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The meaning of 'Full Repairing' and how a tenant can limit their liability.

Posted on May 24, 2014 by James Barry


Question: - I am in the process of agreeing terms to rent a new office building in High Wycombe, Buckinghamshire. The letting agent’s details state that the lease will be on ‘Full Repairing’ terms. Can you explain what this means in practice and whether I should agree to it.

 

Answer:-

As a general rule most landlords will, by default, market their premises to let on the basis of a full repairing lease. However, this should not be automatically accepted and whether or not  an full repairing basis is appropriate will depend on many factors including the length of the lease, the type and age of the property, the strength of the market and the negotiating positions of the landlord and tenant. In a strong market where the supply is limited the landlord will usually be able to dictate the terms whereas in a slow market with an oversupply of accommodation the tenant is often in the driving seat.

A full repairing lease is often referred to as an FRI lease i.e. a full repairing and insuring lease where the tenant is also responsible for the cost of building insurance.

With an FRI lease the tenant has total responsibility for the repair of the demised premises. You should be aware that the covenant to ‘keep the premises in repair’ carries with it an obligation to put the property in repair if it is out of repair even though you as the tenant were not responsible for the disrepair.

Additional words surrounding the obligation to repair need careful consideration. Repairing covenants will often state that the tenant is to keep the premises in ‘good repair’, ‘full repair’ or ‘good and tenantable repair’. It is suggested that these words probably add little to the obligation to keep in repair but it would be wise to avoid these if possible to remove any argument.

But what does repair actually mean? Arguably the best definition of repair was given by Buckley L.J. in Lurcott v Wakely & Wheeler -

‘……..Repair is restoration by renewal or replacement of subsidiary parts of a whole’.

 As such a covenant to repair can require renewal or replacement and, therefore, to some extent improvement. The question of repair is in every case one of degree and the test is whether the act to be done is one which in substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole.

Some covenants extend beyond the standard repairing obligations by including an obligation to rebuild e.g. ‘to keep the demised premises in good and substantial repair and condition and when necessary to rebuild, reconstruct or replace the same’. This imposes a far greater potential burden on the tenant and should generally be strongly resisted especially when signing a relatively short term lease.

However, the additional word ‘condition’ may have an impact on the tenant’s liability and it was held in the case of Welsh v Greenwich London Borough Council that reference to ‘good condition’ was intended to mark a separate concept and was a significant addition to the word ‘repair’. This case applied to a short term residential, tenancy and it is is unclear if the wording would have the same effect in a commercial lease. However, the best advice is to avoid any possible argument and exclude it from the tenants repairing liability.

Suggested Course of Action.

As stated above the standard of repairing liability you should accept will depend on numerous factors. However, as a general rule you should always endeavour to limit your repairing liability. Time spent doing this upfront will pay dividends both during and at the end of your lease. So how can this be done?

 1.            Commission a full Building Survey

It is imperative that you commission a full building survey by a Chartered Surveyor to include all buildings demised and external areas. It is also advisable to commission a full mechanical and electrical survey including air conditioning as well as lifts. Other surveys such as asbestos and land contamination surveys maybe required and your qualified surveyor should be able to advise you in this respect. Where you occupy part of a building with common parts you will usually be liable for a proportion of maintaining these areas through a service charge. As such your surveyor will need to inspect and report on the condition of the common areas and services in addition to your demised accommodation. A survey is just as important with a new building as an older building. Many tenants mistakenly believe that   because the building is brand new they do not need to incur the cost of a survey.  The report will identify any items of concern which can be discussed and addressed with the landlord.

 2.            Limit the repairing liability.

There are a number  of ways that this can be achieved.

a)      Get the landlord to rectify any defects.

Firstly, having identified specific problems from the building survey these can either be rectified by and at the cost of the landlord before the start of the lease or within a defined period of time.  Alternatively have the works costed and obtain a rent free equivalent period from your landlord.

b)      Exclude the defects from the tenants repairing liability.

Where defects are apparent but will not cause the tenant an issue and will not lead to further deterioration then these items can simply be excluded from the tenant's repairing liability. However, where there is a problem that is likely to cause ongoing issues, although the tenant’s liability for this item can be excluded, it is important in such cases that the landlord is specifically made responsible for repair and maintenance. In a case where the tenant is not liable but neither is the landlord the tenant as a general rule cannot force the landlord to undertake any repairs.

c)       Cap any Service Charge.

Where there is a service charge for common areas/services an attempt should be made to cap the amount maybe with the cap subject to an annual increase linked to CPI or to a sensible building related index. Items of improvement/ refurbishment should be excluded as should sinking funds especially with regard to short term leases (money paid into a sinking fund cannot be reclaimed at the end of the lease).

d)      Consider the wording of the lease carefully.

Consider each word of the tenant's repairing liability within the draft lease carefully to ensure that no onerous words or clauses creep in such as the requirement to’ rebuild’ or keep in ‘good condition’ in addition to the standard repairing wording.

e)      Temper the repairing obligation with a ‘Schedule of Condition’.

