Rent costs on the lease agreement
It is a typical situation that happens countless times. The pressure is on to sign the lease and get production started straight away.
Everyone’s eyes are drawn to the rent costs on page one of the lease agreement – but the dilapidations liability is buried on page five, and typically no one has paid it any attention.
But without pre-acquisition due diligence, the dilapidations liability can turn out to be a major unbudgeted cost at lease expiry – made worse in the current climate of labour shortages and the rising costs of raw materials.
A tenant’s dilapidations liability is neatly summed up with these three words: reinstatement, repair and redecoration while a Schedule of Condition is a factual record of the condition of the premises at the start of the lease.
Without a Schedule of Condition, the tenant will be responsible for full repair, which in most cases will involve handing the property back to the landlord in significantly better condition than it was at the start of the lease.
But even with a Schedule of Condition in place, it is not foolproof.
A Schedule of Condition does not transfer the obligation to the landlord (although the landlord may have a repairing liability under a superior lease).
If a defect occurs in the building which affects your productivity, you, as a tenant, may have to carry out repair even if it is not strictly your responsibility in the lease.
In addition, a tenant will often need to carry out repairs to a higher standard than required by lease because you cannot ‘part’ repair a building element back to the condition it was in at the start of the lease.
Finally, there is also a ‘perception trap’ about any alterations you have made to the fabric of the building during the tenancy.
Typically, a client thinks, ‘I have put a kitchen in, I have put an office in, it is much better than when I took it over’ but the terms of the lease state that the building has to be put back to its original arrangement.
So where does this situation leave the tenant?
A Schedule of Condition is typically used at the end of a lease to interpret a tenant’s alterations that may have been carried out and can provide a useful reference point.
Although a Schedule of Condition is not foolproof in limiting a tenant’s dilapidations liability, if thoroughly prepared and properly incorporated into the lease it can provide effective protection at lease expiry against these costs.
With increasing cost of building supplies and labour shortages, there are many traps for the unwary around dilapidations liability, and the need to plan and budget is more important than ever before.
For further information and support about how to manage your repair liability and lease terms, contact Edward Love, Project Director for SBM.