Why the repair obligation is one of the most important to consider when a commercial lease comes to an end

As a general rule, when a lease comes to an end the tenant is obliged to return the property demised by the lease to the landlord in the state of repair and condition provided for in the lease.  If the tenant fails to comply with this obligation, the landlord may pursue the tenant for damages.

The starting point for the landlord’s claim is to consider the extent of the property demised by the lease.  For example, is the whole of the property included in the demise or is the structure of the property and the external parts retained by the landlord?  After the extent of the property demised has been identified, the next step is to consider the yield up clause in the lease.  Typically the yield up clause will say that the tenant must give back the property having complied with the tenant’s repairing covenant and other covenants such as decorations and compliance with statutes.  These covenants are usually found in the lease, however it is important to consider supplemental documents, such as a licence for alterations or a deed of variation to ascertain the extent of the tenant’s obligations.  Often the lease will have attached to it a schedule of condition recording the condition of the property at the date of the lease.  The tenant’s repairing obligations will be linked to the schedule and the tenant will not be obligated to give the property back to the landlord in a better condition than detailed in the schedule.

In the absence of a schedule of condition, the tenant’s repairing obligation can be quite onerous.  For example, a covenant by the tenant to keep the property in repair includes an obligation to put the property in repair if it is in disrepair at the date of the lease.  Tenants are therefore advised to inspect the property before completing the lease to assess the potential cost of repair works and where appropriate, agree a schedule of condition limiting the repairing obligation or to seek a rent free period to cover the cost of the repairs.

Inspection by a dilapidations surveyor

Once the extent of the tenant’s covenant has been identified, the landlord should arrange for the property to be inspected by a dilapidations surveyor and for a terminal schedule of dilapidations to be prepared.  The schedule should comply with the pre-action protocol for dilapidations and should be served on the tenant as soon as possible after the end of the lease and generally within 56 days of the termination date.  In a nutshell, schedules should identify the covenant in the lease that has been breached, the nature of the breach and the work required to remedy the breach and should be costed.

As a general rule, the amount of damages the landlord is entitled to recover is the reasonable cost of carrying out the work required to remedy the breach, plus loss of rent for the period of the works.  However, there is a statutory cap to the amount a landlord may recover in damages.  Under section 18(1) of the Landlord and Tenant Act 1927 a landlord is not entitled to recover damages in excess of the diminution in the value of the reversion at the date the lease came to an end caused by the disrepair.  In some cases there may be no diminution in the value of the reversion.  For example, if the landlord intends to demolish or redevelop the property, the value of the reversion in disrepair may be equal to the value of the revision in repair because the landlord’s intended work makes the repairs unnecessary and of no value.  Also, if the property is occupied by a sub-tenant, protected by the Landlord and Tenant Act 1954 (see earlier post), there may be no damage to the reversion if the sub-tenant’s repairing obligations reflect those in the headlease.

Upon receiving a terminal schedule of dilapidations, the tenant is best advised to instruct its own dilapidations surveyor to consider the schedule with reference to the lease and any relevant supplemental documents and with reference to the landlord’s plans for the property, for example, any application for planning permission.

Ideally, an agreement between the landlord and tenant concerning the amount of damages a tenant is to pay at the end of the lease (if any) should be recorded in writing in a settlement agreement.

If you have any questions about the points raised in this article please get in touch.