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Thinking of renting a new property for your business?

If a business is looking for premises, whether it’s a shop, an industrial or commercial unit or an office, the range of options can be quite large. That’s maybe especially so for the small to medium sized business.

Most businesses take a lease, rather than buy premises. They will focus, probably on location, and rent and other costs.

Condition of the premises, however, may not get quite the same attention. Of course, if there are obvious disrepairs or things that need fixed before lease commencement, they will likely pick that up. Often, however, a business will decide that the premises are adequate for their purposes, and sign the lease.

But what have they signed up for?

Every commercial lease makes the tenant liable in some way for the state of repair of the premises. It will say what condition the premises are to be in during the lease, and what condition they are to be left in at the end. The lease is likely to say that when it comes to an end the tenant either leaves the premises in a condition that meets a specified standard (usually the one that applies during the lease term) or pays the landlord the cost of putting the premises into the required condition. This is a “dilapidations” claim.

Frequently, and regardless of the type of premises or the length of the lease, a landlord will propose what’s often called a “full repairing” Lease. Typically such a lease says, firstly, that the tenant accepts the premises, at lease commencement, as being in a good state of repair and fit for the tenant’s purposes. The tenant has no scope after that to say this or that wasn’t quite right when the tenant moved in.

Secondly, it will make the tenant comprehensively responsible for repair and maintenance of the premises and any necessary renewal or replacement. The lease will require that the premises are put into, and remain, in “good and substantial repair and condition”, or words to that effect.

That is a highly significant undertaking for many business tenants.

All premises, except the newly built or fully refurbished, will have at least wear and tear from previous occupation, and may already be in need of more extensive maintenance. A tenant taking a full repairing lease of premises like that takes on the burden of bringing the premises back to good and unblemished condition.

Even if the tenant doesn’t do works at once, at the end of the ease term, a full repairing lease entitles the Landlord to require the tenant to bring the premises up to the required good and substantial state of repair, even if they were not at that standard when the tenant took over.

The result can be that premises a tenant thought were perfectly acceptable, even if not “brand new” are actually the source of an unexpected liability when it’s time to move out.

That’s a particular issue for short term leases. Plenty of businesses look for, say, 5 or 10 year leases, and want options for early termination. Frequently, those kinds of leases are offered in older industrial or commercial estates, where the units are quite probably in adequate condition, but no more than that.

On lease expiry, the unwary tenant under a full repairing lease can be faced with a demand for costs of works which, if done, amount to an upgrade of the premises.

Some leases contain provisions which allow the landlord to get from the tenant the money equivalent of the cost of making good the repairs, even if the landlord has no intention of spending that money on the premises.

Deals are often done for cash settlements for the tenant to exit the dilapidations debate.

A dilapidations claim can be a very unwelcome, and unexpected, liability. It can hinder an expanding business, or create an additional difficulty for a business which is not doing so well.

It’s fair to say that landlords don’t have it all their own way in disputes over end of lease dilapidations. The exact provisions of the lease are important, and there are legal arguments which can come into play depending on the circumstances. The fact remains, however, that a tenant who has signed on to a full , or substantial, repairing obligation is often on the back foot when it comes to arguing over dilapidations.

What can be done?

The time to manage your repairing liabilities under your lease is at the start. Make sure you understand and manage the risk , and get the right clauses into the lease. That means that the lease will allow a fair settlement for any disrepairs.

For example (and some of these ideas depend on exactly what the premises are) a tenant might:

  • agree only to be responsible for the interior of the premises
  • insist on a photographic record of the premises’ condition being made, and undertake to leave the premises in no worse condition (but no better)
  • require the landlord to do repair works before the lease begins
  • refuse to take responsibility for some parts of the premises which are clearly defective.

Broadly, the shorter the lease, and / or the poorer the condition of the premises, the less a tenant should be willing to take on.

What about multi-occupied buildings, or estates with numerous tenants?

Leases there will usually say that any areas used in common by the tenants in the building or the estate are to be looked after by the landlords. Their costs are charged back to the tenants under a service charge. Tenants need to make sure that the lease makes clear what the landlords can charge back, and avoid the landlords running up unnecessary or excessive costs. It’s important that the landlords actually have an obligation to maintain the common parts. The fact that the tenant needn’t maintain the common parts doesn’t mean the landlords must.

Periods of leases of many kinds of business premises are getting shorter. Tenants increasingly feel that long term commitments to premises reduce flexibility as their business grows, or the model changes, for example because of technology, or product development. Tenants need to ensure they have control of their maintenance liabilities, and avoid surprises when the lease ends. It’s more important than ever for business tenants to know what the condition of their premises might be getting them into.

Written by Robin Corbett

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