Create a comprehensive schedule to avoid dispute at the lease end, says the Cluttons partner

It is widely believed a schedule of condition will help mitigate a tenant’s liability for dilapidations at the end of a lease.

However, many tenants are surprised when, although having a schedule of condition, they still face significant claims at the end of leases.

Tenants need to exercise caution before signing a new lease on unrefurbished space if they wish to mitigate a future claim for dilapidations.

A Ripe market

The current market will create many opportunities for prospective tenants. Landlords struggling to let vacant space will be headlining attractive rents and rent-free periods.

However, tenants need to look beyond the headlines and consider the cost of the leases over the full term.

Commercial landlords, who previously earmarked buildings within their portfolios for refurbishment or redevelopment, are rethinking their strategies and delaying proposals.

Envisaged wholesale refurbishment or redevelopments are being substituted for piecemeal works involving painting over cracks and tired wall finishes, laying new carpets and seeking to let the properties on short-term leases to extract revenue and avoid the issue of empty rates.

Often the previous tenant’s fixtures and fittings will be left in place.

‘Second-hand’ space will suit many tenants, particularly when large spending on fitting out space and commitments to large rents on long leases is counter-intuitive.

However, the true cost of taking such space is not always clear and often, although assurances from the landlord of an impending redevelopment at the end of the term and therefore no dilapidations, situations have a habit of changing.

It is important the issues of repair, reinstatement and redecoration liability are considered carefully and managed before the lease is signed.

A simple schedule of condition will rarely be enough.

Silence is not always golden

While a schedule of condition, if properly prepared, will aid in mitigating a tenant’s potential exposure to a claim, it is an imperfect tool.

Drafting a schedule of condition is often viewed as a simple process and is often one of the last aspects of agreeing a new tenancy undertaken.

The task is often assigned to a junior member of staff who has little or no consideration of the context.

In straightforward cases this approach may be enough but with larger and more complex properties this will almost inevitably lead to problems.

If the schedule is silent on an element it must be assumed the element was in good repair at the start of the lease.

If at the end of the lease, disrepair to that element is obvious; tenants may find they are responsible for repairing that element regardless of what the condition was at the start of the lease.

The devil is in the detail

To avoid confusion and dispute at the lease end, the schedule must be comprehensive.

It should contain a good selection of photographs showing both the condition as well as specific defects and should also have supporting text detailing the condition of each element.

All elements of the fabric and structure need to be documented, including difficult to access areas.

Often a schedule is attached to a lease which has no reference to the mechanical and electrical installations, the drainage or even the roof.

The mechanical and electrical elements can, sometimes, amount to as much as 40% of the claim.

Even a well drafted schedule may lose its effectiveness over time.

Therefore, a schedule of condition attached to a lease for a term greater than three to five years needs careful consideration.

An expression of true intent

While it is not uncommon for leases to be granted subject to a condition the tenant is not obliged ‘… to put the premises into a better state of repair and condition as evidenced by a schedule of condition …’, the lease will almost certainly contain a clause requiring the tenant to redecorate the premises both during the term and in the last six to three months of the term.

This ‘express covenant’ is often included regardless of the state and condition of the decorations at the start of the term and it will, usually, override the schedule of condition.

Further, to redecorate substantially and in a competent manner it may be necessary to undertake some preparatory work so the surfaces will take to being redecorated.

So, it is reasonable to assume in redecorating the tenant would need to prepare the surface to receive the paint.

Some change is inevitable

It is also important to consider how a tenant’s own alterations may impact on the reinstatement liability.

Can the alterations be easily and inexpensively removed, with minimum damage to the landlord’s finishes? It is important to clarify the position before embarking on any such alterations.

If the previous tenant’s fixtures and fittings remain in the property, these need to be documented clearly in the schedule to avoid the landlord insisting these be removed at the end of the lease.

Finally …

Unprecedented market conditions call for unprecedented solutions.

Tenants should not fear departing from standard practices, with assistance from their advisors, including their lawyers and surveyors, and landlords need to embrace more flexibility in negotiating new terms with their tenants.