UK: The Importance Of Tenants Including A Schedule Of Condition Within A Lease

A commercial property lease is often a full repairing and insuring lease (an "FRI lease"), meaning the tenant takes on the full costs of repairing and insuring the whole property, including the structural parts – such as the foundations, walls and roof.

Other leases are "internal repair only", where the tenant is only obliged to look after the internal parts of the property, such as the floor, wall and ceiling surfaces.

Regardless of whether the lease is FRI or Internal-Repair, the repairing obligations can place a considerable financial burden on tenants.

It is important that the tenant is clear about the extent of the property they will be required to repair and which elements of repair they will be responsible for, either directly or by reimbursing the landlord via a service charge.

The repairing obligations in a lease typically require a tenant to put and keep the property in a good and substantial state of repair and condition.

This can mean putting the premises into a better state of repair and condition than when the tenant first takes occupation.

This can be particularly onerous, especially when the property is in a poor state of repair, to begin with.

It is, therefore, important to ensure you properly assess the current state and condition of a property and check what your repairing liabilities are going to be before committing to a commercial lease.

If a tenant fails to comply with their repairing covenant, they could be looking at significant dilapidation payments when the lease ends.

One way to mitigate this is to agree that the repairing obligations in the lease will be by reference to a schedule of condition.

What is a Schedule of Condition?

A Schedule of Condition comprises a series of photographs and written evidence concerning the state of the repair, condition and decoration of the property at the time of the grant of the lease.

Most importantly, these schedules highlight any areas of disrepair to the property.

It is important to prepare the schedule at the beginning of the lease agreement as this can be used as a basis for the condition of the property to be assessed against in the future and will identify any significant changes to condition.

Becoming aware of any disrepairs to the property early on will be useful when negotiating the lease agreement terms.

Schedules of Conditions are not required to be signed by both the landlord and the tenant.

However, it is good practice to do so to indicate that the parties have both accepted the contents of the schedule to avoid any later dispute.

It is important to carefully compile a Schedule of Condition to avoid ambiguity if the property is not represented accurately or the schedule is incomplete.

It is in the tenants and their conveyancers' best interests to produce a detailed Schedule of Condition to counteract any future problems.

Usually, a fully qualified surveyor will assist with preparing and producing these documents.

Why is a Schedule of Condition important?

Including a Schedule of Condition will limit the tenant's repairing obligations.

For example, it may limit the tenant to the condition that the property was in at the start of the lease.

The repairing clauses in the lease will not require the tenant to put the property into a better state of repair and condition than that detailed in the schedule of condition.

Without a Schedule of Condition, a tenant may be obliged to put the property into a better state and condition than before the tenancy agreement, which may be costly.

Annexing a Schedule of Condition to a lease will help protect the tenant against any potential future dilapidation claims from a landlord.

The evidence included in the schedule will safeguard the tenant, typically at the end of the lease, if a landlord claims that the property is in disrepair or poor condition and determine who is responsible for any repair to the property.

It will also highlight any repairs for the landlord to rectify before a tenant enters a commercial lease agreement.

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