Schedules of Condition, which qualify the extent of a tenant's repairing obligations, have become commonplace in commercial leases, with tenants holding greater bargaining power in the post-recession years in comparison to the landlord-friendly full repairing and insuring (FRI) leases which dominated the market prior to the banking crisis.
Although attractive to tenants, Schedules of Condition come with pitfalls which should be identified and addressed, where possible, when negotiating the lease.
Why use a Schedule of Condition?
The purpose of a Schedule of Condition is to qualify the extent of the tenant's repairing (or other similar) obligations by reference to the condition of the premises at the commencement of the lease - the end result is that the tenant is not obliged to put the property into a better condition than is evidenced by the Schedule of Condition.
This is in contrast to a standard FRI lease which imposes on the tenant full responsibility for the upkeep, repair and renewal of the premises and ensuring that it is decorated and complies with all appropriate legislation. In an FRI lease, the tenant carries the obligation to repair the premises even if the defect or damage requiring repair was present before the tenant took entry. It's also important to highlight that "repair" can include renewal and rebuilding, therefore it's easy to understand why tenants would be keen to limit the scope of this expensive obligation.
A decent Schedule of Condition will ordinarily be prepared by a surveyor and will comprise photographs and written descriptions, together documenting the condition of the property. The tenant will wish to ensure that the Schedule clearly shows the defects, by referring to the precise location and extent of the defects – the photographs and text must be specific enough to allow the defects to be identified in the future.
A tenant would be well advised to invest in a Schedule of Condition properly prepared by a buildings surveyor, as a poor record of the condition of the property will do no favours to a tenant when a landlord enforces the tenant's repair obligation under the lease.
Getting the wording right
If the tenant's repairing obligation is to be subject to a Schedule of Condition, it is essential that the schedule is referred to in any clause throughout the lease itself which would otherwise require the tenant to carry out the excluded repair work (for example, any obligation on the tenant to decorate or to carry out works required by statute). The landlord will, however, usually insist on a requirement that the tenant will take all reasonable steps and use all reasonable endeavours to prevent the defects or wants of repair worsening to a material extent or to notify the landlord so that they can take any required action.
Whilst the tenant may, through use of the schedule, have successfully limited its repairing obligation, it's not necessarily the case that the landlord will instead be responsible for carrying out the excluded works. If responsibility has not been placed back on to the landlord, then no one will be obliged to carry out the repair work and the tenant will need to put up with the defects until expiry of its lease. That might cause the tenant considerable discomfort, for instance, in the case of a leaking roof or window. Consideration should also be given to protection of the tenant's own stock or fittings, or damage which might arise as a direct result of a defect identified in the schedule. The tenant will want liability for any such consequential damage to rest with the landlord, but again this must be specifically agreed in the lease.
It might be in neither party's interest to allow a defect to continue throughout the period of the lease, and when dealing with that kind of damage the parties might be better advised to agree that such works will be done at the outset, with responsibility for completion of the works or any costs narrated in the agreement for lease. In such an event, the Schedule of Condition would show the premises after the defect has been rectified.
Limits of Schedules of Condition
Schedules of Condition are only useful in documenting visible defects. An FRI lease will oblige the tenant to repair, at its own cost, any damage caused by latent or inherent defects in the design and construction of the property, and clearly it will not be possible to show hidden defects in photographs. Unless there are specific exclusions, the tenant will also be responsible for plant and machinery, such as lifts, air conditioning plant, and boiler systems, and it is unlikely that a photographic schedule of condition will be useful in showing defects in such apparatus. A tenant should therefore consider commissioning specialist reports, and if defects are found, the parties should agree either that the landlord will carry out repairs, or that the tenant's liability for repairing the plant and machinery is limited or excluded.
Preparing your Schedule of Condition - a surveyor's view
Gerard Smith, the Partner in charge of Ryden's Project & Building Consultancy team in Glasgow, shared his advice in relation to tenants agreeing Schedules of Condition and the problems which can arise if they are not prepared properly.
"We would always recommend that tenants limit their liability under a new lease, particularly if this relates to a second hand or older property. One of the ways that this can be achieved is by producing and attaching a Schedule of Condition to the lease.
"The Schedule of Condition should be carried out by a professional, preferably a Building Surveyor, and this should detail the condition all of elements or defects that exist with associated photographs. Electronic and colour copies of the Schedule of Condition and photographs should also be retained.
"We have encountered numerous examples where Tenants have agreed Schedules of Condition at lease commencement and no copies of these documents can be provided at lease termination. Similarly, there are many examples where poor quality basic Photographic Schedules have been used. These are of no benefit to a tenant at lease termination as they provide little or no protection or limitation of their liability due the poor quality of the images and/or lack of information detailing the original condition or defects.
"Finally we would always recommend that Lease are correctly drafted and agreed by solicitors and any Schedules of Condition are properly recorded and annexed to the Lease."
Improvements or repairs?
It is, of course, near impossible to recreate the original state of the premises. Therefore, it's inevitable that the tenant will be required to make some improvements to the premises while carrying out its repair obligations during the period of the lease. The tenant will, in such instances, want to be clear that any improvements will be disregarded for rent review purposes. Otherwise, the tenant could find itself paying twice for the same works: firstly for the remedial works; and secondly by way of the uplift in rent.
Get in touch
If you would like to discuss any of the issues raised in this article, or any other property related matter, please get in touch with a member of our team.