Leased Said, Soonest Mended

Stephen Scott, a partner with corporate lawfirm McClure Naismith, says that usually dilapidation costs are simply down to the terms of the lease – and common law.

BUSINESSES spend considerable time endeavouring to reduce costs and maximise profitability. However, while most businesses leasing premises are aware that when their lease ends they have some responsibility to repair and redecorate, frequently they do not appreciate quite how onerous and, in particular, expensive this obligation can be until it is too late.

Most commercial leases contain provisions for the landlord’s building surveyor to visit the property towards the end of the life of the lease and draw up a ‘Terminal Schedule of Dilapidations’. The extent of this will vary according to the terms of the actual lease; however, this will usually contain provisions for such things as repairs, redecoration and reinstatement. In England and Wales, under certain circumstances, statute provides a tenant with protection against sizeable dilapidations costs. However, in Scotland, there are no such provisions – it is simply down to the terms of the lease and common law. The chances are that the lease will also make the tenant liable to pay the landlord’s surveyor to produce this schedule, adding to the cost.

The problem which most frequently arises is that the tenant accepts the property at the date of entry as being “in good and tenantable/repair and condition” regardless of the property’s actual condition. The result is that the tenant acknowledges that the property is in good condition and is likely to be liable for faults or defects which arise during the tenant’s occupation under the lease and which were in existence when the tenant took entry. Without a limitation on this responsibility, it is likely that the tenant will have to rectify all of them at its cost.

The standard commercial Lease, the FRI (full repairing and insuring) Lease imposes a very high standard of repair on tenants. Whilst any Lease should be considered solely on its terms, generally the tenant is to maintain and repair, keep a property in good condition and renew, re-build and replace the structure and the fabric of a property and to redecorate on a regular basis. This obligation extends to plant and machinery in the property and, in certain circumstances will oblige a tenant to improve a property: for example, if the roof of a property was in a poor condition at the expiry of the Lease and could not be repaired then the Landlord would be able to insist upon the roof being entirely renewed. If the works which are necessary are the only practicable way of making good the premises then they will be treated as falling within the ambit of “repair” notwithstanding that this may require renewal or replacement.

How far-reaching those obligations might have to be was illustrated last year in the case of West Castle Properties Limited v. The Scottish Ministers. The Scottish Executive, as tenant of a property owned by West Castle, repaired and maintained it over the 25 years of the lease and so believed it had kept to the repairs clause requiring the building to be kept in “good tenantable condition and repair”. However, when the lease ended in 2002 the landlord argued that this meant that the premises should have been in the same condition as at the start and claimed another £4 million including replacement of the lifts, the water heating system and parts of the roof.

When the case went to court, the judge decided that the tenant had an obligation to replace, not just repair, items coming to the end of their reasonable life even if the benefit would extend years beyond the termination of the lease.

Whilst a tenant may be able to show that a property was not in good condition at the commencement of a Lease, it will do them little good if they have accepted that the property was in a good condition and that they are obliged to leave the property in good condition at the end of the Lease. It is essential a tenant fully understands the obligations which he is accepting. Even if he believes that a property is in reasonable condition, he must invest in a full pre-lease condition survey undertaken by a Building Surveyor. Whilst a layman may consider premises to be in good condition, the expert eye of a Building Surveyor will highlight any deficiencies in the condition of the property and they can then advise on the cost of rectifying them.

Close liaison between the tenant, his Solicitors and Building Surveyor should ensure that a tenant is fully aware of the condition of the property, the repairing obligations which the tenant is accepting and the potential costs involved in complying with them. Negotiations can then be undertaken with the Landlord regarding any defects which should be rectified at the Landlords’ cost or excluded from the tenants’ obligations. The exclusions would be documented in a Schedule of Condition forming part of the Lease and which, combined with appropriate limitations to the tenants’ repairing obligations, should protect the tenant from dilapidations for which he is not responsible.

Taking appropriate measures at the outset to minimise dilapidation claims is essential. The cost of employing a solicitor and surveyor to advise over the condition of a property, the lease provisions and the legal implications at the outset may seem like an expense, but should be viewed as an investment. These costs are far outweighed by the potential savings.