If you are to agree to a full repairing liability it is only right and proper that the building is in full repair at the commencement of your lease. If your building and other surveys show this not to be the case then you need to limit your liability to reflect the defects noted. We have suggested in point a) above that one way is to specifically exclude liability for any defects noted. Another option is to limit the repairing liability by reference to a ‘Schedule of Condition’. This comprises of a detailed photographic and descriptive record of the condition at the start of the lease so that the tenant can return the premises in no worse state than as evidenced by the schedule. It is vital that any schedule is detailed and accurate and is attached to the lease and the relevant repairing clauses in the lease make adequate reference to it. Of course, a defect noted in the schedule may lead to a further defect e.g. badly weathered roof tiles which although noted may fail and allow water penetration leading to, say, wood rot which may fall within the repairing liability of the tenant. In an ideal world, therefore, you add wording to the effect that the tenant will not be liable for any damage caused from a defect noted within the Schedule of Condition or from a deterioration of a defect noted in the Schedule. It would also be wise to state that the landlord would be responsible for any repair works in this respect.

f)       Provide for ‘Fair Wear and Tear’

Although more common in residential leases the provision of a ‘fair wear and tear’ clause may offer some protection. So, for example where there is wear to the carpet commensurate with normal commercial usage the landlord would not be able to argue that this item is out of repair. This is likely to be resisted by landlords but maybe worth considering especially with older buildings.

g)      Exclude damage from insured risks

You should ensure that the lease provides that the tenant is not liable for repairs/damage covered by an insured risk. The risks covered are extremely important as they are linked to the repairing obligation, meaning if any damage is caused to the property as a result of an Insured Risk, the Tenant is not liable to repair the property as a result. A tenant should, therefore, ensure that the insured risks list is as comprehensive as possible, as where damage caused is not insured against, the tenant will be responsible for repairs as a result.

h)      Limit the liability to internal repairs only

Rather than accept a FRI lease try and obtain an internal repairing liability only. Remember, however, to make the landlord liable for all other repairs. With an internal repairing lease it is important to accurately define what is meant by ‘internal’. Does this include, for example, the floor finish e.g. carpet but exclude the floor slab or does it exclude the floor slab but include the screed? Does it exclude the structural elements in the demised premises?  Where there is a separate service charge remember that this in reality another form of the repairing liability controlled by your landlord. This too will need to be carefully looked at as what you gain from limiting your liability on your demised premises may be taken away by your landlord through the service charge.

i)        Exclude liability for ‘Inherent Defects’.

Inherent defect are defects in the design or construction of a building or the materials used in its construction. These latent or inherent defects are those which are present at completion of the construction of the building but are not apparent from an inspection and as such would not be identified on a survey. The law states that although a latent defect may exist the tenant is not responsible for rectifying it under a repairing liability unless the defect causes disrepair.  In the case of  Post Office-v-Aquarius Properties (1986) the basement of a newly constructed office building leaked when the water table rose and became ankle deep in water. No actual damage, however, was caused to the building itself. The defect was due to poor workmanship resulting in weakness in the concrete so it was porous in parts. Although the tenant had a full repairing liability as no actual damage occurred the tenant was not liable to repair the inherent defect  i.e. the weakness in the concrete.

However, where damage and disrepair occurs  as a result of an inherent defect then the tenant will be required to rectify the damage and maybe required at this stage to rectify the inherent defect to avoid ongoing damage occurring.

The ideal solution is to exclude inherent defects and more importantly exclude any liability for damage arising from any latent defects with a requirement that the landlord is to assume responsibly.  Exclusion of inherent defects are more common with new buildings but inherent defects may not come to light for many years and so an inherent defects liability exclusion clause should generally be sought. Landlords, however, do not like excluding inherent defects especially on new buildings as this not only  passes liability back onto them but it generally reduces the investment value of the property.

There are two other possible solutions. For new buildings one way is the use of collateral warranties which would be granted in favour of the tenant. These in effect give the tenant a contractual right to bring a claim against the project team in the event that a defect arises in the property. The problem with these, however, is that the tenant will still need to prove that the relevant party has been negligent and it is often difficult with so many professionals involved to identify who is actually responsible. This can be a lengthy and expensive exercise with no guarantee of success and, of course, whilst the tenant is taking action, which can take years, the defect remains with the tenant often having to rectify the problem and hope that they can recover the costs. It also relies on each personal member of the original project team maintaining their own adequate professional indemnity insurance.

 A second option is to obtain Latent Defects Insurance. The advantage is that it is not dependant on establishing who is responsible for the defect and is unaffected by the subsequent insolvency of any member of the construction or design team. These policies are not without their problems however. They generally do not cover economic loss but only the cost of the repair and usually only cover the structural parts e.g. defects in the M&E equipment are generally not covered. Claims are often also subject to often large excess payments. Specialist advice should be sought with regard to collateral warranties and inherent defect liability insurance.

 

As can be seen an apparent simple requirement for the tenant to keep the premises in repair raise all sorts of issues and emphasises the need to obtain the services of a qualified acquisition agent/surveyor to look at the property and limit your liability before you enter into a lease.

Checking and limiting the repairing liability of a property is just one of the many items under the heading of due diligence that JAMES Chartered Surveyors as experienced property acquisition and relocation agents undertake as part of the acquisition process. JAMES Chartered Surveyors are commercial acquisition and relocation agents acquiring shops, offices, factories, leisure properties and development sites throughout Buckinghamshire, Berkshire, Oxfordshire and West London. Please contact us for further information.

 

Tel: 01628 486992

Tel: 07827446132

Email: james@jamescs.co.uk

Web: www.jamescs.co.uk

 

This article has been prepared by JAMES Chartered Surveyors for general information purposes only and is not intended as legal advice. Specialist advice should be obtained before taking or refraining from taking actions based on comments in this paper. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

 Photograph "Cracked Egg With Bandage" by digitalart Courtesy of FreeDigitalPhotos.net

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