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Commercial Property - Schedules of Condition

Nov 24, 2016

Commercial Property - Schedules of Condition

Taking a lease on a commercial property, on full repairing terms, without proper advice on the potential implications, can be an expensive experience for those new to business leases. David Park, head of Barker Storey Matthews' Building Surveying department explains more.

Short term leases of 3-5 years are now common, and it is important that any prospective tenant ensures that the obligations they take on are proportionate to the length of the lease.  For example, entering a full repairing lease for five years where the roof is in relatively poor condition could result in the tenant being responsible for replacing this if the condition deteriorates to a point where it is beyond economic repair before or at lease expiry. 

It is important, therefore, that the repairing and other obligations within the lease are properly considered and, where relevant, defensive measures put in place to protect the tenant's interests. 

Of course, depending on the other terms of the lease, this may be rejected by landlords, especially where rents have been reduced and/or incentives are given in the first place. So tenants also need to be mindful that cheap rents may reflect the increased costs of repair.

A common way of achieving protection is to have a schedule of condition prepared to record the condition of the premises at lease commencement.  Typically, this schedule would include photographs and text to ensure that there is an accurate record of the condition at lease commencement.  The content of the document is normally agreed between the landlord and tenant, and a copy of this, signed by both parties, is appended to the lease.

It is important that the document is properly prepared, particularly as the relative cost of professional advice is generally insignificant when compared to the potential cost of a substantial dilapidations claim at lease expiry. 

We have seen many examples of poorly prepared schedules of condition and these have led to uncertainty, disagreement and unexpected costs at lease expiry.  Examples of the problems encountered include:

  • Poor quality photographs which do not clearly show the defects that exist
  • An insufficient number of photographs, mainly consisting of general views without close-ups of individual defects
  • Original digital photographs not being available, with reliance on colour copies of original prints
  • Schedule of condition misplaced or lost

We have even had one or two instances where a lease has referred to a schedule of condition, only to find that the Schedule of Condition was never prepared!  It is critical, therefore, that the document is properly prepared, the photographs are of good quality, a digital copy of the photographs is available, and that supporting text is provided, cross-referenced to the photographs. 

The cost of hiring a mobile platform will add £400-£500 to the overall cost and may seem an unnecessary expense, but this could be a false economy when the potential cost of roof repairs or replacement is taken into account.

While schedules of condition are a useful means of protecting a tenant's position, they do not remove the obligation to repair and do not necessarily provide the level of protection some tenants expect. 

For example, if the schedule records that there is minor wet rot to a door and no attempt is made to maintain the door to prevent further deterioration, such that by lease expiry the door is beyond economic repair and will need to be replaced, it would be the tenant's responsibility to do this, notwithstanding that this includes an element of improvement.

In most cases, it is just the repairing covenant that is qualified by the schedule of condition, and there is still an obligation to redecorate prior to lease expiry.  This matter should be considered and properly addressed when agreeing lease terms, as this can prove costly.  Often, the exposed steel frame in industrial buildings remains undecorated for many years, and the cost of redecorating could be significant. 

Commercial Property Peterborough - Schedule Ready

We have recently prepared a schedule for a commercial property in Peterborough, an industrial building of just over 100,000 sq.ft., where the decorating covenant was not qualified and the steelwork had not been redecorated for some considerable time.  We inspected prior to lease terms being agreed and were, therefore, able to ensure that there was no obligation to redecorate the steel frame at lease expiry.

How can we help?

Obtaining professional advice at an early stage in lease negotiations will give prospective tenants the best opportunity of protecting their position and limiting their potential dilapidations liability at lease expiry.  Please contact David Park or Ian Beesley on 01733 233445 should you require assistance.

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