenant wants to leave without any unexpected expense. An argument over repair could even prevent a tenant exercising a valuable break right. Getting good legal advice at the outset will mean both parties know what to expect and will avoid a costly dispute.
For further information or guidance on agreeing on a full repairing and insuring commercial lease, contact our commercial property specialists. Call us on 0161 969 3131 or fill in our contact form and one of the team will be in touch