Repair clauses in commercial leases: what tenants need to know

Repair obligations can represent a significant financial liability for a tenant taking on a commercial lease. Depending on the wording of the lease, a tenant may be responsible not only for maintaining the property during the term but also for correcting existing defects, even where those problems existed before the lease began.

This can leave tenants facing unexpected repair costs during the lease or a substantial dilapidations claim when the lease ends.

Understanding the property's condition and exactly what the repair clause requires is therefore essential before signing a commercial lease.

If you are taking on a commercial lease, renewing an existing lease, or have concerns about your repairing obligations, contact our solicitors for expert advice.

What is a full repairing lease?

Many commercial properties are let on what are commonly described as full repairing terms.

When leasing a whole building, this typically means the tenant has direct responsibility for repairs, potentially including the building's structure and roof.

Where a tenant leases only part of a larger building, responsibility is often divided. The tenant may have direct responsibility for internal and non-structural repairs to its premises, while the landlord retains responsibility for structural, external and common parts.

However, the landlord will commonly recover some or all of the cost of those works from tenants through a service charge.

The precise position will depend on the lease, making it important to establish both who is responsible for carrying out repairs and who ultimately bears their cost.

Can a tenant be responsible for existing problems?

Yes. One of the most important aspects of a commercial lease is that a tenant's repairing liability may not be limited to damage that occurs after they move in.

Case law has long established that an obligation to "keep" a property in repair can include an obligation first to put it into repair, even where it was already in significant disrepair at the beginning of the lease.

In Anstruther-Gough-Calthorpe v McOscar [1924], Atkin LJ described repair as involving making good damage so that, as far as possible, the property is left as though it had not been damaged.

In practical terms, if there is a problem with the flooring, windows, or another part of the premises when the tenant takes the lease, a covenant requiring the tenant to keep the property in good repair could make the tenant responsible for putting that problem right.

James Halpin, senior partner and head of commercial property, says:

"One of the biggest risks for tenants is assuming they will only be responsible for damage that occurs during their lease. Depending on the wording of the repairing covenant, they may be responsible for putting existing problems right, too. The condition of the property and the repairing obligation need to be considered together before the lease is signed."

What does 'good and tenantable repair' mean?

Commercial leases use a variety of expressions to describe the required standard, including "good repair", "good and tenantable repair" and "substantial repair".

There is generally little practical distinction between these expressions, but the precise wording and circumstances remain important.

The extent of the work required may depend on factors such as the age, character, and condition of the property.

The distinction between repair and improvement can also become important. A repairing obligation does not automatically give a landlord the right to require improvements simply because something newer or better is available.

For example, in Tedworth North Management v Miller [2016], the Upper Tribunal found that replacement windows could not be justified under the relevant repairing covenant where the window frames were not in disrepair and most required only painting.

Tenants should therefore establish whether proposed works genuinely fall within their repairing obligations rather than assuming every request for work is necessarily their responsibility.

What does 'repair and condition' mean?

Tenants should pay particular attention where a lease requires premises to be kept in good "repair and condition".

An obligation relating to both repair and condition can potentially be more onerous than an obligation relating to repair alone.

A requirement concerning condition may require works even where there is no actual disrepair. The exact wording should therefore be considered carefully before the lease is agreed.

Who is responsible for the structure and roof?

There should be no assumption that structural repairs are automatically the landlord's responsibility in a commercial lease.

Where a tenant takes a lease of an entire building, responsibility for the structure, exterior and roof may fall directly on the tenant.

Where the premises form part of a larger building, the landlord will more commonly retain responsibility for these areas. However, the tenant may still contribute towards the cost through the service charge.

This distinction can be financially significant where major expenditure may be required during the lease.

What if the property is already in poor condition?

Where premises are already in poor condition, tenants should consider whether their repairing liability can be limited before agreeing the lease.

A common way of doing this is through a schedule of condition.

An independent surveyor will usually inspect the premises and record their condition, identifying and photographing existing defects.

However, the existence of a schedule by itself is not enough. The lease should expressly provide that the tenant is not required to return the property in any better condition than evidenced by the schedule.

This can prevent a tenant from inadvertently accepting responsibility for putting existing defects right.

James Halpin says:

"A schedule of condition can provide valuable protection, but having photographs of the property isn't enough on its own. The repairing provisions in the lease need to make clear how the schedule limits the tenant's liability."

The additional cost of preparing a proper schedule of condition should be weighed against the potential repair and dilapidations liability it can help avoid.

What about latent and inherent defects?

Some defects arise from the original design or construction of a building and may not be apparent when the tenant first inspects the premises. These can be particularly relevant with newly constructed or substantially refurbished commercial property.

Where appropriate, a tenant should seek to exclude damage arising from inherent or latent defects from its repairing obligations.

The position should be considered carefully before the lease is completed, particularly where accepting repairing liability could expose the tenant to defects that it did not cause and could not reasonably have identified.

How do repair clauses affect dilapidations?

Repairing obligations become particularly important when a commercial lease approaches its end.

A landlord is likely to inspect the property and may prepare a schedule of dilapidations identifying alleged breaches of the tenant's repairing and other lease obligations.

The wording of the repairing covenant will be central to determining what works fall within the tenant's responsibility and can therefore have a significant effect on the tenant's potential dilapidations liability.

A tenant who has not fully understood the repairing obligations when entering the lease may consequently face substantial costs at the end of the term.

What should tenants check before signing a commercial lease?

Before committing to a lease, tenants should consider:

• Which parts of the property they are directly responsible for repairing.
   
• Whether they could be required to put existing defects right.
   
• Whether responsibility extends to the structure, exterior or roof.
   
• Whether the required standard refers to both "repair" and "condition".
   
• Whether their liability should be limited by a schedule of condition.
   
• Whether latent or inherent defects should be excluded.
   
• Which repair costs may be recovered through a service charge.
   
• What condition the property will need to be left in when the lease ends.

The repairing provisions should be considered before the lease is signed. Once the lease has completed, the agreed repairing standard will generally be fixed for the duration of the lease.

Taking on a commercial lease?

Repair obligations can have financial consequences extending well beyond the rent payable under a commercial lease. Identifying potential problems with the property and negotiating appropriate repairing provisions before signing can help reduce the risk of unexpected costs during the lease and a substantial dilapidations liability at the end.

Our commercial property solicitors advise landlords and tenants on commercial leases, including the negotiation of repairing obligations, schedules of condition, service charge provisions and lease renewals.

If you are considering taking a commercial lease and would like advice on the proposed terms, contact our commercial property team.