Whilst acquiring a building occupied under a full repairing and insuring (FRI) lease may hold many attractions to a prospective purchaser, would-be landlords should be aware that this does not necessarily mean that their tenant will be responsible for all required remedial work. Many factors come into play, so getting appropriate pre-acquisition advice from a building surveyor experienced in dilapidations and service charge matters is vital.
Purchasing the freehold interest in leased commercial property is, of course, a risky business. Seeking good tenant covenant strength, full market rent and a reasonable number of years unexpired on leases are all important factors in the decision-making process. Landlords take comfort from the knowledge that tenants with FRI leases or with comprehensive service charge provisions will be responsible for repairing and maintaining their property investment. So, what then should be the concern if a landlord can always turn to his tenant on an FRI lease to deal with any defects that may exist or become apparent at the premises?
If only it was that clear cut! We review below, some of the situations that have ended up in court, where the property owner has retained a liability that he thought had otherwise been transferred.
What is the subject matter of the repairing covenant?
In a true FRI lease this is rarely an issue, but what seemingly should be a straightforward exercise in determining whether a landlord or tenant is responsible for any particular part of the building, is, not always the case.
Differences of interpretation certainly do arise. By way of example, in the service charge dispute heard in Pattrick v Marley Estates Management1 the Court of Appeal decided that partially demolished cloisters fell within the definition of the “building” and as such were within the landlord’s service charge liability. Responsibility for window repairs was also an issue, and it was held that on the proper construction of the lease windows did form part of the “exterior” but not of the “main structure”.
It is important, therefore to understand the way that buildings are constructed and of course apply that to the particular lease in question.
Has there been any deterioration?
Turning to the defect itself, of fundamental importance is understanding whether the subject matter of the covenant has, in fact, deteriorated.
If its condition is no worse than when first constructed the tenant cannot be responsible for any work to directly rectify it. The 1987 case of Post Office v Aquarius Properties Ltd2 is often cited as a good example of this. The property’s basement had flooded due to a defective floor joint that had existed since the building’s construction. Crucially, however, because there was no subsequent deterioration to the floor joint, the judge found that there was no disrepair and therefore the landlord had to accept that the liability for remedial work could not be passed onto his tenant.
This case raises the thorny issue of inherent defects. This can be fertile ground for disagreement and it is not uncommon for tenants to argue that they are not responsible for disrepair where the building was constructed with an underlying problem.
What is the required standard of repair?
Once it has been established that the tenant is potentially in breach of its covenant to repair, does this then mean that the obligation can be enforced? Unfortunately for property owners the answer is not always. What needs to be established is whether or not the nature of the damage brings the condition of the building below the standard contemplated by the repairing covenant. In assessing whether that has happened due consideration is to be given to the age, character and location of the premises. In addition, what level of repair would be deemed ‘reasonable’ by a reasonably minded tenant?
What if part of the building is nearing the end of its notional life expectancy? Well, this itself does not automatically trigger liability; disrepair must nevertheless still feature. This was well demonstrated in the 2001 case of Fluor Daniel Properties Ltd v Shortlands Investments Ltd3 in which tenants successfully argued that air conditioning plant did not need replacing as it was not actually in disrepair, even though the system was nearing the end of its notional life.
At lease commencement did the landlord and tenant reasonably envisage the required repair?
A further consideration is whether the required repair goes beyond what the parties could have reasonably contemplated at the time of entering their lease.
In looking at the intentions of the parties at lease commencement, courts will always apply the test of fact and degree and assess whether work involves giving something back, which is different from that which existed previously.
Interestingly, length of lease term is often flagged by tenants in service charge recoverability disputes, particularly where significant works are planned by a landlord towards the tail end of the term. If properties are bought in such situations, purchasers can perhaps take some comfort from knowing that a tenant’s objection to significant expenditure within the last year or so of its lease is unlikely to succeed on that basis alone, and indeed overall lease term is probably of more significance than how long remains. Of course, the need to demonstrate disrepair still remains an absolute requirement.