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Full Repairing and Insuring Leases

Do you really know what this means for a tenant?
The FRI Lease is now the most commonly used lease preferred by landlords. Essentially when signing up to an FRI lease, the tenant is stepping into the shoes of the owner and taking on all liability to insure, maintain and repair the premises to a good and substantial standard. The repairing obligation in the lease displaces on to the tenant the landlord’s historic common law obligations and imposes full liability, to include both ordinary and extraordinary repairs. In the worst of circumstances a tenant, can find itself liable for rebuilding premises which were in poor condition on the date of entry simply to hand them back to the landlord at expiry of the lease. This on the face of it seems incredible but that is what the FRI lease is capable of achieving for a landlord.
A lease can be very expensive for a tenant when adding up the cost of rent, service charge, insurance, maintenance and dilapidations not to mention fitting out costs etc.. It is relatively simple to factor in to budgets the known costs such as rent, insurance, service charge and fit out, but the costs of repairs and dilapidations (which can include removal of the fit out and repairing any damage caused by such removal) can run to substantial sums, unknown at the commencement of the lease.
So what can a tenant do to assist in budgeting?
1 Have the premises professionally surveyed to assess the condition of the premises at the outset;
2 Try to restrict liability for repairs and in particular dilapidations;
3 Carve out replacement of certain items within the premises from the tenants liability e.g. the air conditioning systems or heating system;
4 Put in place a Schedule of Condition showing the condition of the premises as at the date of entry as a benchmark for which the premises should be kept being in no worse condition than shown in the Schedule of Condition. The issue with this is if there are defects which deteriorate over time there can be arguments that the tenant is still liable so we would recommend that any latent or inherent defects are also excluded from the tenant’s liability.
The above list is not exhaustive and what a tenant will achieve will depend on the attitude of the landlord and the state of the rental market at the relevant time. If there is high demand for premises, the landlord will have the upper hand and be less likely to concede on anything. If the market is poor, the tenant will have a greater chance of getting the concessions he or she wants.
More often than not a tenant is keen to take on premises to get his or her business up and running quickly. However as a cautionary note it is worth taking the time to carefully negotiate the terms of the lease at the outset, and this will, at the very least, prepare the tenant for the potential liability both throughout the duration and at the end of the lease. Most importantly this will allow a tenant to take account of the potential liability costs relative to the lease in the business planning and budgeting process.
The process can be fraught with difficulties and we would recommend you speak to your professional advisers at the outset before you agree anything with the landlord.
Unless a tenant takes the time to have the premises professionally surveyed, and is able to restrict liability for repairs and in particular dilapidations, he or she could find themselves facing substantial unanticipated costs in relation to the premises.

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